FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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 (I.R.S. Employer
incorporation or organization) Identification Number)
22 Union Street, North, Concord, N.C. 28026 -0228
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (704) 786-3300.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
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 ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of March 20, 1998 was $183,590,155.
As of March 20, 1998 the Registrant had outstanding 9,328,546 shares of
Common Stock, no par value.
Documents Incorporated by Reference
PARTS I and II: Annual Report to Shareholders for the fiscal year ended
December 31, 1997 (with the exception of those portions which are specifically
incorporated by reference in this Form 10-K, the Annual Report to Shareholders
is not deemed to be filed as part of this report).
PART III: Definitive Proxy Statement to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A promulgated pursuant to the
Securities Exchange Act of 1934 in connection with the 1998 Annual Meeting of
Shareholders (with the exception of those portions which are specifically
incorporated by reference in this Form 10-K, the Proxy Statement is not deemed
to be filed as part of this report).
<PAGE>
FIRST CHARTER CORPORATION
AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business........................................................ 1
Item 2. Properties...................................................... 25
Item 3. Legal Proceedings............................................... 27
Item 4. Submission of Matters to a Vote of Security
Holders....................................................... 27
Item 4A. Executive Officers of the Registrant............................ 28
PART II
Item 5. Market For Registrant's Common Equity and
Related Shareholder Matters.................................. 29
Item 6. Selected Financial Data......................................... 29
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................... 30
Item 7A. Quantitative and Qualitative Disclosures
about Market Risk............................................ 30
Item 8. Financial Statements and Supplementary Data..................... 30
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure....................... 30
PART III
Item 10. Directors and Executive Officers of the
Registrant................................................... 31
Item 11. Executive Compensation.......................................... 31
Item 12. Security Ownership of Certain Beneficial
Owners and Management........................................ 31
Item 13. Certain Relationships and Related
Transactions................................................. 31
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K.......................................... 32
<PAGE>
Part I
Item 1. Business
General
First Charter Corporation (hereinafter referred to as either the
"Registrant" or the "Company") is a multi-bank holding company established as a
North Carolina Corporation in 1983 and is registered under the Bank Holding
Company Act of 1956, as amended (the "BHCA"). Its principal assets are the stock
of its banking subsidiaries, First Charter National Bank ("FCNB") and Bank of
Union ("Union," and together with FCNB, the "Banks"). The Banks account for over
85% of the Registrant's consolidated assets and consolidated revenues. The
principal executive offices of the Company are located at 22 Union Street,
North, Concord, North Carolina 28025. Its telephone number is (704) 786-3300.
FCNB, a national banking association, is the successor entity to The
Concord National Bank, which was established in 1888 and acquired by the
Registrant in 1983. On December 22, 1997, the Company acquired Carolina State
Bank ("CSB") which was merged into FCNB. CSB was a state-chartered commercial
bank with four banking offices in Cleveland and Rutherford Counties, North
Carolina. FCNB is a full service bank and trust company with sixteen branch
offices (including the former CSB banking offices), and two limited service
facilities. FCNB has twenty-two ATMs (automatic teller machines) located in
Cabarrus, Cleveland, Rutherford, Rowan and northern Mecklenburg Counties, North
Carolina. The ATMs are part of the HONOR network.
Union is a state-chartered commercial bank organized under the laws of
North Carolina in 1985. It was acquired by the Registrant effective December 21,
1995. Union provides general banking services through a network of five branch
offices and four ATMs located in Union and southern Mecklenburg Counties, North
Carolina.
Through their branch locations, the Banks provide a wide range of banking
products, including checking accounts; NOW accounts; "Money Market Rate"
accounts; certificates of deposit; individual retirement accounts; overdraft
protection; commercial, consumer, agriculture, real estate, residential mortgage
and home equity loans; personal and corporate trust services; safe deposit
boxes; and automated banking. In addition, through BOU Financial, Inc. ("BOU
Financial"), a subsidiary of Union, the Registrant also offers discount
brokerage services, insurance and annuity sales and financial planning services
pursuant to a third party arrangement with UVEST Investment Services.
At December 31, 1997, the Registrant and its subsidiaries had 264 full-time
employees and 68 part-time employees. The Registrant had no employees who were
not also employees of one of its subsidiaries. The Registrant considers its
relations with employees to be good.
As part of its operations, the Registrant is not dependent upon a single
customer or a few customers whose loss would have a material adverse effect on
the Registrant.
1
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As part of its operations, the Registrant regularly evaluates the potential
acquisition of or merger with, and holds discussions with, various financial
institutions. The Registrant does not currently have any specific plans or
agreements in effect with respect to any such acquisition or merger. In
addition, the Registrant periodically enters new markets and engages in new
activities in which it competes with established financial institutions. There
can be no assurance as to the success of any such new office or activity.
Furthermore, as the result of such expansions, the Registrant may from time to
time incur start-up costs that could affect the financial results of the
Registrant.
Competition
The banking laws of North Carolina allow banks located in North Carolina to
develop branches throughout the State. In addition, as the result of recent
federal and state legislation, certain out-of-state banks may open de novo
branches in North Carolina as well as acquire or merge with banks located in
North Carolina. See "Government Supervision and Regulation--General." As a
result of such laws, banking activities in North Carolina are highly
competitive.
The Banks' service delivery facilities are located in Union, Cabarrus,
Cleveland, Rutherford Counties and southern Rowan Counties and the northern and
southern edges of Mecklenburg County. A large portion of the population that
resides in these market areas, however, commutes to Charlotte and other
locations within Mecklenburg County, and these locations have numerous branches
of money-center, super-regional, regional, statewide and other Charlotte-based
institutions. In its market area, the Registrant faces competition from other
banks, savings and loan associations, savings banks, credit unions, finance
companies and major retail stores that offer competing financial services. Many
of these competitors have greater resources, broader geographic coverage and
higher lending limits than the Banks. The Banks' primary method of competition
is to provide quality service and fairly priced products.
Government Supervision and Regulation
General. As a registered bank holding company, the Registrant is subject to
the supervision of, and to regular inspection by, the Board of Governors of the
Federal Reserve System (the "Federal Reserve"). FCNB is organized as a national
banking association and is subject to regulation, supervision and examination by
the Office of the Comptroller of the Currency (the "OCC") and to regulation by
the Federal Deposit Insurance Corporation (the "FDIC"). Union is organized as a
state-chartered banking association and is subject to regulation, supervision
and examination by the North Carolina State Banking Commission (the "Banking
Commission"). As a federally insured non-member bank, Union also is subject to
regulation, supervision and examination by the FDIC.
In addition to banking laws, regulations and regulatory agencies, the
Company and its subsidiaries are subject to various other laws and regulations
and supervision and examination by other regulatory agencies, all of which
directly or indirectly affect the Company's operations, management and ability
2
<PAGE>
to make distributions. The following discussion summarizes certain aspects of
those laws and regulations that affect the Company.
Restrictions on Bank Holding Companies. The Federal Reserve is authorized
to adopt regulations affecting various aspects of bank holding companies. Under
the BHCA, the Company's activities, and those of companies which it controls or
in which it holds more than 5% of the voting stock, are limited to banking or
managing or controlling banks or furnishing services to or performing services
for its subsidiaries, or any other activity which the Federal Reserve determines
to be so closely related to banking or managing or controlling banks as to be a
proper incident thereto. In making such determinations, the Federal Reserve is
required to consider whether the performance of such activities by a bank
holding company or its subsidiaries can reasonably be expected to produce
benefits to the public such as greater convenience, increased competition or
gains in efficiency that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of
interest or unsound banking practices.
Generally, bank holding companies are required to obtain prior approval of
the Federal Reserve to engage in any new activity not previously approved by the
Federal Reserve or to acquire more than 5% of any class of voting stock of any
company. The BHCA also requires bank holding companies to obtain the prior
approval of the Federal Reserve before acquiring more than 5% of any class of
voting stock of any bank which is not already majority-owned by the bank holding
company.
The Company is also subject to the North Carolina Bank Holding Company Act
of 1984. As required by this state legislation, the Company, by virtue of its
ownership of the Banks, has registered as a bank holding company with the
Commissioner of Banks of the State of North Carolina. The North Carolina Bank
Holding Company Act also prohibits the Company from acquiring or controlling
certain non-bank banking institutions which have offices in North Carolina.
Interstate Banking and Branching Legislation. Pursuant to the Reigle--Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
and Branching Act"), which became effective September 29, 1995, a bank holding
company may now acquire banks in states other than its home state, without
regard to the permissibility of such acquisition under state law, but subject to
any state requirement that the bank has been organized and operating for a
minimum period of time, not to exceed five years, and the requirement that the
bank holding company, prior to or following the proposed acquisition, controls
no more than 10% of the total amount of deposits of insured depository
institutions in the United States and no more than 30% of such deposits in that
state (or such lesser or greater amount set by state law).
The Interstate Banking and Branching Act also authorizes banks to merge
across state lines, thereby creating interstate branches beginning June 1, 1997.
Under such legislation, each state had the opportunity either to "opt out" of
this provision, thereby prohibiting interstate branching in such states, or to
"opt in" at an earlier time, thereby allowing interstate branching within that
state prior to June 1, 1997. The State of North Carolina elected to "opt in" to
such legislation, effective June 22, 1995. Furthermore, pursuant to the
Interstate Banking and Branching Act, a bank is
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<PAGE>
now able to open new branches in a state in which it does not already have
banking operations, if the laws of such state permit such de novo branching.
Regulation of the Banks. As a national banking association, FCNB is subject
to regulation, supervision and examination by the OCC. OCC rules and
requirements applicable to national banking associations such as FCNB relate to
required reserves, allowable investments, loans, mergers, consolidations,
issuance of securities, payment of dividends, establishment of branches,
limitations on credit to subsidiaries and other aspects of the business of such
subsidiaries. The OCC has broad authority to prohibit national banks from
engaging in unsafe or unsound banking practices.
Union is a state-chartered non-member commercial bank. As such, Union must
file various reports with, and is subject to periodic examinations by, the
Banking Commission. As a federally-insured, non-member bank, Union is also
subject to regulation, supervision and examination by the FDIC. North Carolina
and FDIC rules and requirements applicable to state banks such as Union relate
to, among other things, required capital, permissible activities, reserves,
investments, lending authority, branching, mergers and consolidations, payment
of dividends, and transactions with and borrowings by affiliated parties.
Capital and Operational Requirements.
The Federal Reserve, the OCC and the FDIC have issued substantially similar
risk-based and leverage capital guidelines applicable to United States and
state-chartered banking organizations. The risk-based guidelines define a
two-tier capital framework, under which the Company and each of the Banks is
required to maintain a minimum ratio of Tier 1 Capital (as defined) to total
risk-weighted assets of 4.00% and a minimum ratio of Total Capital (as defined)
to risk weighted assets of 8.00%. With respect to the Company, Tier 1 Capital
generally consists of total stockholders' equity calculated in accordance with
generally accepted accounting principals less certain intangibles, and Total
Capital generally consists of Tier 1 Capital plus certain adjustments, the
largest of which for the Company is the general allowance for loan losses (up to
1.25% of risk-weighted assets). Tier 1 Capital must comprise at least 50% of the
Total Capital. Risk-weighted assets refer to the on- and off-balance sheet
exposures of the Company, as adjusted for one of four categories of risk-weights
established in Federal Reserve, OCC and FDIC regulations, based primarily on
relative credit risk. At December 31, 1997, the Company and the Banks were in
compliance with the risk-based capital requirements.
The leverage ratio is determined by dividing Tier 1 Capital by adjusted
total assets. Although the stated maximum ratio is 3 percent, most banking
organizations are required to maintain ratios of at least 100 to 200 basis
points about 3 percent. Management believes that the Company and each of its
banks meet their leverage ratio requirement.
4
<PAGE>
The Company's compliance with existing capital requirements is summarized in the
below.
<TABLE>
<CAPTION>
RISK BASED CAPITAL
(Dollars in -------------------------------------------
thousands) Leverage Capital Tier I Capital Total Capital
---------------- -------------- -------------
Amount Percentage (1) Amount Percentage (2) Amount Percentage (2)
<S> <C> <C> <C> <C> <C> <C>
Actual $73,919 10.65% $73,919 12.92% $81,079 14.15%
Required 27,773 4.00 22,912 4.00 45,824 8.00
Excess 46,146 6.65 51,007 8.92 35,255 6.15
</TABLE>
(1) Percentage of total adjusted average assets. The Federal Reserve minimum
leverage ratio requirement is 3% to 5%, depending on the institution's
composite rating as determined by its regulators. The Federal Reserve Board
has not advised the Company of any specific requirement applicable to it.
(2) Percentage of risk-weighted assets.
In addition to the above described Capital Requirements, the federal
regulatory agencies may from time to time require that a banking organization
maintain capital above the minimum levels whether because of its financial
condition or actual or anticipated growth.
Prompt Corrective Action under FDICIA. The Federal Deposit Insurance
Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies
five capital categories for insured depository institutions (well capitalized,
adequately capitalized, undercapitalized, significantly under capitalized and
critically undercapitalized) and requires the respective federal regulatory
agencies to implement systems for "prompt corrective action" for insured
depository institutions that do not meet minimum capital requirements within
such categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines could
also subject a banking institution to capital raising requirements. In addition,
pursuant to FDICIA, the various regulatory agencies have prescribed certain
non-capital standards for safety and soundness relating generally to operations
and management, asset quality and executive compensation, and such agencies may
take action against a financial institution that does not meet the applicable
standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the total risk-based capital, Tier 1 risk-based capital and leverage capital
ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
under-capitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 Capital ratio of at least 6%, a Total Capital
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<PAGE>
ratio of at least 10% and a leverage ratio of at least 5% and not be subject to
a capital directive order. An "adequately capitalized" institution must have a
Tier 1 Capital ratio of at least 4%, a Total Capital ratio of at least 8% and a
leverage ratio of at least 4%, or 3% in some cases. Under these guidelines, each
of the Banks is considered well capitalized.
Banking agencies have also adopted final regulations which mandate that
regulators take into consideration (i) concentrations of credit risk, (ii)
interest rate risk (when the interest rate sensitivity of an institution's
assets does not match the sensitivity of its liabilities or its
off-balance-sheet position) and (iii) risks from non-traditional activities, as
well as an institution's ability to manage those risks, when determining the
adequacy of an institution's capital. This evaluation will be made as a part of
the institution's regular safety and soundness examination. In addition, the
banking agencies have amended their regulatory capital guidelines to incorporate
a measure for market risk. In accordance with amended guidelines, the Company
and either Bank with a significant trading activity (as defined) must
incorporate a measure for market risk in its regulatory capital calculations
effective for reporting periods after January 1, 1998. The revised guidelines
are not expected to have a material impact on the Company or the Banks'
regulatory capital ratios or their well-capitalized status.
Distributions. The primary source of funds for distributions paid by the
Company to its shareholders is dividends received from the Banks. The amount of
dividends that FCNB may pay is subject to regulation by the OCC. Under current
regulations, the amount that may be declared in any calendar year without
approval of the OCC is the sum of its net profits (as defined by statute) for
that year and its net retained profits for the preceding two years. In 1998,
FCNB can initiate dividend payments without the approval of the OCC of an amount
not exceeding its net retained profits for 1996 and 1997 (approximately
$11,213,000) plus an additional amount equal to its net profits for 1998 up to
the date of any such dividend declaration.
The payment of dividends by Union is subject to restrictions of North
Carolina law applicable to the declaration of distributions by a commercial
bank. In general, Union may declare dividends in an amount that does not exceed
its undivided profits (determined as set forth in Chapter 53 of the North
Carolina General Statutes), as long as the surplus of Union equals at least 50%
of Union's paid-in capital stock. In 1998, Union can initiate dividend payments
without the approval of the North Carolina Banking Commission of an amount of
approximately $7,931,000 plus an additional amount equal to its net profits for
1998 up to the date of any such dividend declaration.
In addition to the foregoing, the ability of the Company and its
subsidiaries to pay dividends may be affected by the various minimum capital
requirements and the capital and non-capital standards established under FDICIA,
as described above. Furthermore, if, in the opinion of a federal regulatory
agency, a bank under its jurisdiction is engaged in or is about to engage in an
unsafe or unsound practice (which, depending on the financial condition of the
bank, could include the payment of dividends), such agency may require, after
notice and hearing, that such bank cease and desist from such practice. The
right of the Company, its shareholders and its creditors
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to participate in any distribution of assets or earnings of the Banks is further
subject to the prior claims of creditors against the respective Banks.
Deposit Insurance. The deposits of the Banks are insured up to applicable
limits by the FDIC. Accordingly, the Banks are subject to deposit premium
assessments of the Bank Insurance Fund ("BIF") of the FDIC. As mandated by
FDICIA, the FDIC has adopted regulations for a risk-based insurance assessment
system. Under this system, the assessment rates for an insured depository
institution vary according to the level of risk incurred in its activities. To
arrive at a risk assessment for a bank, the FDIC places it in one of nine risk
categories using a process based on capital ratios and on other relevant
information from supervisory evaluations of the bank by the bank's primary
federal regulator (the OCC for FCNB and the FDIC for Union), statistical
analyses of financial statements and other relevant information. Under the
FDIC's risk-based insurance system, assessments currently can range from no
assessment to 0.27% of the bank's average deposits base, with the exact
assessment determined by the bank's capital and the applicable regulatory
agency's opinion of the bank's operations. The range of deposit insurance
assessment rates can change from time to time, in the discretion of the FDIC,
subject to certain limits.
Source of Strength. According to Federal Reserve policy, bank holding
companies are expected to act as a source of financial strength to each
subsidiary bank and to commit resources to support each such subsidiary. This
support may be required at times when a bank holding company may not be able to
provide such support. Similarly, under the cross-guaranty provisions of the
Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by
the FDIC, either as a result of default of a banking or thrift subsidiary of the
Company or related to FDIC assistance provided to a subsidiary in danger of
default, the other banking subsidiaries of the Registrant may be assessed for
the FDIC's loss, subject to certain exceptions.
Future Legislation. Proposals to change the laws and regulations governing
the banking industry are frequently introduced in Congress, in the state
legislatures and before the various bank regulatory agencies. The likelihood and
timing of any such proposals or bills being enacted and the impact they might
have on the Company and its subsidiaries cannot be determined at this time.
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Statistical Information
The following tables present certain statistical information relating to the
Registrant. The tables should be read in conjunction with the Registrant's
Consolidated Financial Statements and Notes thereto (pages 5 through 29) and
Management's Discussion and Analysis of Financial Condition and Results of
Operations (pages 30 through 43), both of which are incorporated herein by
reference to the First Charter Corporation 1997 Annual Report to Shareholders.
All historical financial data for the periods prior to the respective dates of
acquisition of Union and CSB (each of which was accounted for as a pooling of
interest) has been restated to combine the accounts of Union and CSB with those
of the Company.
The following table includes for the years ended December 31, 1997, 1996, and
1995 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 average net yield on average
earning assets. Average balances were calculated based on daily averages.
Table 1
Average Balances and Net Interest Income Analysis
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------- ------------------------------- --------------------------
(Dollars in thousands) Interest Average Interest Average Interest Average
Average Income/ Yield/Rate Average Income/ Yield/Rate Average Income/ Yield/Rate
Balance Expense Paid Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) (2) (3) $488,331 $46,427 9.51% $437,701 $41,170 9.41% $379,472 $36,619 9.65%
Securities available for
sale - taxable 71,942 4,249 5.91 78,941 4,916 6.23 46,217 3,014 6.52
Securities available for
sale - nontaxable (4) 72,468 5,754 7.94 64,511 5,214 8.08 6,421 491 7.65
Investment securities -
taxable 13,375 766 5.73 12,093 707 5.85 46,779 2,852 6.10
Investment securities -
nontaxable (4) 1,251 83 6.66 - - - 39,807 3,398 8.54
Federal funds sold 3,661 160 4.37 4,973 266 5.35 8,136 483 5.94
Interest-bearing bank
deposits 7,529 433 5.75 8,621 460 5.34 7,398 593 8.02
-------- ------- -------- ------- -------- -------
Total $658,557 $57,872 8.79% $606,840 $52,733 8.69% $534,230 $47,450 8.88%
======== ======= ======== ======= ======== =======
Interest bearing liabilities:
Demand deposits $ 88,806 1,622 1.83% $ 82,432 $ 1,605 1.95% $ 75,642 $ 1,546 2.04%
Money market accounts 50,152 1,958 3.90 46,793 1,361 2.91 49,212 1,442 2.93
Savings deposits 118,176 5,223 4.42 119,707 5,866 4.90 108,440 5,281 4.87
Other time deposits 244,682 14,009 5.73 213,579 12,311 5.76 179,026 10,212 5.70
Other borrowings 36,590 1,939 5.30 32,158 1,654 5.14 26,229 1,355 5.17
-------- ------- -------- ------- -------- -------
Total $538,406 $24,751 4.60% $494,669 $22,797 4.61% $438,549 $19,836 4.52%
======== ======= ======== ======= ======== =======
Net interest income and
spread $33,121 4.19% $29,936 4.08% $27,614 4.36%
======= ======= =======
Net yield on interest
earning assets (5) 5.03% 4.93% 5.17%
</TABLE>
8
<PAGE>
(1) Includes loan fees of approximately $519,000 in 1997, $519,000 in 1996, and
$400,000 in 1995.
(2) The preceding analysis takes into consideration the principal amount of
nonaccruing loans and only income actually collected on such loans.
(3) Loans are shown net of unearned income.
(4) Yields on nontaxable securities are stated on a fully taxable equivalent
basis, assuming a Federal tax rate of 35% for 1997, 1996 and 1995. The
adjustments made to convert to a fully taxable equivalent basis were
$1,918,000 for 1997, $1,826,000 for 1996 and $1,515,000 for 1995.
(5) Represents net interest income as a percentage of total average interest
earning assets.
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Changes in Interest Income and Expense
The following table contains the dollar amount of change in interest income
and interest expense and segregates the dollar amount of change due to rate and
volume variances for the years ended December 31, 1997 and 1996. The change in
interest income, stated on a tax equivalent basis, or interest expense
attributable to the combination of rate variance and volume variance is included
in the table, but such amount has also been allocated between, and included in
the amounts shown as, changes due to rate and changes due to volume. The
allocation of the change due to rate/volume variance was made equally to rate
variance and to volume variance. Interest income related to tax exempt
securities is stated on a tax equivalent basis using a Federal income tax rate
of 35% in 1997, 1996 and 1995.
Table 2
Volume and Rate Variance Analysis
<TABLE>
<CAPTION>
(Dollars in thousands) From Dec. 31, 1996 to Dec. 31, 1997 From Dec. 31, 1995 to Dec. 31, 1996
------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
------------------------------------- ----------------------------------------
Rate/ Total Rate/ Total
Volume Rate Volume Change Volume Rate Volume Change
------ ---- ------ ------ ------ ---- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income:
Loans $ 51 $ 469 $4,788 $5,257 $(142) $ (997) $ 5,548 $ 4,551
Securities Available for
Sale - Taxable 22 (242) (425) (667) (96) (184) 2,086 1,902
Securities Available for
Sale - Non-Taxable (11) (97) 637 540 253 154 4,569 4,723
Investment Securities
Taxable (2) (15) 74 59 87 (74) (2,071) (2,145)
Nontaxable 83 41 42 83 3,397 (1,699) (1,699) (3,398)
------ ------ ------ ------ ----- ------ ----- ------
Total securities 92 (313) 328 15 3,641 (1,803) 2,885 1,082
Federal funds sold 13 (42) (64) (106) 19 (39) (178) (217)
Interest bearing bank deposits (5) 33 (60) (27) (33) (215) 82 (133)
------ ------ ------ ------ ------ ------- ------ -------
Total interest income 151 147 4,992 5,139 3,485 (3,054) 8,337 5,283
------ ------ ------ ------ ------ ------- ------ -------
Interest expense:
Demand deposits (8) (103) 120 17 (7) (76) 135 59
Money market accounts 33 483 114 597 1 (10) (71) (81)
Savings deposits 7 (572) (71) (643) 3 35 550 585
Other time deposits (12) (90) 1,788 1,698 21 118 1,981 2,099
Other borrowings 7 54 231 285 (1) (7) 306 299
------ ------ ------ ------ ------ ------ ------ ------
Total interest expense 27 (228) 2,182 1,954 17 60 2,901 2,961
------ ------ ------ ------ ------ ------- ------ ------
Net interest income $ 124 $ 375 $2,810 $3,185 $3,468 $(3,114) $5,436 $2,322
====== ====== ====== ====== ====== ======= ====== ======
</TABLE>
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Interest Rate Sensitivity
The following table presents the Company's interest sensitivity analysis for
December 31, 1997 and sets forth at various maturity periods the cumulative
interest sensitivity gap, which is the difference between rate sensitive assets
and rate sensitive liabilities for assets and liabilities that management
considers rate sensitive. The mortgage-backed securities are shown at their
weighted average expected life obtained from an outside evaluation of the
average remaining life of each security based on historic prepayment speeds of
the underlying mortgages at December 31, 1997. Demand deposits, money market
accounts and savings deposits are presented in the earliest repricing window
because the rates are subject to immediate repricing.
<TABLE>
<CAPTION>
Table 3 Non-
Interest Rate Sensitivity Sensitive
As of December 31, 1997 and
Interest Sensitivity in Days Sensitive
(Dollars in thousands) --------------------------------- Over 5
1 - 90 91 - 180 181 - 365 Total 1-2 Years 2-5 Years Years Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earning Assets
Interest-bearing due
from banks $7,975 $ -- $ -- $ 7,975 $ -- $ -- $ -- $ 7,975
Securities available
for sale, at
amortized cost:
Taxable 22,248 420 3,445 26,113 30,956 15,167 15,773 88,009
Nontaxable 1,170 1,224 101 2,495 7,475 14,688 59,138 83,796
Loans 241,499 7,876 18,063 267,438 82,070 67,402 107,166 524,076
------- ------ ------ ------- ------- ----- ------ -------
Total earning assets 272,892 9,520 21,609 304,021 120,501 97,257 182,077 703,856
------- ------ ------ ------- ------- ----- ------ -------
Interest-Bearing Liabilities
Interest-bearing deposits:
Demand deposits 95,343 -- -- 95,343 -- -- -- 95,343
Money market accounts 63,580 -- -- 63,580 -- -- -- 63,580
Savings deposits 4,703 3,078 16,176 23,957 48,279 -- 45,081 117,317
Other time deposits 88,468 56,396 42,393 187,257 62,660 760 3 250,680
Other borrowings 24,400 -- -- 24,400 260 1,143 27,476 53,279
------- ------ ------ ------- ------- ----- ------ -------
Total interest-bearing
liabilities 276,494 59,474 58,569 394,537 111,199 1,903 72,560 580,199
------- ------ ------ ------- ------- ----- ------ -------
Interest sensitivity
gap $(3,602) $(49,954) $(36,960) $(90,516) $ 9,302 $95,354
======= ======== ======== ======== ======== =======
Cumulative gap $(3,602) $(53,556) $(90,516) $(90,516) $(81,214) $14,140
======= ======== ======== ======== ======== =======
Ratio of earning assets
to interest-bearing
liabilities 98.70% 16.01% 36.89% 77.06% 108.37% 102.00%
</TABLE>
11
<PAGE>
Distribution of Assets and Liabilities
The following table shows the distribution of the Company's assets, liabilities
and shareholders' equity at December 31, 1997, 1996, and 1995. Average balances
were calculated based on daily averages.
Table 4
Average Balance Sheet
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
(Dollars in thousands) Average Percentage Average Percentage Average Percentage
Balance Distribution Balance Distribution Balance Distribution
------- ------------ ------- ------------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Cash and due from banks $ 25,224 3.6% $ 24,650 3.8% $ 28,677 5.0%
Interest bearing bank deposits 7,529 1.1 8,621 1.3 7,398 1.3
Investment securities - taxable 13,375 1.9 12,093 1.9 46,779 8.2
Investment securities - nontaxable 1,251 0.2 -- -- 39,807 7.0
Securities available for sale
- taxable 71,942 10.2 78,941 12.2 46,217 8.1
Securities available for sale
- nontaxable 72,468 10.3 64,511 10.0 6,421 1.1
Loans, net (1) 481,065 68.4 431,216 66.4 373,620 65.3
Federal funds sold 3,661 0.5 4,973 0.8 8,136 1.4
Other assets 26,497 3.8 23,263 3.6 15,047 2.6
-------- ----- -------- ----- -------- -----
Total $703,012 100.0% $648,268 100.0% $572,102 100.0%
======== ===== ======== ===== ======== =====
Liabilities and shareholders' equity Deposits:
Demand (2) $174,099 24.8% $162,801 25.1% $146,981 25.7%
Savings 118,176 16.8 119,707 18.5 108,440 19.0
Insured money market 50,152 7.1 46,793 7.2 49,212 8.6
Time 244,682 34.8 213,579 32.9 179,026 31.2
Other borrowings 36,590 5.2 32,158 5.0 26,229 4.6
Other liabilities 3,210 0.5 5,065 0.8 4,044 0.7
Shareholders' equity 76,103 10.8 68,165 10.5 58,170 10.2
-------- ----- -------- ----- -------- -----
Total $703,012 100.0% $648,268 100.0% $572,102 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
(l) Loans, net is net of unearned income and the allowance for loan losses.
(2) Demand includes non-interest bearing and interest bearing demand deposits.
12
<PAGE>
Securities Available for Sale
The following table shows, as of December 31, 1997, 1996 and 1995, the
carrying value of (i) U.S. Government obligations, (ii) U.S. Government agency
obligations, (iii) mortgage-backed securities, (iv) state and municipal
obligations, and (v) equity securities.
Table 5
Securities Available for Sale
(Dollars in thousands) December 31,
----------------------------------
Securities Available for Sale:
1997 1996 1995
-------- -------- --------
U.S. Government obligations $ 22,333 $ 39,095 $ 41,964
U.S. Government agency obligations 45,863 11,583 26,524
Mortgage-backed securities 9,676 14,513 18,290
State and municipal obligations 85,532 72,050 59,053
Equity securities 13,627 6,424 5,421
-------- -------- --------
$177,031 $143,665 $151,252
======== ======== ========
Investment Portfolio
The following table shows, as of December 31, 1997, 1996 and 1995, the
amortized cost (face amount, plus unamortized premiums, less unamortized
discounts), of (i) U.S. Government obligations, (ii) U.S. Government agency
obligations, (iii) mortgage-backed securities, and (iv) state and municipal
obligations.
Table 6
Investment Portfolio
(Dollars in thousands) December 31,
---------------------------------
Investment Securities
1997 1996 1995
------- ------- -------
U.S. Government obligations $ -- $13,940 $ 8,959
U.S. Government agency obligations -- -- --
Mortgage-backed securities -- -- --
State and municipal obligations -- -- --
------- ------- -------
$ -- $13,940 $ 8,959
======= ======= =======
13
<PAGE>
Securities Available for Sale - Maturities
The following table indicates the carrying value of each significant
securities available for sale category due within one year, after one year but
within five years, after five years but within ten years, and after ten years,
together with the weighted average yield for each range of maturities, as of
December 31, 1997. Mortgage-backed securities are presented at their contractual
maturity date. Actual maturities will differ from contractual maturities because
borrowers have the right to pre-pay these obligations without pre-payment
penalties. Yields are determined based on amortized cost. Yields are stated on a
tax equivalent basis assuming a Federal income tax rate of 35% in 1997.
Table 7
Securities Available for Sale
As of December 31, 1997
<TABLE>
<CAPTION>
(Dollars in thousands)
After Five
Due Within One After One Year but Years But
Year Within Five Years Within Ten Years After Ten Years
----------------- ----------------- ---------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
Obligations $10,016 6.68% $12,317 7.47% $ -- -% $ -- -%
U.S. Government
Agency Obligations 799 5.98 17,838 6.70 27,226 7.24 -- --
Mortgage-Backed
Securities 504 5.40 2,641 6.68 4,649 6.07 1,882 7.81
State & Municipal
Obligations 2,504 9.43 24,035 8.02 37,665 7.06 21,328 7.33
Equity securities -- -- -- -- -- -- 13,627 5.46
------- ------- ------- -------
Total $13,823 7.09% $56,831 7.42% $69,540 6.94% $36,837 6.62%
======= ======= ======= =======
</TABLE>
As of December 31, 1997, there were no issues of securities available for
sale (excluding U.S. Government obligations and U.S. Government agency
obligations) which had carrying values that exceeded 10% of shareholders' equity
of the Company.
As of December 31, 1997, there were no investment securities classified as
held to maturity.
14
<PAGE>
Loan Portfolio
The table below summarizes loans in the classifications indicated as of
December 31, 1997, 1996, 1995, 1994, and 1993.
Table 8
Loan Portfolio Composition
<TABLE>
<CAPTION>
(Dollars in thousands) December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 80,656 $ 63,552 $ 66,753 $ 60,414 $ 55,562
Real estate - construction
and development 76,429 47,133 35,578 31,884 23,688
Real estate - mortgage 304,188 277,405 255,513 210,350 175,486
Installment 62,803 68,619 57,269 49,021 39,445
--------- --------- --------- --------- ---------
Total loans 524,076 456,709 415,113 351,669 294,181
--------- --------- --------- --------- ---------
Less - allowance for loan
losses (8,004) (6,528) (6,056) (5,056) (4,605)
Unearned income (273) (193) (296) (201) (88)
--------- --------- --------- --------- ---------
Loans, net $ 515,799 $ 449,988 $ 408,761 $ 346,412 $ 289,488
========= ========= ========= ========= =========
</TABLE>
15
<PAGE>
Maturities and Sensitivities of Loans to Change in Interest Rates
Set forth in the table below are the amounts of each loan type, except
installment loans and real estate mortgage loans, due in one year, after one
year through five years, and after five years, at December 31, 1997. This table
excludes nonaccrual loans.
Table 9
Maturities and Sensitivity to
Change in Interest Rates
December 31, 1997
------------------------------------------------
(Dollars in thousands) After l
l year Year through After
or less 5 Years 5 Years Total
------- ------- ------- --------
Commercial, financial
and agricultural $36,298 $31,919 $12,439 $ 80,656
Real estate
construction and
development 43,394 32,926 109 76,429
------- ------- ------- --------
Total $79,692 $64,845 $12,548 $157,085
======= ======= ======= ========
The amounts of the above loans with a maturity over one year which have a
predetermined interest rate or a floating or adjustable interest rate are as
follows:
December 31, 1997
(Dollars in thousands) ----------------
Predetermined interest rate $45,303
Floating or adjustable interest rate 32,089
16
<PAGE>
Non-performing Loans
Non-performing loans includes non-accrual loans, re-structured loans and
accruing loans which are contractually past due 90 days or more.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Balance Sheet Analysis - Asset Quality" in the First
Charter Corporation 1997 Annual Report to Shareholders, incorporated herein by
reference, for a complete discussion of non-performing assets.
Accruing Loans 90 Days or More Past Due
The following table reflects the dollar amount of loans outstanding in each
category and the amount and percentage of those accruing loans which are 90 days
or more past due as of December 31, 1997, 1996, 1995, 1994, and 1993.
Table 10
Accruing Loans 90 Days or More Past Due
Accruing Percentage of
Loans 90 Such Loans to
Days or Gross Gross Loans
(Dollars in thousands) More Loans Outstanding
Past Due Outstanding By Category
-------- ----------- -----------
December 31, 1997
Commercial, financial and
agricultural $ 999 $ 80,656 1.24%
Real estate - construction
and development 33 76,429 .04
Real estate - mortgage 858 304,188 .28
Installment 219 62,803 .35
-------- --------
Total $ 2,109 $524,076 .40%
======== ========
December 31, 1996
Commercial, financial and
agricultural $ 34 $ 63,552 .05%
Real estate - construction
and development 49 47,133 .10
Real estate - mortgage 469 277,405 .17
Installment 133 68,619 .19
-------- --------
Total $ 685 $456,709 .15%
======== ========
December 31, 1995
Commercial, financial and
agricultural $ 27 $ 66,753 .04%
Real estate - construction
and development 47 35,578 .13
Real estate - mortgage 163 255,513 .06
Installment 164 57,269 .29
-------- --------
Total $ 401 $415,113 .10%
======== ========
December 31, 1994
Commercial, financial and
agricultural $ 219 $ 60,414 .36%
Real estate - construction
and development -- 31,884 --
Real Estate - mortgage 1,109 210,350 .53
Installment 224 49,021 .46
-------- --------
Total $ 1,552 $351,669 .44%
======== ========
Table 10 is continued on page 18
17
<PAGE>
Table 10 (Continued)
Accruing Loans 90 Days or More Past Due
Accruing Percentage of
Loans 90 Such Loans to
Days or Gross Gross Loans
(Dollars in thousands) More Loans Outstanding
Past Due Outstanding By Category
-------- ----------- -----------
December 31, 1993
Commercial, financial and
agricultural $ 110 $ 55,562 .20%
Real estate - construction
and development -- 23,688 --
Real estate - mortgage 198 175,486 .11
Installment 82 39,445 .21
-------- --------
Total $ 390 $294,181 .13%
======== ========
Non-Accrual Loans and Restructured Loans
The determination to discontinue the accrual of interest is based on a
review of each loan. Interest is discontinued on loans 90 days past due as to
principal or interest unless in management's opinion collection of both
principal and interest is assured by way of collateralization, guarantees or
other security and the loan is in the process of collection. The table below
summarizes the Company's non-accrual loans and restructured loans as of the
dates indicated.
Table 11
Non-accrual and Restructured Loans
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands)
Non-accrual loans
Principal balance outstanding $2,105 $1,630 $2,453 $2,857 $2,495
====== ====== ====== ====== ======
Interest income recorded during
the year $ 22 $ 42 $ 82 $ 143 $ 77
Interest income that would have
been recorded if the loans had
been current and accruing $ 225 $ 174 $ 330 $ 356 $ 224
Restructured loans
Principal balance outstanding $ - $ - $ 300 $ 325 $ 795
====== ====== ====== ====== ======
Interest income recorded during
the year $ - $ - $ 45 $ - $ 50
Interest income that would have
been recorded if the loans had
been current and accruing $ - $ - $ 27 $ 36 $ 59
</TABLE>
18
<PAGE>
Summary of Loan Loss and Recovery Experience
The table below presents certain data for the years ended December 31,
1997, 1996, 1995, 1994, and 1993, including the following: (i) the average
amount of net loans outstanding during the year, (ii) the allowance for loan
losses at the beginning of the year, (iii) the provision for loan losses, (iv)
loans charged off and recoveries of loans previously charged off presented by
major loan categories, (v) loan charge-offs, net, (vi) the allowance for loan
losses at the end of the year, (vii) the ratio of net charge-offs to average
loans, (viii) the ratio of the allowance for loan losses to average loans and
(ix) the ratio of the allowance for loan losses to loans at year-end, excluding
loans held for sale.
Table 12
Summary of Loan Loss and Recovery Experience
<TABLE>
<CAPTION>
(Dollars in thousands) Years Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Average loans, net of unearned
income $488,331 $437,701 $379,472 $316,103 $273,269
======== ======== ======== ======== ========
Allowance for loan losses:
Beginning balance $ 6,528 $ 6,056 $ 5,056 $ 4,605 $ 4,362
Add provision for loan losses 2,702 1,540 1,991 1,105 1,133
-------- -------- -------- -------- --------
9,230 7,596 7,047 5,710 5,495
-------- -------- -------- -------- --------
Loan charge-offs:
Commercial, financial and
agricultural 347 367 513 625 713
Real estate - construction
and development - - - 132 -
Real estate - mortgage 61 95 196 84 86
Installment 1,218 1,004 498 241 240
-------- -------- -------- -------- --------
1,626 1,466 1,207 1,082 1,039
-------- -------- -------- -------- --------
Recoveries of loans previously
charged-off:
Commercial, financial and
agricultural 123 154 58 187 60
Real estate - construction
and development - 3 - 1 -
Real estate - mortgage 33 16 3 110 19
Installment 244 225 155 59 70
-------- -------- -------- -------- --------
400 398 216 357 149
-------- -------- -------- -------- --------
Loan charge-offs, net 1,226 1,068 991 725 890
-------- -------- -------- -------- --------
Allowance acquired in branch
purchases - - - 71 -
-------- -------- -------- -------- --------
Ending balance $ 8,004 $ 6,528 $ 6,056 $ 5,056 $ 4,605
======== ======== ======== ======== ========
Net charge-offs to average loans .25% .24% .26% .23% .33%
Allowance for loan losses to
average loans, net of
unearned income 1.64 1.49 1.60 1.60 1.69
Allowance for loan losses to
gross loans at year-end, excluding
loans held for sale 1.53 1.43 1.46 1.44 1.57
</TABLE>
For a discussion of management's evaluation of the allowance for loan loss,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations Earnings Performance - Provision for Loan Losses" and "- Balance
Sheet Analysis - Asset Quality" in the First Charter Corporation 1997 Annual
Report to Shareholders, incorporated herein by reference.
19
<PAGE>
Allowance for Loan Losses
The following table presents the dollar amount of the allowance for loan
losses applicable to major loan categories (including pro rata share of
unallocated reserves) the percentage of the allowance amount in each category
to the total allowance and the percentage of the loans in each category to
total loans as of December 31, 1997, 1996, 1995, 1994, and 1993. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Earnings Performance - Provision for Loan Losses" and "- Balance
Sheet Analysis - Asset Quality" in the First Charter Corporation 1997 Annual
Report to Shareholders, incorporated herein by reference.
Table 13
Allowance for Loan Losses
Percentage of
(Dollars in thousands) Percentage Gross Loans in
Allowance of Total Each Category
Amount Allowance to Total Loans
December 31, 1997
Type of Loan:
Commercial, financial and
agricultural $1,664 21% 15%
Real estate - construction and
development 1,216 15 15
Real estate - mortgage 4,290 54 58
Installment 834 10 12
------ --- ---
Total $8,004 100% 100%
====== === ===
December 31, 1996
Type of Loan:
Commercial, financial and
agricultural $1,329 20% 14%
Real estate - construction and
development 640 10 10
Real estate - mortgage 4,007 61 61
Installment 552 9 15
------ --- ---
Total $6,528 100% 100%
====== === ===
December 31, 1995
Type of Loan:
Commercial, financial and
agricultural $936 15% 16%
Real estate - construction and
development 477 8 9
Real estate - mortgage 3,933 65 61
Installment 710 12 14
------ --- ---
Total $6,056 100% 100%
====== === ===
Table 13 is continued on page 21.
20
<PAGE>
Table 13
Allowance for Loan Losses (Continued)
(Dollars in thousands) Percentage of
Percentage Gross Loans in
Allowance of Total Each Category
Amount Allowance to Total Loans
December 31, 1994
Type of Loan:
Commercial, financial and
agricultural $1,516 30% 17%
Real estate - construction and
development 354 7 9
Real estate - mortgage 2,511 50 60
Installment 675 13 14
------ ------ ------
Total $5,056 100% 100%
====== ====== ======
December 31, 1993
Type of Loan:
Commercial, financial and
agricultural $1,902 41% 19%
Real estate - construction and
development 475 10 8
Real estate - mortgage 1,767 39 60
Installment 461 10 13
------ ------ ------
Total $4,605 100% 100%
====== ====== ======
21
<PAGE>
Deposits
The Banks primarily serve individuals and small- to medium-sized businesses with
a variety of deposit accounts, such as NOW accounts, money market accounts,
certificates of deposit and individual retirement accounts. The following table
presents average balances by category and average rates paid for the years ended
December 31, 1997, 1996, and 1995. Average balances were calculated based on
daily averages.
Table 14
Deposits
<TABLE>
<CAPTION>
As of December 31,
1997 1996 1995
-------------------------- ------------------------ -------------------------
Avg. Avg. Avg.
(Dollars in thousands) Average Interest Rate Average Interest Rate Average Interest Rate
Balance Expense Paid Balance Expense Paid Balance Expense Paid
------- ------- ---- ------- ------- ---- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Non-interest bearing demand
deposits $ 85,293 $ - - $ 80,369 $- - $ 71,339 $ - -
Interest bearing deposits:
Demand deposits 88,806 1,622 1.83% 82,432 1,605 1.95% 75,642 1,546 2.04%
Insured money markets 50,152 1,958 3.90 46,793 1,361 2.91 49,212 1,442 2.93
Savings deposits 118,176 5,223 4.42 119,707 5,866 4.90 108,440 5,281 4.87
Time deposits 244,682 14,009 5.73 213,579 12,311 5.76 179,026 10,212 5.70
-------- ------- -------- ------ -------- -------
Total $501,816 $22,812 $462,511 $21,143 $412,320 $18,481
-------- ------- -------- ------- -------- -------
Total deposits $587,109 $22,812 $542,880 $21,143 $483,659 $18,481
======== ======= ======== ======= ======== =======
</TABLE>
As of December 31, 1997, domestic time deposits of $100,000 or more totaled
$66,135,141, with the following maturities: $35,488,736, three months or less;
$15,479,238, over three months through six months; $5,212,989, over six months
through twelve months and $9,954,178, over one year.
22
<PAGE>
Other Borrowings
The following is a schedule of other borrowings which consists of the
following categories: securities sold under repurchase agreements, federal funds
purchased and Federal Home Loan Bank ("FHLB") borrowings for the years ended
December 31, 1997, 1996 and 1995.
Table 15
Other Borrowings
Interest Maximum
Balance Rate Avg. Outstanding
(Dollars in thousands) as of as of Average Int. at Any
Dec. 31 Dec. 31 Balance Rate Month-End
------- -------- ------- ---- ---------
1997
Federal funds purchased,
securities sold under
agreements to purchase
and FHLB borrowings $ 53,279 5.79% $36,590 5.37% $55,789
======== ======= =======
1996
Federal funds purchased,
securities sold
under agreements to
repurchase and
FHLB borrowings $ 32,895 5.23% $32,158 5.14% $36,440
======== ======= =======
1995
Federal funds purchased,
securities sold
under agreements to
repurchase and
FHLB borrowings $ 39,714 5.40% $26,145 5.16% $58,565
======== ======= =======
At December 31, 1997, the Banks had two available lines of credit with the FHLB
totaling $52.5 million with $26,933,275 outstanding. The outstanding amounts
consisted of $24,400,000 maturing in 1998, $260,417 maturing in 1999, $1,142,858
maturing in 2001, $600,000 maturing in 2003, and $530,000 maturing in 2011. At
December 31, 1997, such amounts were outstanding at market interest rates for
the specific advance program and maturity. In addition, the Banks are required
to pledge collateral to secure the advances as described in the line of credit
agreements. The collateral consists of FHLB stock and qualifying 1-4 family
residential mortgage loans.
23
<PAGE>
Return on Equity and Assets
The table below indicates the return on average assets (net income divided
by average total assets), return on average equity (net income divided by
average equity), dividend payout ratio (dividends declared divided by net
income), and average equity to average assets ratio (average equity divided by
average total assets) and other key operating data for the years ended December
31, 1997, 1996, and 1995. Averages are based on daily balances.
Table 16
Return on Equity and Assets
December 31,
-------------------------------------
(Dollars in thousands 1997 1996 1995
------- ------- -------
except per share amounts)
Net income $8,401 $10,069 $8,304
Average shareholders' equity 76,103 68,165 58,170
Average total assets 703,012 648,268 572,102
Dividends declared 4,246 3,775 2,618
Dividends per share .53 .50 .43
Basic net income per share 0.91 1.10 0.95
Diluted net income per share 0.90 1.09 0.94
Return on average assets 1.20% 1.55% 1.45%
Return on average equity 11.04 14.77 14.28
Dividend payout ratio 50.54 37.49 31.53
Average equity to average assets ratio 10.83 10.51 10.17
24
<PAGE>
Item 2. Properties
The Company -
The trust department and certain corporate offices of the Company and FCNB
are located at Church Street Commons, 845 Church Street, North, Concord, North
Carolina. This property, consisting of approximately 4,633 square feet of office
space, is leased pursuant to an agreement providing for a three year period
beginning October 1, 1996 and ending September 30, 1999, with an option to renew
for one five year period. Lease payments under the agreement are $5,358.84 per
month. The accounting, operations and data processing departments of FCNB, as
well as the principal executive office of the Company and FCNB, currently are
located in a facility at 22 Union Street, North, Concord, North Carolina which
was purchased in 1980 and contains approximately 19,500 square feet of office
space.
The main office of FCNB is located at 4 Union Street, North, Concord, North
Carolina and contains approximately 12,300 square feet of office space, parking
and a three lane drive-in teller facility with an attached full service ATM. The
main office of Union is located at 201 North Charlotte Avenue, Monroe, North
Carolina in a two-story building containing approximately 6,850 square feet,
which was constructed by Union in 1985 and which Union owns in fee simple. Union
owns a vacant lot adjacent to its main office on which it maintains a
full-service ATM.
Union's mortgage loan department is located in Monroe, North Carolina, in a
building containing approximately 2,000 square feet, which is leased from a
third party under an agreement providing for a current term of three years which
expires on February 28, 2000. Union has options to renew the lease for up to
three consecutive additional terms of three years each. As of March 1, 1997,
lease payments under the agreement will be $2,200 per month
In addition to its main office, FCNB has full service branches located in
North Carolina which are listed below:
Boiling Springs Concord - Wilmar (10
Cornelius (1) Davidson Concord - Highway 29
Forest City Harrisburg (1)
Huntersville (1) Kannapolis (1)
Kings Mountain Landis (1)
Midland (1) Mt. Pleasant
Oakdale (1) Shelby
- ----------
(1) Branch maintains an ATM on site
All of these branches, except Davidson, have drive-in teller facilities. In
addition, eight remote ATMs are maintained in various convenience-style
locations throughout Cabarrus and northeast Mecklenburg counties.
The Branchview Shopping Center branch (in Concord), the Huntersville branch
and a small portion of the main office are leased
25
<PAGE>
from third parties. The rest of the aforementioned FCNB properties are owned
free of any encumbrances. The monthly rents for the Branchview and Huntersville
branches are $1,152 and $3,500, respectively. The respective leases expire in
2002 and 1999, and each have remaining renewal options of five years.
FCNB owns two separate properties in northeast Mecklenburg County for
future branch expansion. Both properties could accommodate full service branches
with drive-in teller facilities, if desired, for future development.
In addition to its main office, Union has full service branches located in
North Carolina which are listed below:
Indian Trail (2), (1) Skyway Drive (3)
Waxhaw (4), (1) Matthews (5)
- ----------
(1) Branch maintains an ATM on site
(2) The building and the land are leased from a third party under an
agreement providing for an original term of fifteen years which expires on
October 31, 2001. Union has options to renew the lease for up to three
consecutive additional terms of five years each. Lease payments under the
agreement are $2,685 per month.
(3) The building is located on land leased from a third party under an
agreement which provides for an original term of fifteen years which
expires on February 1, 2003. Union has options to renew the lease for up to
five consecutive additional terms of five years each. Lease payments under
the Agreement are $1,450 per month, and Union has an option to purchase the
property at the end of ten years at a price of $200,000.
(4) Branch is owned by Union in fee simple.
(5) The facility is leased from a third party under an agreement which
provided for an original term of one year which expired on March 31, 1993.
The original agreement provided for options to renew the lease for up to
three consecutive additional terms of one year each. Union exercised its
final option to renew, which expired on March 31, 1996. As of April, 1996,
monthly lease payments of $3,000 are being paid per a month-to-month
agreement with the third party. Property for a new branch has been
purchased, and a new building is under construction and is estimated to be
completed during the first quarter of 1998. Management expects it will be
able to continue its month to month lease arrangement with the third party
at the present site until such time as new branch construction is complete
and available for occupancy.
26
<PAGE>
Item 3. Legal Proceedings
The Corporation and the Banks are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated operations, liquidity or financial position of the Corporation or
the Banks.
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of the shareholders of the Registrant was held on
December 10, 1997 (the "First Charter Special Meeting") to (A) consider and vote
upon a proposal to approve the Agreement and Plan of Merger dated August 15,
1997, by and between the Registrant and CSB (the "Merger Agreement"), and the
transactions contemplated thereby, including (i) the merger of CSB into FCNB
(the "Merger") and (ii) the issuance of 1.023 shares of common stock of the
Registrant for each outstanding share of common stock of CSB upon the
consummation of the Merger, and (B) consider and vote upon Amended and Restated
Articles of Incorporation for the Registrant, which included amendments to (i)
increase the number of shares of common stock that the Company is authorized to
issue from 10,000,000 to 25,000,000 and (ii) make certain technical changes to
reflect changes in the North Carolina Business Corporation Act.
A motion to approve the Merger Agreement and the transactions contemplated
thereby was adopted by a vote of the majority of the votes cast by shareholders
of the Registrant, as follows:
For: 5,486,170
Against: 13,363
Abstained: 13,092
Broker Non Votes: -
A motion to approve the Amended and Restated Articles of Incorporation of
the Registrant and the amendments contemplated thereby was adopted by a vote of
the majority of the votes cast by shareholders of the Registrant, as follows:
For: 5,137,858
Against: 662,544
Abstained: 13,027
Broker Non Votes: -
27
<PAGE>
Item 4A. Executive Officers of the Registrant
The following list sets forth with respect to each of the current executive
officers of the registrant his or her name, age, positions and offices held with
the Registrant and the Banks, the period served in such positions or offices
and, if such person has served in such position and office for less than five
years, the prior employment of such person.
<TABLE>
<CAPTION>
Name Age Office and Position - Year Elected
- ---- --- ----------------------------------
<S> <C> <C> <C>
Lawrence M. Kimbrough 57 President and Chief Executive Officer 1986 - Present
of the Registrant and FCNB
Robert O. Bratton 49 Executive Vice President, Chief 1983 - Present
Operating Officer and Chief
Financial Officer of the
Registrant and FCNB
Vice President of Union 1996 - Present
Robert G, Fox, Jr. 48 Executive Vice President 1993 - Present
of the Registrant and FCNB and
Credit Administrator of FCNB
Vice President of Union 1996 - Present
Senior Vice President and 1989 - 1993
Senior Credit Officer
Barclays Bank of NC
H. Clark Goodwin 63 Executive Vice President of the 1995 - Present
Registrant
President and Chief Executive 1985 - Present
Officer of Union
Edward B. McConnell 51 Executive Vice President of the
Registrant and FCNB 1996 - Present
Vice President of Union 1996 - Present
Senior Vice President, FCNB 1995 - 1996
Senior Vice President, First Union 1994 - 1995
President, Crown National Bank 1993 - 1994
John J. Godbold, Jr. 56 Executive Vice President of the
Registrant and FCNB 1997 - Present
President and Chief Executive Officer
of the former Carolina State Bank 1990 - 1997
</TABLE>
28
<PAGE>
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters
The information called for by Item 5 with respect to the market price of
and dividends on the Registrant's Common Stock is set forth on the inside back
cover of the First Charter Corporation 1997 Annual Report to Shareholders
(included herewith as Exhibit 13.1) under the caption "Stock Information and
Dividends" and is hereby incorporated by reference.
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 1993, as amended. During the year
ended December 31, 1997, the Registrant issued the following shares pursuant to
such option exercises:
On February 4, 1997, the Registrant issued 4,080 shares for an aggregate of
$16,899.00.
On March 20, 1997, the Registrant issued 420 shares for an aggregate of
$2,241.75.
On June 15, 1997, the Registrant issued 600 shares for an aggregate of
$5,250.00.
On July 14, 1997, the Registrant issued 4,320 shares for an aggregate of
$38,892.00.
On July 23, 1997, the Registrant issued 350 shares for an aggregate of
$1,868.13.
On August 7, 1997, the Registrant issued 648 shares for an aggregate of
$5,670.00.
On August 20, 1997, the Registrant issued 180 shares for an aggregate of
$2,207.70.
On October 20, 1997, the Registrant issued 672 shares for an aggregate of
$5,880.00.
On December 19, 1997, the Registrant issued 100 shares for an aggregate of
$1,226.51.
On December 22, 1997, the Registrant issued 375 shares for an aggregate of
$2,001.56.
Item 6. Selected Financial Data
The information called for by Item 6 is set forth on page 1 of the First
Charter Corporation 1997 Annual Report to Shareholders (included herein as
Exhibit 13.l) under the caption "Selected Consolidated Financial Data" and is
hereby incorporated by reference.
29
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information called for by Item 7 is set forth on pages 30 through 43 of
the First Charter Corporation 1997 Annual Report to Shareholders (included
herein as Exhibit 13.1) under the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and is hereby
incorporated by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information called for by Item 7A is set forth on pages 32 and 33 of
the First Charter Corporation 1997 Annual Report to Shareholders (included
herein as Exhibit 13.1) under the section entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations and Financial Condition" and is hereby incorporated by reference.
Item 8. Financial Statements and Supplementary Data
The information called for by Item 8 is set forth on pages 5 through 29 of
the First Charter Corporation 1997 Annual Report to Shareholders (included
herein as Exhibit 13.1) and is hereby incorporated by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None
30
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information called for by Item 10 with respect to directors and Section
16 matters is set forth in the Registrant's Proxy Statement for its 1998 Annual
Meeting of Shareholders under the captions "Election of Directors", and "Section
16(a) Beneficial Ownership Reporting Compliance," respectively, and is hereby
incorporated by reference. The information called for by Item 10 with respect to
executive officers is set forth in Part I, Item 4A hereof.
Item 11. Executive Compensation
The information called for by Item 11 is set forth in the Registrant's
Proxy Statement for its 1998 Annual Meeting of Shareholders under the captions
"Election of Directors - Compensation of Directors", "Executive Compensation"
and "Compensation Committee Interlocks and Insider Participation in Compensation
Decisions," respectively, and is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by Item 12 is set forth in the Registrant's
Proxy Statement for its 1998 Annual Meeting of Shareholders under the captions
"Principal Shareholders" and "Management Ownership of Common Stock,"
respectively, and is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions
The information called for by Item 13 is set forth in the Registrant's
Proxy Statement for its 1998 Annual Meeting of Shareholders under the caption
"Certain Relationships and Related Transactions" and is hereby incorporated by
reference.
31
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (l) Financial Statements.
The following financial statements, together with a report thereon of
independent certified public accountants, are included in this report by
incorporation by reference to the First Charter Corporation 1997 Annual
Report to Shareholders (included herein as Exhibit 13.1) as set forth in
Item 8:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1997 and 1996
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
Financial statement schedules, for which provision for filing is made in
the applicable accounting regulations of the Securities and Exchange
Commission for bank holding companies, are omitted because the required
information is not applicable or is included elsewhere herein.
(3) 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.
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 year ended December 31, 1995 (Commission File
No. 0-15829).
32
<PAGE>
Exhibit No.
(per Exhibit
Table in
Item 601 of
Regulation S-K) Description of Exhibits
- --------------- -----------------------
*10.1 Comprehensive Stock Option Plan, incorporated herein by
reference to Exhibit 10.1 of the Registrant's Annual Report on
Form 10-K for the fiscal year ended December 31, 1992
(Commission File No. 0-15829).
10.2 Dividend Reinvestment and Stock Purchase Plan, incorporated
herein by reference to Exhibit 28.1 of the Registrant's
Registration Statement No. 33-52004.
*10.3 Executive Incentive Bonus Plan.
10.4 1996 Employee Stock Purchase Plan, incorporated herein by
reference to Exhibit 99.1 of the Registrant's Registration
Statement No. 333-00321.
*10.5 Change in Control Agreement dated November 16, 1994 for
Lawrence M. Kimbrough, incorporated herein by reference to
Exhibit 10.5 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994 (Commission File No. 0-15829.)
*10.6 Change in Control Agreement dated November 16, 1994 for Robert
O. Bratton incorporated herein by reference to Exhibit 10.6 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 (Commission File No. 0-15829.)
*10.7 Change in Control Agreement dated November 16, 1994 for Robert
G. Fox, Jr. incorporated herein by reference to Exhibit 10.7 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994 (Commission File No. 0-15829.)
*10.8 Amended and Restated Employment Agreement between First Charter
National Bank and John J. Godbold, Jr. dated as of December 22,
1997.
*10.9 Restricted Stock Award Program, incorporated herein by
reference to Exhibit 99.1 of the Registrant's Registration
Statement No. 33-60949.
10.10 Agreement and Plan of Merger between the Registrant and
Carolina State Bank dated as of August 15, 1997, incorporated
herein by reference to Exhibit 2.1 of the Registrant's
Registration Statement No. 333-35905.
33
<PAGE>
Exhibit No.
(per Exhibit
Table in
Item 601 of
Regulation S-K) Description of Exhibits
- --------------- -----------------------
10.11 Stock Option Agreement between the Registrant and Carolina
State Bank dated June 30, 1997, incorporated herein by
reference to Exhibit 99.2 of the Registrant's Current Report on
Form 8-K filed July 2, 1997 (Commission File No. 0-15829).
*10.12 Employment Agreement dated as of January 20, 1993, as amended
as of August 31, 1995, between Bank of Union and H. Clark
Goodwin, incorporated herein by reference to Exhibit 10.12 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1995 (Commission File No. 0-15829).
*10.13 Change in Control Agreement dated October 16, 1996 for Edward
B. McConnell, incorporated herein by reference to Exhibit 10.13
of the Registrant's Annual Report on Form 10-K for the
year-ended December 31, 1996 (Commission File No. 0-15829).
10.14 1998 Employee Stock Purchase Plan, incorporated herein by
reference to Exhibit 99.1 of the Registrant's Registration
Statement No. 333-43617.
*10.15 Stock Option Plan For Non-Employee Directors.
*10.16 Amended and Restated Salary Continuation Agreement between
First Charter National Bank and John J. Godbold, Jr. dated as
of December 22, 1997.
11.1 Statement regarding computation of per share earnings.
13.1 First Charter Corporation Annual Report to its shareholders for
the year ended December 31, 1997. Such Annual Report to its
shareholders, except for those portions which are expressly
incorporated by reference in this Form 10-K, is furnished for
the information of the Commission and is not to be deemed
"filed" as part of the Form 10-K.
21.1 List of subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
* Indicates a management contract or compensatory plan required to be filed
herein.
34
<PAGE>
(b) Reports on Form 8-K.
There were no current reports on Form 8-K filed in the fourth quarter of
1997.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) 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)
By: /s/ Lawrence M. Kimbrough
--------------------------------
Lawrence M. Kimbrough, President
Date: March 26, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Lawrence M. Kimbrough President and Director March 26, 1998
- --------------------------- (Principal Executive
(Lawrence M. Kimbrough) Officer)
- --------------------------- Chairman of the Board
(J. Roy Davis, Jr.) and Director
/s/ Branson C. Jones Vice Chairman of the March 26, 1998
- --------------------------- Board and Director
(Branson C. Jones)
/s/ Robert O. Bratton Executive Vice President March 26, 1998
- --------------------------- (Principal Financial and
(Robert O. Bratton) Principal Accounting Officer)
- --------------------------- Director
(William R. Black)
/s/ Michael R. Coltrane Director March 26, 1998
- ---------------------------
(Michael R. Coltrane)
/s/ T. Carl Dedmon Director March 26, 1998
- ---------------------------
(T. Carl Dedmon)
- --------------------------- Director
(James B. Fincher)
- --------------------------- Director
(John J. Godbold, Jr.)
/s/ H. Clark Goodwin Director March 26, 1998
- ---------------------------
(H. Clark Goodwin)
36
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Charles F. Harry III Director March 26, 1998
- ---------------------------
(Charles F. Harry, III)
/s/ Frank H. Hawfield Director March 26, 1998
- ---------------------------
(Frank H. Hawfield)
/s/ J. Knox Hillman, Jr. Director March 26, 1998
- ---------------------------
(J. Knox Hillman, Jr.)
- --------------------------- Director
(Jerry E. McGee)
/s/ Hugh H. Morrison Director March 26, 1998
- ---------------------------
(Hugh H. Morrison)
- --------------------------- Director
(Thomas R. Revels)
37
<PAGE>
Exhibit Index
Exhibit No.
(per Exhibit
Table in
Item 601 of Sequential
Regulation S-K) Description of Exhibits Page No
- --------------- ----------------------- -------
3.1 Amended and Restated Articles of Incorporation of the
Registrant.
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 year ended December
31, 1995 (Commission File No. 0-15829).
*10.1 Comprehensive Stock Option Plan, incorporated herein by
reference to Exhibit 10.1 of the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1992 (Commission File No. 0-15829).
10.2 Dividend Reinvestment and Stock Purchase Plan,
incorporated herein by reference to Exhibit 28.1 of the
Registrant's Registration Statement No. 33-52004.
*10.3 Executive Incentive Bonus Plan.
10.4 1996 Employee Stock Purchase Plan, incorporated herein
by reference to Exhibit 99.1 of the Registrant's
Registration Statement No. 333-00321.
*10.5 Change in Control Agreement dated November 16, 1994 for
Lawrence M. Kimbrough, incorporated herein by reference
to Exhibit 10.5 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994
(Commission File No. 0-15829.)
*10.6 Change in Control Agreement dated November 16, 1994 for
Robert O. Bratton incorporated herein by reference to
Exhibit 10.6 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994 (Commission
File No. 0-15829.)
*10.7 Change in Control Agreement dated November 16, 1994 for
Robert G. Fox, Jr. incorporated herein by reference to
Exhibit 10.7 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1994 (Commission
File No. 0-15829.)
38
<PAGE>
Exhibit No.
(per Exhibit
Table in
Item 601 of Sequential
Regulation S-K) Description of Exhibits Page No
- --------------- ----------------------- -------
*10.8 Amended and Restated Employment Agreement between First
Charter National Bank and John J. Godbold, Jr. dated as
of December 22, 1997.
*10.9 Restricted Stock Award Program, incorporated herein by
reference to Exhibit 99.1 of the Registrant's
Registration Statement No. 33-60949.
10.10 Agreement and Plan of Merger between the Registrant and
Carolina State Bank dated as of August 15, 1997,
incorporated herein by reference to Exhibit 2.1 of the
Registrant's Registration Statement No. 333-35905.
10.11 Stock Option Agreement between the Registrant and
Carolina State Bank dated June 30, 1997, incorporated
herein by reference to Exhibit 99.2 of the Registrant's
Current Report on Form 8-K filed July 2, 1997
(Commission File No. 0-15829).
*10.12 Employment Agreement dated as of January 20, 1993, as
amended as of August 31, 1995, between Bank of Union and
H. Clark Goodwin, incorporated herein by reference to
Exhibit 10.12 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1995 (Commission
File No. 0-15829).
*10.13 Change in Control Agreement dated October 16, 1996 for
Edward B. McConnell, incorporated herein by reference to
Exhibit 10.13 of the Registrant's Annual Report on Form
10-K for the year-ended December 31, 1996 (Commission
File No. 0-15829).
10.14 1998 Employee Stock Purchase Plan, incorporated herein
by reference to Exhibit 99.1 of the Registrant's
Registration Statement No. 333-43617.
*10.15 Stock Option Plan For Non-Employee Directors.
*10.16 Amended and Restated Salary Continuation Agreement
between First Charter National Bank and John J. Godbold,
Jr. dated as of December 22, 1997.
11.1 Statement regarding computation of per share earnings.
39
<PAGE>
Exhibit No.
(per Exhibit
Table in
Item 601 of Sequential
Regulation S-K) Description of Exhibits Page No
- --------------- ----------------------- -------
13.1 First Charter Corporation Annual Report to its
shareholders for the year ended December 31, 1996. Such
Annual Report to its shareholders, except for those
portions which are expressly incorporated by reference
in this Form 10-K, is furnished for the information of
the Commission and is not to be deemed "filed" as part
of the Form 10-K.
21.1 List of subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
* Indicates a management contract or compensatory plan required to be filed
herein.
40
EXHIBIT 3.1
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
FIRST CHARTER CORPORATION
The undersigned Corporation, a business corporation incorporated under the
North Carolina Business Corporation Act, pursuant to action by its shareholders,
hereby sets forth its Amended and Restated Articles of Incorporation:
ARTICLE 1: The name of the Corporation is First Charter Corporation.
ARTICLE 2: The period of duration of the Corporation shall be perpetual.
ARTICLE 3: The purposes for which the Corporation is organized are:
(a) to purchase, own, and hold the stock of other corporations, and to
do every act and thing covered generally by the denomination "bank holding
corporation" or "holding corporation," and especially to direct the
operations of banks, banking associations or other corporations through the
ownership of stock therein;
(b) to purchase, subscribe for, acquire, own, hold, sell, exchange,
assign, transfer, create security interests in, pledge, or otherwise
dispose of shares of the capital stock, or any bonds, notes, securities, or
evidences of indebtedness created by any other corporation or corporations
organized under the laws of this state or any other state and also bonds or
evidences of indebtedness of the United States or of any state, district,
territory or subdivision or municipality thereof and to issue in exchange
therefor shares of the capital stock, bonds, notes, or other obligations of
the Corporation and while the owner thereof to exercise all the rights,
powers and privileges of ownership including the right to vote on any
shares of stock so owned;
(c) to promote, lend money to, and guarantee the dividends, stocks,
bonds, notes, evidences of indebtedness, contracts, or other obligations
of, and otherwise aid in any manner which shall be lawful, any corporation
or association of which any bonds, stocks or other securities or evidences
of indebtedness shall be held by or for the Corporation, or in which, or in
the welfare of which, the Corporation shall have any interest, and to do
any acts and things permitted by law and designed to protect, preserve,
improve, or enhance the value of any such bonds, stocks, or other
securities or evidences of indebtedness or the property of the Corporation;
(d) to engage in any other lawful act or activity for which
corporations may be organized under Chapter 55 of the General Statutes of
North Carolina, as amended, including, but not limited to, manufacturing,
purchasing or otherwise acquiring, owning, mortgaging, pledging, selling,
assigning and transferring, or otherwise disposing of, investing, trading,
dealing in and with, goods, wares and merchandise and property of every
class and description, whether real, personal, mixed, tangible, or
intangible; entering into or serving in any kind of management,
investigative, advisory, promotional, protective, insurance, guarantyship,
suretyship, fiduciary or representative relationship or capacity for any
persons or corporations whatsoever; and
(e) to engage in, conduct and operate any other business which may be
deemed adapted, directly or indirectly, to add to the profits of its
business or to increase the value of its property.
In furtherance and not in limitation of the power conferred by the laws of
the State of North Carolina upon corporations organized for the foregoing
purposes, the Corporation shall have power to borrow money, to lend money, to
guarantee obligations, to purchase, construct, lease or otherwise acquire, own,
hold, use, maintain, operate or otherwise manage or control, sell, exchange,
lease, mortgage, pledge or otherwise dispose of, property of any kind or
character, real, personal or mixed, tangible or intangible, necessary, useful or
convenient therefor, and to acquire, hold, mortgage, pledge or dispose of
shares, bonds and other evidences of indebtedness and securities of the United
States of America or any state or municipality therein or of any domestic or
foreign Corporation.
The foregoing clauses shall be construed as enumerating specific purposes
and powers, but no recitation, expression or declaration of specific purposes or
powers herein enumerated shall be deemed to be exclusive, but it is hereby
expressly declared that all other lawful purposes and powers not inconsistent
therewith are hereby included.
The Board of Directors of the Corporation shall have the authority to adopt
resolutions approving the indemnification, to the fullest extent permitted by
Chapter 55 of the North Carolina General Statutes, of any person made a party to
any action or
<PAGE>
proceeding, whether civil, criminal or administrative, by reason of the fact
that such person was serving as director, officer, employee or agent of the
Corporation.
ARTICLE 4: The aggregate number of shares the Corporation is authorized to
issue is twenty-five million (25,000,000) shares of Common Stock, without par
value.
ARTICLE 5: The shareholders of the Corporation shall have no preemptive
right to acquire additional shares of the Corporation.
ARTICLE 6: The address of the registered office of the Corporation is 22
Union Street, North, Post Office Box 228, Concord, Cabarrus County, North
Carolina, 28025-0228 and the name of its registered agent at such address is
Robert O. Bratton.
ARTICLE 7: The board of directors of the Corporation shall be and is
divided into three classes, Class I, Class II and Class III, which shall be as
nearly equal in number as possible. Each director shall serve for a term ending
on the date of the third annual meeting of shareholders following the annual
meeting at which the director was elected.
ARTICLE 8: The Corporation shall not consolidate with, or merge with or
into, any other corporation or convey to any corporation, other person or
otherwise dispose of all or substantially all the assets or dispose of by any
means all or substantially all the stock or assets of any major subsidiary of
the Corporation unless such consolidation, merger, conveyance or disposition is
approved (a) by the affirmative vote of not less than seventy-five percent (75%)
of the aggregate voting power of the outstanding stock entitled to vote thereon,
and (b) by the affirmative vote of not less than seventy-five percent (75%) of
the aggregate voting power of the outstanding stock entitled to vote thereon,
which shall include the affirmative vote of at least fifty percent (50%) of the
voting power of the outstanding stock of shareholders entitled to vote thereon
other than controlling shareholders, (i) if the shareholder entitled to vote
thereon is a person who, including affiliates of such person, is the beneficial
owner (as the terms are defined in the Securities Exchange Act of 1934 and in
the rules thereunder) of more than twenty percent (20%) of the voting power of
the Corporation (a "controlling shareholder"), provided that shares held, voted
or otherwise controlled by a person as a trustee, plan administrator, officer of
the Corporation or otherwise pursuant to an employee benefit plan of the
Corporation or of an affiliate of the Corporation shall not be deemed to be
beneficially owned by any person for the purpose of determining whether a person
is a controlling shareholder, and (ii) if, prior to the acquisition of twenty
percent (20%) of the voting power of the Corporation by a shareholder, the Board
of Directors of the Corporation had not unanimously approved such consolidation,
merger, conveyance or disposition. If there is a controlling shareholder, this
Article 8 can be amended only by the affirmative vote of the voting power of the
Corporation then required to approve a consolidation, merger, conveyance or
disposition under this Article 8.
ARTICLE 9: The vote of three-quarters of the number of directors fixed in
the manner provided in the Bylaws of the Corporation shall be required for the
approval of a plan of merger or plan of consolidation or similar plan of the
Corporation with any other corporation(s) or entity(ies) in which the
Corporation is the acquired corporation or for adopting a resolution
recommending a sale, lease or exchange of all or substantially all the property
of the Corporation.
The Board of Directors of the Corporation, when evaluating any offer of
another party to (a) make a tender or exchange offer for any equity security of
the Corporation, (b) merge or consolidate the Corporation with another
corporation, or (c) purchase or otherwise acquire all or substantially all of
the properties and assets of the Corporation, shall, in connection with the
exercise of its judgment in determining what is in the best interests of the
Corporation and its shareholders, give due consideration to all relevant
factors, including without limitation, the social and economic effects on the
employees, customers and other constituents of the Corporation and its
subsidiaries and on the communities in which the Corporation and its
subsidiaries operate or are located. The provisions of this Article 9 may be
amended only by the affirmative vote of the voting power of the Corporation as
would be required at the time of such amendment to amend Article 8 hereof.
ARTICLE 10: To the fullest extent permitted by the North Carolina Business
Corporation Act, as the same exists or may hereafter be amended, a director of
the Corporation shall not be personally liable to the Corporation, its
shareholders or otherwise for monetary damage for breach of his or her duty as a
director. Any repeal or modification of this Article 10 shall be prospective
only and shall not adversely affect any limitation on the personal liability of
a director of the Corporation existing at the time of such repeal or
modification.
<PAGE>
Exhibit 10.3
Description of Executive Incentive Bonus Plan
First Charter Corporation (the "Corporation") maintains an Executive
Incentive Bonus Plan (the "Bonus Plan"), from which performance-oriented bonuses
may be paid to certain key officers in any given year. The Compensation
Committee of the Board of Directors (the "Committee") annually determines the
officers eligible to participate in the Bonus Plan. In general, those officers
that are considered to have major policy input with respect to the Corporation,
or who are in a position to generate a major impact on the Corporation's
earnings, are selected to participate in the Bonus Plan. The officers eligible
to receive bonuses under the Bonus Plan in any given fiscal year generally
include all of the Corporation's executive officers. Actual bonuses paid
pursuant to the Bonus Plan are based on various return on asset ("ROA") levels
of the Corporation at fiscal year end. No bonuses may be paid unless the
Corporation reaches a minimum ROA, determined at the beginning of the year.
Pursuant to the Bonus Plan, the Committee annually establishes a bonus pool
amount for each participating officer, which is equal to a given percentage of
the base salary of such officer. Such percentages are determined based on the
executive's relative responsibilities and ability to impact the financial and
operating performance of the Corporation. At year-end, the Committee applies a
multiple to the bonus pool amounts to determine the actual amounts available to
be awarded to participants. The multiple used is based on a scale of various ROA
amounts as determined by the Committee at the beginning of a fiscal year. Of the
amount eligible to be paid to a participant, 50% is paid to the officer on a
non-discretionary basis. The remaining half of the eligible amount may be paid
to the participant, in the discretion of the Committee, based on the
participant's individual performance. When evaluating the performance of a
participant, the Committee considers the Corporation's actual operating
performance (such as reduced levels of past due loans, reduced levels of
non-performing and restructured loans, improvements in asset quality and
corresponding reductions in provision amounts, increased non-interest income and
continued control of corporate expenses) in relation to its targeted long range
action plan and the officer's ability to impact the various components thereof.
Other criteria considered include the officer's initiative, contribution to
overall corporate performance, managerial ability and other factors as the
Committee may determine with respect to any particular individual.
EXHIBIT 10.8
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made
this 22nd day of December, 1997, by and between FIRST CHARTER NATIONAL BANK, a
national banking association (the "Bank"), and JOHN J. GODBOLD, JR., of Shelby,
North Carolina (the "Employee").
Statement of Purpose
Employee currently is a party to that certain Employment Agreement dated
November 13, 1990 (the "Existing Agreement") between Employee and Carolina State
Bank, a corporation organized and existing under the laws of the State of North
Carolina ("CSB"). As of the close of business on December 22, 1997, CSB will
merge with and into the Bank (the "Merger"), and Employee's employment with and
the separate corporate existence of CSB will cease. Under the Existing
Agreement, Employee is generally obligated to remain employed by the Bank, as
successor by merger with CSB, through November 12, 2001. The Bank desires to
employ Employee and Employee desires to be employed to provide services to the
Bank pursuant to the terms of this Agreement. The Bank and Employee have agreed
that, in consideration of the Bank's agreement to limit Employee's employment
with the Bank for a period of approximately one year, the additional
consideration to Employee set forth in Section 4(b) and 10(d) hereof and the
other terms and conditions of this Agreement, Employee and the Bank shall enter
into this Amended and Restated Employment Agreement, which amends, restates and
supersedes the Existing Agreement in its entirety.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, it is agreed as follows:
1. Employment. Effective December 23, 1997, the Bank agrees to employ
Employee during the term set forth in Section 2 hereof and Employee accepts
employment by the Bank, as an executive employee with the initial title of
Executive Vice President, subject to and upon the terms and conditions of this
Agreement. This Agreement supersedes any prior employment agreements, including
without limitation the Existing Agreement.
2. Term. The term of Employee's employment created by this Agreement shall
be for a term commencing as of December 23, 1997 and terminating December 31,
1998, unless sooner terminated as hereinafter provided in Section 8 below.
3. Duties. Employee agrees, during the term of his employment hereunder, to
use his best efforts, skills and abilities to promote the Bank's business and
interest and to perform such duties reasonably assigned to him from time to time
by the Board of Directors of the Bank (the "Board"). During the term of his
employment hereunder, Employee shall primarily devote his business time,
attention and energies, reasonable vacations excepted, to the business of the
Bank and
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the performance of his duties hereunder. Further, during the term of his
employment hereunder, Employee shall not be engaged in or connected with,
directly or indirectly, any business activity or the performance of his duties
hereunder, without the prior written approval of the Board. Also, upon request
of the Board, Employee will disclose all business activities or commercial
pursuits in which Employee may be engaged, other than Bank duties.
4. Compensation. (a) As compensation for his services rendered hereunder,
during the term of Employee's employment hereunder, the Bank shall pay Employee
an annual base salary of $125,000, payable in accordance with the Bank's normal
payroll procedures.
(b) The Bank and Employee acknowledge and agree that, although pursuant to
Section 2(b) of the Existing Agreement, a change of control of CSB will occur
upon consummation of the Merger, in consideration of the additional
consideration to Employee set forth in this Section and Section 10(d) below, the
Bank's agreement to limit Employee's employment with the Bank for a period of
one year and the other terms and conditions of this Agreement, the provisions of
paragraph 2(b) of the Existing Agreement are hereby void and are expressly
waived. However, as additional compensation for Employee's employment with the
Bank under this Agreement, the Bank agrees to pay Employee a total amount equal
to $250,000, payable in accordance with the Bank's normal payroll procedures in
48 equal semi-monthly installments beginning with the first calendar month
following the expiration of the term of his employment under this Agreement;
provided, however, that Employee hereby expressly agrees that he shall not be
entitled to any benefits under this Section 4(b), and the Bank shall not be
obligated to make any payments hereunder, if Employee's employment terminates or
ends prior to December 31, 1998 for any reason other than earlier termination of
such employment pursuant to Section 8(a)(i) or Section 8(a)(ii) hereof.
5. Deferred Compensation. The Bank shall provide Employee with such
deferred compensation as is provided in that certain Amended and Restated Salary
Continuation Agreement dated as of the date hereof by and between the Bank and
Employee.
6. Benefits. (a) During the term of Employee's employment hereunder,
Employee shall be entitled to all so-called "fringe benefits" in the nature of
sick leave, pension plans, and the like, which may generally be provided by the
Bank for its employees. However, during the term of Employee's employment
hereunder, Employee (i) shall be entitled to minimum vacation time of four
weeks, and (ii) shall be provided, at Bank's cost, (A) family health care
insurance to the maximum extent available under a full family health care plan;
(B) short-term disability insurance for a period not to exceed 180 days with
coverage for full based salary for such period; and (C) long-term disability
insurance with coverage for two-thirds of Employee's annual base salary to age
sixty-five (when added to social security benefits).
(b) During the term of Employee's employment hereunder, the Bank shall
provide Employee a reasonable automobile as determined by the Board to enable
him to perform his services hereunder and shall defray reasonable expenses of
operation of such automobile for business purposes; provided, however, that
Employee may, as additional compensation, use such automobile for personal
purposes, provided Employee maintains records of such personal use for tax
purposes.
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In addition, the Bank shall reimburse Employee for reasonable out-of-pocket
business expenses incurred by Employee in performance of his duties under this
Agreement on behalf of the Bank. The Bank also agrees during the term of
Employee's employment hereunder to pay all reasonable dues and expenses incurred
by Employee with respect to memberships in clubs and organizations of which
Employee currently is a member and which are business in nature, but the Bank
shall not pay for any such expenses which are of a personal nature to Employee
or Employee's family or associates.
7. Deductions from Payments. Any payments made to Employee hereunder shall
be subject to such deductions as are from time to time required pursuant to
governmental law, regulations or order, and which may be agreed to by the Bank
and Employee.
8. Termination. (a) In addition to the termination of this Agreement and
the expiration of the term specified in Section 2, Employee's employment created
hereby and the Bank's obligations hereunder shall terminate immediately upon the
earlier of:
(i) Employee's death;
(ii) Employee's disability, as provided in Section 9;
(iii) The dissolution of the Bank or discontinuance of its business;
or
(iv) The dismissal of Employee for cause, as provided in Section 8(b)
below.
(b) The Bank shall have the right to terminate the employment of Employee
hereunder for cause upon written notice to him specifying the cause. Thereupon,
all of the Bank's obligations under this Agreement shall terminate. "Cause"
shall mean:
(i) Any act of dishonesty, fraud or neglect of job duties by Employee
in connection with his employment with the Bank or against any parent,
affiliate or subsidiary company of the Bank;
(ii) Any conviction, guilty plea or plea of nolo contendere by
Employee for any crime involving moral turpitude or for any felony, if the
Board of Directors reasonably deems that such conviction or plea may have a
significant adverse effect upon the Bank or any parent, affiliate or
subsidiary company of the Bank or upon Employee's ability to perform under
this Agreement;
(iii) Repeated use of alcohol during or after working hours that
materially interferes with Employee's duties under this Agreement, use of
illegal drugs or violation of the Bank's drug and/or alcohol policies by
Employee;
(iv) Excessive absenteeism not related to illness, authorized
family/medical leave or vacation;
(v) An intentional violation by Employee of the Bank policies, rules
or instructions;
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(vi) Insubordination or Employee's unwillingness or failure to carry
out the reasonable performance criteria established by the Board of
Directors from time to time;
(vii) The breach or threatened breach of any provision of this
Agreement by Employee or under any other agreement between Employee and the
Bank; or
(viii) The occurrence of any event or circumstance which would prevent
the Bank from obtaining a fidelity bond with respect to Employee's
performance of his duties hereunder.
(c) On termination of Employee's employment hereunder, the Bank shall pay
all compensation theretofore accrued under this Agreement and, unless expressly
provided otherwise herein, or expressly provided otherwise as a standard feature
of a benefit program of general applicability to its employees or in a signed,
written agreement approved by the Board, Employee shall have no further right
for any salary, compensation or other benefits hereunder, including without
limitation any payments under Section 4(b) or Section 10(d) hereof.
Notwithstanding any such termination, the obligations and restrictions imposed
on Employee pursuant to Sections 10 and 11 shall survive any termination of
employment.
9. Disability. If it is determined by the Bank that Employee is unable,
with or without a reasonable accommodation, to perform the essential functions
and duties of his position with the Bank under this Agreement because of a
physical or mental disability, impairment or condition, other than death, that
has continued for more than four (4) consecutive months, then Bank, in its sole
discretion, may notify Employee or his representative of the same in writing,
and thereupon this Agreement and Employee's employment hereunder shall
terminate. A determination of the nature and extent of Employee's disability,
impairment or condition under this section may be made at the request of either
the Bank or Employee; provided, however, that in the event Employee is unable,
due to his disability, impairment or condition to make such a request, his
spouse or other designee may make a request in his stead, whereupon each of
Employee (or Employee's designee) and the Bank shall designate one doctor to
participate in the determination. If the two doctors so designated agree on a
determination required by this Section, such determination shall be final. If
the two doctors fail to agree, they shall by agreement designate a third doctor
to make the determination required by this Section, which determination shall be
final.
10. Noncompetition. (a) During the term of his employment hereunder and for
a period of two years after his employment hereunder has terminated or ended
(whatever the reason for the end of the employment relationship), Employee shall
not own any interest in (except for ownership of a minor percentage of stock in
a "public" competitor), operate, serve as an employee, director, operator or
contractor of, consult with, advise or otherwise represent in any capacity any
"bank or savings and loan association" (as those terms may be defined from time
to time by federal or state law applicable thereto) with respect to such an
institution's operations or business anywhere within Cleveland County, North
Carolina, or within a 15 mile radius of any Bank office (present or future)
outside of Cleveland County, North Carolina that exists at the time of the end
of Employee's employment under this Agreement, unless such activity is approved
in advance by the Board.
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(b) During the term of his employment hereunder and for a period of two
years after his employment hereunder has terminated or ended (whatever the
reason for the end of the employment relationship), Employee shall not engage in
any business activities engaged in by the Bank of the type with which Employee
was involved at the time of the Merger and/or during the term of this Agreement,
including but not limited to the performance of banking executive duties, within
Cleveland County, North Carolina or within a 15 mile radius of any Bank office
(present or future) outside of Cleveland County, North Carolina that exists at
the time of the end of Employee's employment under this Agreement, unless such
activity is approved in advance by the Board.
(c) If the scope of any restrictions contained in Section 10(a) or Section
10(b), including without limitation the scope of any geographic and time
limitation, is determined by a court of competent jurisdiction to be too broad
to permit enforcement thereof to their fullest extent, then such restrictions
shall be enforced to the maximum extent permitted by law, and Employee hereby
consents and agrees that such scope and other provisions of this Section 10 may
be modified or "blue pencilled" judicially in any other proceeding brought to
enforce such restriction.
(d) In consideration of the covenants contained in Section 10(a) and
Section 10(b), the Bank agrees to pay Employee a total amount equal to $125,000,
payable in accordance with the Bank's normal payroll procedures in 48 equal
semi-monthly installments beginning with the first calendar month following the
expiration of the term of his employment under this Agreement; provided,
however, that Employee shall not be entitled to any benefits under this Section
10(d), and the Bank shall not be obligated to make any payments hereunder, if
Employee's employment terminates or ends prior to December 31, 1998 for any
reason.
11. Non-Disclosure and Return of Information. Employee acknowledges that
the work performed by the Bank and the Employee involves confidential and
proprietary information, business forecasts, competitive analyses, pricing
policies, or the substance of agreements with customers or customer lists, and
Employee agrees that he will not (a) misappropriate, (b) use for the purpose of
competing with the Bank, either directly or indirectly, (c) disclose to any
third party, either directly or indirectly, or (d) aid anyone else in disclosing
to any third party, either directly or indirectly, all or any part of any
information of a confidential or competitively sensitive nature about the work
of the CSB or Bank, including but not limited to, all information concerning the
Bank's customers, financial information, operating results, contracts, plans and
projections for business opportunities for new or developing business, personnel
matters, salary information, or any other confidential or proprietary processes,
ideas, plans, patents or trade secrets, except to other Bank personnel and
others who have a genuine need to know such information to render assistance to
the Bank under appropriate confidentiality restrictions or understandings.
Employee understands that he will be liable to the Bank for any damages caused
by an unauthorized disclosure of such information. Employee further agrees. that
upon the termination or end of his employment with the Bank, Employee will
deliver to the Bank all electronic or other records, memoranda, data and other
media or materials of every kind and character and all copies thereof,
regardless of how maintained, which are in the Employee's possession or control,
and which are the property of the Bank and/or which relate to his employment or
to the activities of the Bank, including, but not limited to, drawings, prints,
manuals, software, notebooks, reports and correspondence.
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12. Legal and Equitable Relief. In the event of a breach or threatened
breach by Employee of the provisions contained in Sections 10 and 11, Employee
agrees and understands that he shall forfeit and the Bank shall be entitled to
cease any and all payments pursuant to this Agreement, and the Bank shall be
entitled to injunctive relief, without bond, to restrain Employee from breaching
or continuing to breach such provisions, and to such other and further relief as
may be proper. Nothing herein shall be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank, for the breach or threatened
breach of Sections 10 and 11, including the recovery of damages from Employee.
13. Severability. If any provision of this Agreement, or the application
thereof to either party is held illegal, unenforceable, or otherwise invalid in
any respect by government promulgation, operation of law, court decree or
otherwise, such holding(s) shall not affect the other provisions or applications
of this Agreement which can be given effect without the invalid provision. In
addition, if any one or more of the provisions of this Agreement regarding
restrictions of future employment be deemed invalid, such provisions shall be
construed in a manner to enable it to be enforced to the extent allowed by
applicable law.
14. Inurement. This Agreement shall be binding on and shall inure to the
benefit of the parties hereto and their respective heirs, legal representatives,
successors and assigns except to the extent that the right to assign the
Agreement is limited by Section 15 below.
15. Assignment. Employee recognizes and agrees that this Agreement is a
contract for personal services with the Bank and none of Employee's obligations
under this Agreement may be assigned or delegated by him. This Agreement may be
assigned by the Bank; provided, however, that such assignee shall assume all of
the Bank's obligations to Employee hereunder.
16. Attorney's Fees. In the event that either party seeks judicial
enforcement of the Agreement, and thereby obtains legal or equitable relief or
both, the prevailing party shall be entitled to recover from the other party the
reasonable attorney's fees and costs paid or to be paid by such party related to
such enforcement. Further, each party consents and agrees to venue and service
of process in any state court and federal court in the State of North Carolina.
17. Governing Law. This Agreement has been executed in and shall be
governed by the laws of the State of North Carolina.
(Signatures on following page.)
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IN WITNESS WHEREOF, the parties hereto have executed and delivered
duplicate copies of this Agreement, each of which is deemed to be an original,
as of the date and year first above written.
FIRST CHARTER NATIONAL BANK
By: /s/ LAWRENCE M. KIMBROUGH
-----------------------------------------
Lawrence M. Kimbrough
President and Chief Executive Officer
[Corporate Seal]
ATTEST:
/s/ ANNE C. FORREST
- -----------------------------
Assistant Corporate Secretary
EMPLOYEE:
JOHN J. GODBOLD, JR.
/s/ JOHN J. GODBOLD, JR. (SEAL)
-----------------------------
Signature
326 Tremont Place
Shelby, North Carolina 28150
-----------------------------
Address
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EXHIBIT 10.15
FIRST CHARTER CORPORATION
STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
First Charter Corporation, a North Carolina corporation (the
"Corporation"), hereby establishes this Stock Option Plan for Non-Employee
Directors for the benefit of the Corporation and its Subsidiaries (hereinafter
defined), employees, shareholders and directors.
Article I - General Provisions
Section 1.1 Purpose. This First Charter Corporation Stock Option Plan
for Non- Employee Directors (the "Plan") is intended to secure for First Charter
Corporation and its shareholders the benefits arising from ownership of the
Corporation's Common Stock by the non-employee members of the Boards of
Directors of the Corporation and its Subsidiaries. The Plan is designed to help
attract and retain superior individuals for service on the Board of Directors of
the Corporation and its Subsidiaries and to provide each such non-employee
director with an additional incentive to contribute to the success of the
Corporation. It is also intended that the Plan shall satisfy the requirements of
Rule 16b-3 under the Exchange Act (hereinafter defined).
Section 1.2 Definitions.
(a) "Board of Directors" means the Board of Directors of the
Corporation or of a Subsidiary, unless otherwise specified.
(b) "Code" means the Internal Revenue Code of 1986, as amended from
time to time.
(c) "Committee" shall have the meaning set forth in Section 2.1
hereof.
(d) "Common Stock" means the common stock, par value $5.00 per share,
of the Corporation to be issued pursuant to the Plan.
(e) "Corporation" means First Charter Corporation.
(f) "Director" shall have the meaning set forth in Section 3.2 hereof.
(g) "Disability" means the inability of an Optionee to engage in his
or her profession by reason of any medically determinable physical or
mental impairment which can be expected to result in death or which is to
last or can be expected to last for a continuous period of not less than
twelve months, as determined by the Committee in its sole discretion upon
certification thereof by a qualified physician selected by the Committee
after such physician examines the Optionee.
(h) "Effective Date" means February 19, 1997.
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(i) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(j) "Fair Market Value" means the closing sales price of a share of
Common Stock if the Common Stock is listed on a national securities
exchange or reported on the NASDAQ National Market; or the average of the
closing bid and asked prices for a share of Common Stock in the
over-the-counter market as reported by the NASDAQ National Market or the
NASDAQ Stock Market if the Common Stock is not listed on a national
securities exchange or the NASDAQ National Market or if there is no closing
sales price reported on the NASDAQ National Market; or the fair value of a
share of Common Stock determined in good faith by the Board of Directors if
the Common Stock is not listed on a national securities exchange or
reported on the NASDAQ National Market or the NASDAQ Stock Market or the
over-the-counter market.
(k) "Grant Date" means the date of the Committee's authorization of
such grant as indicated in the Optionee's Stock Option Agreement.
(l) "Option" means the right granted by the Corporation to an Optionee
to purchase shares of Common Stock pursuant to the Plan. All Options
granted hereunder shall be nonstatutory options and will not qualify for
special income tax treatment under Code Section 422.
(m) "Optionee" means a Director to whom an Option is granted
hereunder.
(n) "Option Period" shall have the meaning set forth in Section 3.4(a)
hereof.
(o) "Option Price" shall have the meaning set forth in Section 3.3
hereof.
(p) "Plan" means the First Charter Corporation Stock Option Plan for
Non-Employee Directors.
(q) "Stock Option Agreement" means a formal written agreement between
the Corporation and an Optionee in such form and containing such provisions
not inconsistent with the provisions of the Plan as the Committee shall
from time to time approve setting forth the terms and conditions of the
grant of an Option to purchase shares of Common Stock pursuant to the Plan.
(r) "Subsidiary" means a subsidiary corporation of the Corporation as
that term is defined in Section 424(f) of the Code. "Subsidiaries" means
more than one Subsidiary.
(s) The term "vest," or any derivation thereof, as used in this Plan,
shall mean the time or times at which an Option or a portion thereof shall
become exercisable. The use of the term "vest" or any derivation thereof
shall not create on the part of any Optionee any absolute right to an
Option or absolute right to exercise such Option, which right shall at all
times be determined in the discretion of the Committee, subject to the
express provisions of the Plan and the applicable Stock Option Agreement.
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Article II - Administration
Section 2.1 Appointment of Committee. The Board of Directors of the
Corporation shall appoint a committee for the administration of the Plan, which
generally shall be the Compensation Committee of the Board of Directors and
shall consist of not less than three directors of the Corporation. The Committee
shall at all times be composed solely of "non-employee directors" within the
meaning of Rule 16b-3 under the Exchange Act, in effect as of the date hereof or
as hereafter amended, to the extent that the Board of Directors of the
Corporation deems necessary or as may be required from time to time under
Section 16 of the Exchange Act. No member of the Committee or member of the
Board of Directors of the Corporation shall be liable for any action or
determination made in good faith with respect to the Plan or to any Option
granted thereunder.
Section 2.2 Authority of Committee. Subject to the other provisions of the
Plan and with a view to effecting its purpose, the Committee shall have sole
authority in its absolute discretion: (i) to construe and interpret the Plan;
(ii) to define the terms used herein; (iii) to prescribe, amend and rescind
rules and regulations relating to the Plan; (iv) to determine the time or times
when Options shall be granted; (v) to determine the Option Periods; (vi) to
determine the number of shares to be subject to each Option; (vii) to determine
the Directors to whom Options shall be granted; (viii) to determine whether any
Options granted shall become vested over a period of time and, if so, when such
Options shall become fully vested; (ix) to amend or modify the terms of any
Options granted hereunder, but only with the consent of the Optionee; (x) to
determine any other vesting, acceleration or termination provisions applicable
to any such options in addition to those set forth in the Plan or a Stock Option
Agreement; and (xi) to make any other determinations necessary or advisable for
the administration of the Plan and to do everything necessary or appropriate to
administer the Plan. All decisions, determinations, and interpretations made by
the Committee shall be binding and conclusive for all purposes upon all persons
including, without limitation, the Corporation, its Subsidiaries, the Committee
and each of the members thereof, the directors, officers and employees of the
Corporation and of the Subsidiaries, the Optionees, and their respective
successors in interest.
Section 2.3 Committee Administration. The members of the Committee shall
serve at the pleasure of the Board of Directors of the Corporation, which may
fill vacancies, however caused, in the Committee, all in accordance with the
Bylaws of the Corporation. The Committee shall select one of its members as its
chairman and shall hold its meetings at such times and places as it shall deem
advisable. A majority of its members shall constitute a quorum, and all actions
of the Committee shall be taken by a majority of its members. Any action of the
Committee evidenced by a written instrument, signed by a majority of its
members, shall be fully as effective as if it had been taken by a vote of a
majority of its members at a meeting duly called and held. The Committee shall
(i) appoint a secretary, who may be but need not be a member of the Committee,
(ii) keep minutes of its meetings, and (iii) make such rules and regulations for
the conduct of its business as it shall deem advisable, as set forth in or
pursuant to the Bylaws of the Corporation.
Section 2.4 Privileges of Stock Ownership. No person entitled to exercise
any Option granted under the Plan shall have any of the rights or privileges of
a shareholder of the Corporation in respect of any shares of stock issuable upon
exercise of such Option until certificates representing
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such shares shall have been issued and delivered. No shares shall be required to
be issued and delivered upon exercise of any Option under the Plan unless and
until all of the requirements of law and of all regulatory agencies having
jurisdiction over the issuance and delivery of the securities shall have been
fully complied with. No adjustment shall be made for dividends or any other
distributions for which the record date is prior to the date on which such stock
certificate is issued.
Section 2.5 Reservation of Shares of Common Stock. The Corporation, during
the term of this Plan, will at all times reserve and keep available such number
of shares of its Common Stock as shall be sufficient to satisfy the requirements
of the Plan. In addition, the Corporation will from time to time, as is
necessary to accomplish the purposes of this Plan, seek to obtain from any
regulatory agency having jurisdiction any requisite authority in order to issue
and sell shares of Common Stock hereunder. The inability of the Corporation to
obtain from any regulatory agency having jurisdiction the authority deemed by
the Corporation's counsel to be necessary for the lawful issuance and sale of
any shares of its stock hereunder shall relieve the Corporation of any liability
in respect of the non-issuance or sale of the stock as to which the requisite
authority shall not have been obtained.
Section 2.6 Tax Withholding. The exercise of any Option granted under the
Plan is subject to the condition that if at any time the Corporation shall
determine, in its discretion, that the satisfaction of withholding tax or other
withholding liabilities under any state or federal law is necessary or desirable
as a condition of, or in any connection with, such exercise or the delivery or
purchase of shares pursuant thereto, then in such event, the exercise of such
Option shall not be effective unless such withholding tax or other withholding
liabilities shall have been satisfied in a manner acceptable to the Corporation.
Any such exercise and the satisfaction of such withholding liabilities shall be
approved by the Committee prior thereto.
Article III - Options
Section 3.1 Stock Subject to Option. Subject to adjustment as provided in
Section 3.9 hereof, shares to be issued upon the exercise of Options shall be
authorized but unissued shares of Common Stock, and the aggregate number of
shares of Common Stock which may be issued upon exercise of all Options under
the Plan shall not exceed one hundred and fifty thousand (150,000). If any
Option granted under the Plan shall expire or terminate for any reason without
having been exercised in full, the shares remaining subject to such Option, but
not purchased, shall again be available for grants of Options under the Plan.
Section 3.2 Eligibility for and Grant of Options. In the discretion of the
Committee, Options may be granted to any individual member of the Board of
Directors who is not an officer or full-time employee of the Corporation or any
Subsidiary (each, a "Director"). In determining those Directors to whom Options
may be granted hereunder, the Committee may take into account the historical
performance of the Corporation, as well as the anticipated future performance,
and such other factors as it shall deem relevant in connection with
accomplishing the purposes of the Plan. A Director who has been granted an
Option or Options may be granted additional Options if the Committee shall so
determine. Following a grant of an Option, the Corporation shall tender to each
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Optionee for signature a Stock Option Agreement, which Stock Option Agreement
shall comply with and be subject to the terms and conditions contained herein.
Section 3.3 Exercise Price. The exercise price per share of Common Stock
covered by any Option (the "Option Price") shall be the Fair Market Value per
share on the Grant Date.
Section 3.4 Termination of Option. Except as otherwise provided in Sections
3.9 and 4.2 hereof, an Option shall terminate and no longer be exercisable and
be of no force or effect upon the expiration of the term of years from the Grant
Date (the "Option Period") as indicated in such Optionee's Stock Option
Agreement. Notwithstanding the foregoing, however, if (i) such Optionee ceases
to be a director during the Option Period for any reason other than death,
disability or retirement as a director as a result of the Corporation's or a
Subsidiary's mandatory retirement age policy, such Option shall terminate and no
longer be exercisable immediately upon such termination as director, unless the
Committee, in its sole and complete discretion, permits such Optionee to
exercise all or any part of such Option by a date not later than the expiration
of the stated Option Period; or (ii) if the Optionee ceases to be a director
during the Option Period by reason of the Optionee's death or Disability, such
option shall terminate and no longer be exercisable upon the expiration of one
(1) year after such date of death or Disability, during which such one (1) year
period the Option may be exercised (to the extent otherwise exercisable) by the
Optionee (in the case of Disability) or the person to whom the Optionee's rights
hereunder shall have passed by will or by the laws of descent and distribution.
Section 3.5 Vesting. All Options granted hereunder that are not otherwise
vested shall become fully vested upon the first to occur of (i) the last day of
any vesting schedule provided in the respective Stock Option Agreement, (ii) the
occurrence of any event described in Section 3.9(c) hereof, (iii) the death or
Disability of the Optionee, and (iv) the date the Optionee retires from the
Board of Directors as a result of the Corporation's or a Subsidiary's mandatory
retirement age policy. The exercise of any such Options shall be subject to the
provisions of this Plan, the applicable Stock Option Agreement and the
authorization of the Committee.
Section 3.6 Exercise of Option. Options granted hereunder may only be
exercised following shareholder approval of the Plan. At any time following
shareholder approval of the Plan and before termination of the Option as
provided in Section 3.4, the vested portion of an Option may be exercised by
written notice to the Corporation at its offices at Post Office Box 228,
Concord, North Carolina 28026-0228, Attention: Robert O. Bratton, or such other
address to which the office may be relocated, which notice shall (i) be signed
by the Optionee or by the Optionee's successors, as provided in Section 3.4,
(ii) state the number of shares with respect to which the Option is being
exercised, and (iii) contain such other representations as the Committee may
require. Payment in full of the Option Price of purchased shares shall be made
at the time of the exercise of the Option (i) in cash or by check payable to the
order of the Corporation, (ii) by delivery of shares of Common Stock of the
Corporation already owned by, and in the possession of, the Optionee, (iii) if
authorized by the Committee or if specified in the Stock Option Agreement
representing the Option being exercised, by a promissory note made by the
Optionee in favor of the Corporation, upon the terms and conditions determined
by the Committee and secured by the shares issuable upon exercise, complying
with applicable law (including, without limitation, state corporate and federal
margin requirements),
5
<PAGE>
(iv) or any combination thereof. Furthermore, if authorized by the Committee at
the time of exercise or if specified in the Stock Option Agreement representing
the Option being exercised, an Optionee may exercise his or her option as to
only a part of the Shares covered thereby, and then in an essentially
simultaneous transaction use the shares so acquired in payment of the Option
Price for additional Option shares. Shares of Common Stock previously held by
the Optionee and surrendered in accordance with rules and regulations adopted by
the Committee for the purpose of making full or partial payment of the Option
Price shall be valued for such purpose at the Fair Market Value thereof on the
date the Option is exercised. As soon as practicable after said notice and the
Option Price have been received by the Corporation, the Corporation shall
deliver to the Optionee a stock certificate registered in the Optionee's name
representing the Option shares.
Section 3.7 Partial Exercises of Options. Subject to any vesting schedule
that may be provided in the applicable Stock Option Agreement, Options granted
hereunder shall be exercisable in whole, or in part from time to time, during
the Option Period. Any exercise of an Option for less than the total number of
shares of Common Stock identified in the Stock Option Agreement shall be deemed
to be an exercise in part and such Option may again be exercised for the
remaining number of shares of Common Stock subject thereto in accordance with
the terms of this Plan at such time or times determined by the Optionee,
provided that at each such time such Option is still exercisable under the terms
of the applicable Stock Option Agreement and the Plan.
Section 3.8 Status as a Director. Nothing contained herein or in any
Option granted hereunder or in any Stock Option Agreement issued hereunder shall
confer upon any Optionee any right to be continued or re-elected as a director
of the Corporation or a Subsidiary, as the case may be, which removal of or
election of directors shall be governed in all cases by the respective Bylaws of
the Corporation and its Subsidiaries and by applicable law.
Section 3.9 Adjustments Upon Changes in Capitalization; Continuation of
Exercise Rights.
(a) The total amount of shares with respect to which Options may be
granted hereunder and Option rights (both as to the number of shares
subject to Option and the Option Price(s) thereof) shall be appropriately
adjusted for any increase or decrease in the number of outstanding shares
of Common Stock resulting from payment of a stock dividend on the Common
Stock, a subdivision or combination of shares of the Common Stock or from a
reclassification of the Common Stock, and (in accordance with the
provisions contained in the next following paragraph) in the event of a
merger or consolidation.
(b) After (i) the merger of one or more corporations into the
Corporation or any Subsidiary, (ii) any merger of the Corporation or any
Subsidiary into another corporation, (iii) any consolidation of the
Corporation or any Subsidiary and one or more other corporations, or (iv)
any other corporate reorganization of any form involving the Corporation or
any Subsidiary as a party thereto, which such event involves any exchange,
conversion, adjustment or other modification of the outstanding shares of
the Common Stock, each Optionee at the time of such corporate
reorganization shall be entitled to receive, at no additional cost, upon
any exercise of his Option and in lieu of the number of shares as to
6
<PAGE>
which such Option shall then be so exercised, the number and class of
shares of stock or other securities or such other property to which such
Optionee would have been entitled pursuant to the terms of the agreement of
merger or reorganization if at the time of such merger or reorganization
such Optionee had been a holder of record of a number of shares of Common
Stock equal to the number of shares with respect to which such Option shall
then be so exercised. Comparable rights shall accrue to each Optionee in
the event of successive mergers or consolidations of the character
described above.
The foregoing adjustments and the manner of application of the
foregoing provisions shall be determined by the Committee in its sole
discretion. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to an Option.
(c) In the event of (i) the adoption of a plan of merger,
consolidation, share exchange or similar transaction of the Corporation
with any other corporation or association as a result of which the holders
of the voting capital stock of the Corporation as a group would receive
less than 50% of the voting capital stock of the surviving or resulting
corporation, (ii) the approval by the Board of Directors of the Corporation
of an agreement providing for the sale or transfer (other than as security
for obligations of the Corporation) by the Corporation of the majority of
the stock of a significant Subsidiary of the Corporation or substantially
all of the assets of the Corporation or of a significant Subsidiary of the
Corporation, (iii) the acquisition of more than 20% of the Corporation's
voting capital stock by any person within the meaning of Section 13(d)(3)
of the Exchange Act, other than a person, or group including a person, who
beneficially owned, as of the Effective Date hereof, more than five percent
of the Corporation's securities, in the absence of a prior expression of
approval by the Board of Directors of the Corporation, (iv) during any
period of two consecutive years, individuals who at the beginning of such
period constitute the Board of Directors of the Corporation cease for any
reason to constitute at least a majority thereof unless the election, or
the nomination for election by the Corporation's shareholders, of each new
director was approved by the vote of at least two-thirds of the directors
of the Corporation then still in office who were directors at the beginning
of the period; or (v) any other change in control of the Corporation of a
nature that would be required to be reported in response to Item 6(e) of
Schedule 14A of Regulation 14A under the Exchange Act or the acquisition of
control, within the meaning of Section 2(a)(2) of the Bank Holding Company
Act of 1956, as amended, or Section 602 of the Change in Bank Control Act
of 1978, of the Corporation by any person, company or other entity, then
any Option granted hereunder shall immediately become exercisable in full,
subject to any appropriate adjustments in the number of shares subject to
such Option and the Option Price(s) thereof, and shall remain exercisable
for the remainder of the respective Option Period, subject to all of the
terms hereof and the Stock Option Agreement with respect thereto not
inconsistent with this paragraph.
(d) Anything contained herein to the contrary notwithstanding, upon
the dissolution or liquidation of the Corporation each Option granted
hereunder shall terminate; provided, however, that following the adoption
of a plan of dissolution or liquidation, and in any event prior to such
dissolution or liquidation (and as provided above regarding certain mergers
and
7
<PAGE>
consolidations), each Option granted hereunder shall remain exercisable in
full, subject to all of the terms hereof and of the Stock Option Agreement
with respect thereto not inconsistent with this paragraph.
(e) The grant of an Option pursuant to this Plan shall not affect in
any way the right or power of the Corporation or any of its Subsidiaries to
make adjustments, reclassifications, reorganizations, or changes of its
capital or business structure, or to merge or consolidate, or to dissolve,
liquidate or sell, or transfer all or part of its business or assets.
Section 3.10 Non-Transferability of Options. No Option granted hereunder
shall be transferable by the Optionee other than by will, or, if Optionee dies
intestate, by the laws of descent and distribution of the state of Optionee's
domicile at the time of death or except pursuant to a qualified domestic
relations order. Except as provided in Section 3.4 hereof, all Options granted
hereunder shall be exercisable only by the Optionee during the Optionee's
lifetime.
Article IV - Miscellaneous Provisions
Section 4.1 Amendment and Termination. This Plan may be amended or
terminated by the Board of Directors of the Corporation without shareholder
approval as deemed in the best interests of the Corporation; provided, however,
that the Board of Directors of the Corporation shall submit any amendments to
the shareholders for approval to the extent necessary to maintain compliance
with the requirements of Rule 16b-3 of the Exchange Act, as it may be amended
from time to time, or the NASDAQ National Market or the NASDAQ Stock Market or
any other national securities exchange on which the Common Stock may be listed.
Unless earlier terminated, the Plan shall terminate on the date as of which
there are no longer any Options available to be granted under the Plan;
provided, however, that subject to the provisions set forth above, prior to such
date the Board of Directors can amend the Plan to provide for more shares to be
subject to options hereunder.
Section 4.2 Shareholder Approval. This Plan is subject to approval of the
shareholders of the Corporation within twelve (12) months from the Effective
Date. Notwithstanding any other provision hereof, Options may be granted
hereunder prior to obtaining shareholder approval, but no Option granted
hereunder may be exercised prior to the approval hereof by the shareholders of
the Corporation. In the event the shareholders of the Corporation do not approve
this Plan within twelve (12) months from the Effective Date, all Options granted
hereunder shall be void.
Section 4.3 Gender and Number. Words used herein in the masculine gender
shall be read in the feminine or neuter wherever the context so requires, and
the plural shall include the singular.
8
EXHIBIT 10.16
AMENDED AND RESTATED
SALARY CONTINUATION AGREEMENT
This Amended and Restated Salary Continuation Agreement (the "Agreement")
is made and entered into this 22nd day of December, 1997, by and between First
Charter National Bank, a national banking association, hereinafter referred to
as the "Bank," and John J. Godbold, Jr., hereinafter referred to as "Employee."
Statement of Purpose
Employee currently is a party to that certain Salary Continuation Agreement
dated March 16, 1993 (the "Existing Agreement") between Employee and Carolina
State Bank, a corporation organized and existing under the laws of the State of
North Carolina ("CSB"). As of the close of business on December 22, 1997, CSB
will merge with and into the Bank, and Employee's employment with and the
separate corporate existence of CSB shall cease. Under the Existing Agreement,
Employee generally forfeits his right to salary continuation benefits in the
event that he voluntarily terminates or resigns his employment with the Bank, as
successor by merger with CSB. The Bank desires to employ Employee and Employee
desires to be employed to provide services to the Bank pursuant to the terms of
this Agreement. The Bank and Employee have agreed that, in consideration of
Employee's employment with the Bank, as successor to CSB, and the Bank's
agreement to limit the termination of service provisions of the Existing
Agreement as set forth in Article I.C. below and the other terms and conditions
of this Agreement, Employee and the Bank shall enter into this Amended and
Restated Salary Continuation Agreement, which amends, restates and supersedes
the Existing Agreement in its entirety.
NOW, THEREFORE, in consideration of services performed by Employee in the
future and based upon the mutual promises and covenants herein contained, the
Bank and the Employee agree as follows:
I. ARTICLE ONE - DEFINITIONS
A. Effective Date
The effective date of this Agreement shall be December 23, 1997.
B. Normal Retirement Date
The Normal Retirement Date shall mean the Employee's 65th birthday.
C. Termination Of Service
Termination of Service shall mean the Bank's discharge of the Employee
for Due Cause as defined in Article V.G. hereof. If a dispute arises
as to discharge for Due
<PAGE>
Cause, such dispute shall be resolved by arbitration as set forth in
Article VI.B. hereof.
II. ARTICLE TWO - EMPLOYMENT
A. Employment
The Bank agrees to employ Employee in such capacity as the Bank may
from time to time agree and/or determine with such duties,
responsibilities and compensation as determined by the President and
Chief Executive Officer of the Bank and/or the Board of Directors of
the Bank (the "Board of Directors").
Employee agrees to remain in the Bank's employment, to devote his full
time and attention exclusively to the business of the Bank and to use
his best efforts to provide faithful and satisfactory service to Bank.
Employment services shall include temporary disability not to exceed
six months "leave of absences" specifically granted Employee by the
Board of Directors.
B. No Employment Agreement Created
No provision of this Agreement shall be deemed to restrict or limit
any existing employment agreement by and between the Bank and the
Employee nor shall any conditions herein create specific employment
rights with respect to any term or guarantee of employment with the
Bank nor in any way limit the Bank's ability to terminate Employee's
employment relationship with the Bank at any time with or without
cause. In a similar fashion, no provision of this Agreement shall
limit the Employee's rights to voluntarily sever his employment with
the Bank at any time.
III. ARTICLE THREE - BENEFITS
The benefits provided by the Bank to the Employee pursuant to this
Agreement are in the nature of a fringe benefit and shall in no event be
construed to effect nor limit the Employee's current or prospective salary
increases, cash bonuses or profit-sharing distributions or credits, if any.
A. Retirement Benefits
Subject to the provisions of this Agreement, Employee shall be
entitled to receive monthly from the Bank the sum of $8,333.33,
commencing on the first day of the month following Employee's Normal
Retirement Date and continuing for a period of one hundred and twenty
(120) consecutive months. In the event the Employee should die
following his Normal Retirement Date but before the expiration of such
one hundred and twenty (120) months, the unpaid balance of such
monthly payments shall be paid monthly by the Bank for the remainder
of such period to the beneficiary selected by Employee in the
Beneficiary Designation Form provided by the Bank. In
2
<PAGE>
the absence of or failure of the Employee to designate a beneficiary,
or in the event the designated beneficiary shall have predeceased the
Employee, the unpaid balance of the above retirement benefits shall be
commuted at 75% and paid in a lump sum to the personal representative
of the Employee's estate.
B. Effect of Termination Of Service
Upon the occurrence of a Termination of Service, all of Employee's
benefits under this Agreement shall be automatically forfeited and
this Agreement shall become null and void.
C. Death Benefit Prior To Retirement
Subject to the provisions of this Agreement, should the Employee die
prior to his Normal Retirement Date, the Bank agrees to pay to the
Employee's designated beneficiary the monthly sum of $8,333.33
commencing on the first day of the month following Employee's death
and continuing for a period of one hundred and twenty (120)
consecutive months. If the designated beneficiary should die prior to
the expiration of such one hundred twenty (120) months, the remaining,
unpaid installments shall be commuted at 75% and paid in a lump sum to
the personal representative of the designated beneficiary.
Employee shall declare his designated beneficiary in writing on a form
provided by the Bank. In the absence of or a failure to designate a
beneficiary, or in the event the designated beneficiary shall have
predeceased the Employee, the unpaid balance shall be commuted at 75%
and paid in a lump sum to the personal representative of the
Employee's estate.
In the event the Employee's death shall be the result of suicide
within a two year period following the effective date of this
Agreement, then no death benefits shall be payable to the Employee or
his designated beneficiary.
IV. ARTICLE FOUR - RESTRICTIONS UPON FUNDING
Bank shall have no obligation to set aside, earmark or entrust any fund or
money with which to pay its obligations under this Agreement. The Employee,
his beneficiaries or any successor in interest to him shall be and remain
simply a general creditor of the Bank in the same manner as any other
creditor having a general claim for matured and unpaid compensation.
The Bank reserves the absolute right at its sole discretion to either fund
the obligations undertaken by this Agreement or to refrain from funding the
same and to determine the extent, nature and method of such funding.
Should Bank elect to fund this Agreement, in whole or in part, through the
purchase of life insurance, mutual funds, disability policies or annuities,
the Bank reserves the absolute right,
3
<PAGE>
in its sole discretion, to terminate such funding at any time, in whole or
in part. At no time shall the Employee be deemed to have any lien nor
right, title or interest in or to any specific funding investment or to any
assets of the Bank.
If Bank elects to invest in a life insurance, disability or annuity policy
upon the life of Employee, then Employee shall assist the Bank by freely
submitting to a physical exam and supplying such additional information
necessary to obtain such insurance or annuities.
V. ARTICLE FIVE - MISCELLANEOUS
A. Alienability And Assignment Prohibition
Neither Employee, his widow nor any other beneficiary under this
Agreement shall have any power or right to transfer, assign,
anticipate, hypothecate, mortgage, commute, modify or otherwise
encumber in advance any of the benefits payable hereunder nor shall
any of said benefits be subject to seizure for the payment of any
debts, judgments, alimony or separate maintenance owed by the Employee
or his beneficiary, nor be transferable by operation of law in the
event of bankruptcy, insolvency or otherwise. In the event the
Employee or any beneficiary attempts assignment, commutation,
hypothecation, transfer or disposal of the benefits hereunder, the
Bank's liabilities shall forthwith cease and terminate.
B. Binding Obligation Of Bank And Any Successor In Interest
Bank expressly agrees that it shall not merge or consolidate into or
with another bank or corporation or sell substantially all of its
assets to another corporation, firm or person until such corporation,
firm or person expressly agrees, in writing, to assume and discharge
the duties and obligations of the Bank under this Agreement. This
Agreement shall be binding, upon the parties hereto, their successors,
beneficiaries, heirs and personal representatives.
C. Revocation
It is agreed by and between the parties hereto that, during the
lifetime of the Employee, this Agreement may be amended or revoked at
any time or times, in whole or in part, by the mutual written assent
of the Employee and the Bank.
D. Gender
Whenever in this Agreement words are used in the masculine or neuter
gender, they shall be read and construed as in the masculine, feminine
or neuter gender, whenever they should so apply.
4
<PAGE>
E. Effect On Other Bank Benefit Plans
Nothing contained in this Agreement shall affect the right of the
Employee to participate in or be covered by any qualified or
non-qualified pension, profit sharing, group, bonus or other
supplemental compensation or fringe benefit plan constituting a part
of Bank's existing or future compensation structure.
F. Headings
Headings and Subheadings in this Agreement are inserted for reference
and convenience only and shall not be deemed a part of this Agreement.
G. "Due Cause"
"Due Cause" shall mean:
1. Any act of dishonesty, fraud or neglect of job duties by Employee
in connection with his employment with the Bank or against any
parent, affiliate or subsidiary company of the Bank;
2. Any conviction, guilty plea or plea of nolo contendere by
Employee for any crime involving moral turpitude or for any
felony, if the Board of Directors reasonably deems that such
conviction or plea may have a significant adverse effect upon the
Bank or any parent, affiliate or subsidiary company of the Bank
or upon Employee's ability to perform under this Agreement;
3. Repeated use of alcohol during or after working hours that
materially interferes with Employee's duties under this
Agreement, use of illegal drugs or violation of the Bank's drug
and/or alcohol policies by Employee;
4. Excessive absenteeism not related to illness, authorized
family/medical leave or vacation;
5. An intentional violation by Employee of the Bank's policies,
rules or instructions;
6. Insubordination or Employee's unwillingness or failure to carry
out the reasonable performance criteria established by the Board
of Directors from time to time;
7. The breach or threatened breach of any provision of this
Agreement by Employee or under any other agreement between
Employee and the Bank; or
5
<PAGE>
8. The occurrence of any event or circumstance which would prevent
the Bank from obtaining a fidelity bond with respect to
Employee's performance of his duties with the Bank.
H. Applicable Law
The validity and interpretation of this Agreement shall be governed by
the laws of the State of North Carolina.
I. Existing Agreement
This Agreement amends and restates the Existing Agreement in its
entirety.
VI. ARTICLE SIX - ERISA PROVISIONS
A. Named Fiduciary And Plan Administrator
The "Named Fiduciary And Plan Administrator" of this Agreement shall
be the Compensation Committee of the Board of Directors of First
Charter Corporation, until such administrator's resignation or removal
by the Board of Directors. As Named Fiduciary and Administrator, such
administrator shall be responsible for the management, control and
administration of this Agreement as established herein. Such
administrator may delegate to others certain aspects of the management
and operation responsibilities of the Agreement including the
employment of advisors and the delegation of administrative duties to
qualified individuals.
B. Claims Procedure and Arbitration
In the event that benefits under this Agreement are not paid to the
Employee (or to his beneficiary in the case of the Employee's death)
and such claimants feel they are entitled to receive such benefits,
then a written claim must be made to the Named Fiduciary and
Administrator named above within sixty (60) days from the date
payments are refused. The Named Fiduciary and Administrator and the
Bank shall review the written claim, and if the claim is denied, in
whole or in part, they shall provide in writing within ninety (90)
days of receipt of such claim their specific reasons for such denial,
reference to the provisions of this Agreement upon which the denial is
based and any additional material or information necessary to perfect
the claim. Such written notice shall further indicate the additional
steps to be taken by claimants if a further review of the claim denial
is desired. A claim shall be deemed denied if the Named Fiduciary and
Administrator fails to take any action within the aforesaid ninety-day
period.
If claimants desire a second review, they shall notify the Named
Fiduciary and Administrator in writing within sixty (60 ) days of the
first claim denial. Claimants may review the Agreement or any
documents relating thereto and submit any written
6
<PAGE>
issues and comments they may feel appropriate. In its sole discretion,
the Named Fiduciary and Administrator shall then review the second
claim and provide a written decision within sixty (60) days of receipt
of such claim. This decision shall likewise state the specific reasons
for the decision and shall include reference to specific provisions of
the Agreement upon which the decision is based.
If claimants continue to dispute the benefit denial based upon
completed performance of the Agreement or the meaning and effect of
the terms and conditions thereof, then claimants may submit the
dispute to a Board of Arbitration for final, binding arbitration. Said
Board shall consist of one member selected by the claimant, one member
selected by the Bank and the third member selected by the first two
members. The Board shall operate under any generally recognized set of
arbitration rules agreed upon by the Bank and the Employee. The
parties hereto agree that they and their heirs, personal
representatives, successors and assigns shall be bound by the decision
of such Board with respect to any controversy properly submitted to it
for determination.
Where a dispute arises as to the Bank's discharge of Employee for Due
Cause, such dispute shall likewise be submitted to arbitration as
above described and the parties hereto agree to be bound by the
decision thereunder.
IN WITNESS WHEREOF, the parties hereto acknowledge that each has carefully
read this Agreement and executed the original thereof as of the _____ day of
December, 1997, and that, upon execution each has received a conforming copy.
/s/ PATRICIA H. BLACKWELL /s/ JOHN J. GODBOLD, JR. (SEAL)
------------------------- -----------------------
WITNESS EMPLOYEE
ATTEST: FIRST CHARTER NATIONAL BANK
/s/ ANNE C. FORREST By: /s/ LAWRENCE M. KIMBROUGH
----------------------------- -----------------------------
Assistant Corporate Secretary Lawrence M. Kimbrough
President and Chief Executive
(SEAL) Officer
7
<PAGE>
SALARY CONTINUATION BENEFICIARY DESIGNATION
Employee, John J. Godbold, Jr., under the terms of a certain Amended and
Restated Salary Continuation Agreement by and between him and First Charter
National Bank, dated as of December ______, 1997, hereby designates the
following beneficiary to receive any guaranteed payments or death benefits under
such Agreement, following his death:
PRIMARY BENEFICIARY: ________________________
SECONDARY BENEFICIARY: _______________________
This Beneficiary designation hereby revokes any prior beneficiary designation
which may have been in effect.
Such beneficiary designation is revocable.
DATE: ____________ , 19 ___
______________________________ ________________________________
WITNESS EMPLOYEE
8
FIRST CHARTER CORPORATION Exhibit 11.1
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
NET INCOME PER SHARE COMPUTED AS FOLLOWS:
BASIC NET INCOME:
1. Net income................................................. $ 8,401 $ 10,069 $ 8,304
========== ========== ==========
2. Weighted average common shares
outstanding............................................. 9,236,786 9,183,738 8,779,066
========== ========== ==========
3. Basic net income per share................................. $ 0.91 $ 1.10 $ 0.95
========== ========== ==========
(Item 1 Divided by Item 2)
DILUTED NET INCOME:
1. Net income................................................. $ 8,401 $ 10,069 $ 8,304
========== ========== ==========
2. Weighted average common shares
outstanding............................................. 9,236,786 9,183,738 8,779,066
3. Dilutive effect arising from
assumed exercise of stock options....................... 102,274 51,208 67,289
---------- ---------- ----------
4. Weighted average common shares and
equivalent shares outstanding........................... 9,339,060 9,234,946 8,846,355
========== ========== ==========
5. Diluted net income per share............................... $ 0.90 $ 1.09 $ 0.94
========== ========== ==========
(Item 1 Divided by Item 4)
</TABLE>
97 ANNUAL REPORT
(watermark image of FIRST CHARTER)
FIRST CHARTER
<PAGE>
FIRST
CHARTER
(icon of a building) Full Service Offices
(icon of a bullet) 24 Hour ATM Banking
(icon of a flag) Drive-In Locations
BANK OF
UNION
(icon of a star) Full Service Offices
(icon of a square) 24-Hour ATM Banking
(picture of a map of North and South Carolina FIRST CHARTER & BANK OF
UNION and ATM bank location(s).)
<PAGE>
First Charter Corporation and Subsidiaries
Selected Consolidated Financial Data
The following table sets forth certain selected consolidated financial data
concerning First Charter Corporation (the "Corporation") for the five years
ended December 31, 1997. All financial data has been adjusted to reflect the
acquisition of Carolina State Bank in 1997 and the acquisition of Bank of Union
in 1995, each of which was accounted for as a pooling of interests.
Additionally, all per share data has been retroactively adjusted to reflect a
6-for-5 stock split declared in the second quarter of 1997 and a stock split
effected in the form of a 33 1/3% stock dividend declared in the fourth quarter
of 1994. This information should be read in conjunction with the Management's
Discussion and Analysis of Financial Condition and Results of Operations
appearing elsewhere in this report, and is qualified in its entirety by
reference to the more detailed consolidated financial statements of the
Corporation and notes thereto.
<TABLE>
<CAPTION>
Years ended December 31,
(Dollars in thousands, except per share amounts) 1997 1996 1995 1994 1993
Income Statement Data:
<S> <C> <C> <C> <C> <C>
Interest income............................... $ 55,954 $ 50,907 $ 45,935 $ 35,824 $ 30,228
Interest expense.............................. 24,751 22,797 19,836 13,265 11,407
---------- ---------- --------- --------- ---------
Net interest income........................... 31,203 28,110 26,099 22,559 18,821
Provision for loan losses..................... 2,702 1,540 1,991 1,105 1,134
Net interest income after provision for
loan losses............................... 28,501 26,570 24,108 21,454 17,687
Noninterest income............................ 9,452 7,271 6,278 5,560 5,394
Noninterest expense........................... 25,642 19,354 19,181 17,283 16,067
------ ------ ------ ------ ------
Income before income taxes.................... 12,311 14,487 11,205 9,731 7,014
Income taxes.................................. 3,910 4,418 2,901 2,653 1,828
----- ----- ----- ----- -----
Net income before cumulative effect
of change in accounting principle......... 8,401 10,069 8,304 7,078 5,186
Cumulative effect of change in
accounting principle...................... -- -- -- -- 300
---------- ---------- --------- --------- ---------
Net income.................................... $ 8,401 $ 10,069 $ 8,304 $ 7,078 $ 5,486
---------- ---------- --------- --------- ---------
Per Share Data:
Basic net income before cumulative effect of
accounting change ........................ $ 0.91 $ 1.10 $ 0.95 $ 0.81 $ 0.61
Diluted net income before cumulative effect
of accounting change..................... 0.90 1.09 0.94 0.80 0.61
Basic net income ............................. 0.91 1.10 0.95 0.81 0.65
Diluted net income............................ 0.90 1.09 0.94 0.80 0.64
Cash dividends declared....................... 0.53 0.50 0.43 0.34 0.26
Period-end book value......................... 8.39 7.80 7.08 6.18 5.79
Balance Sheet Data (at period end):
Securities available for sale................. $ 177,031 $ 143,665 $ 151,252 $ 44,966 $ 34,613
Investment securities......................... -- 13,940 8,959 93,541 78,973
Loans, net.................................... 515,799 449,988 408,761 346,412 289,487
Allowance for loan losses..................... 8,004 6,528 6,056 5,056 4,605
Total assets.................................. 761,694 680,257 626,490 536,182 454,469
Deposits...................................... 621,354 569,856 515,434 450,986 393,398
Borrowed funds................................ 53,279 32,895 39,714 25,374 8,100
Total liabilities............................. 683,890 608,536 561,919 482,090 405,422
Total shareholders' equity.................... 77,804 71,721 64,571 54,092 49,047
Ratios:
Net income to average shareholders' equity.... 11.04% 14.77% 14.28% 13.48% 11.12%
Net income to average total assets............ 1.20 1.55 1.45 1.44 1.29
Net interest income to average earning assets
(tax equivalent).......................... 5.01 4.92 5.13 5.40 5.21
Average loans to average deposits............. 83.92 80.11 80.48 77.93 74.76
Net loans charged off during period
to average loans.......................... 0.25 0.24 0.26 0.23 0.33
</TABLE>
<PAGE>
FIRST CHARTER CORPORATION
Dear Fellow Shareholders:
(picture appears here of Board of Directors)
1997 was a banner year for our First Charter Corporation. Our merger with
Carolina State Bank became effective on December 22, 1997, giving us a
substantial presence in the new markets of Cleveland and Rutherford Counties.
Although Carolina State Bank had been in operation for only a few years, John
Godbold and his team have established a sound book of business, which we look
forward to building upon together over the coming years. First Charter National
Bank has certainly been welcomed warmly in Shelby, Boiling Springs, Kings
Mountain, Forest City and surrounding environs.
We realized record earnings in 1997 totaling $11 million, or $1.19 basic
income per share, before nonrecurring pretax charges of $3.4 million ($2.6
million net of income tax) associated with completing the acquisition of
Carolina State Bank. Excluding the nonrecurring charges, 1997 earnings per share
increased 8.8% compared to 1996. First Charter's 1997 results, excluding the
nonrecurring charges, produced a return on average assets of 1.57% and a return
on average equity of 14.40%, compared to prior year ratios of 1.55% and 14.77%,
respectively.
Including nonrecurring charges, First Charter earned $8.4 million, or $0.91
basic income per share, for the year ended 1997, compared to $10.1 million or
$1.10 basic income per share in 1996. The 1997 results also reflect a $1.4
million provision for loan losses recorded by Carolina State Bank in 1997
compared to $619,757 for 1996, in recognition of increased 1997 charge-offs and
portfolio growth.
Total assets at December 31, 1997 were $762 million, up 12.0% from December
31, 1996. Gross loans increased 15% to $524 million, and total deposits
increased 9% to $621 million from the previous year-end. Total shareholders'
equity was $78 million at December 31, 1997, which represents a book value per
share of $8.39 and an equity-to-assets ratio of 10.21%. At year-end 1997, First
Charter had 9,268,573 shares outstanding. The closing price of First Charter
Corporation Common Stock at December 31, 1997 was $26.00 per share resulting in
a market capitalization for the Corporation of $241 million.
Although we recognized substantial nonrecurring charges relating to our
merger with Carolina State Bank, we were very satisfied with our operating
results for 1997. With our focus on shareholder value, we felt it prudent to
maximize our investment in the future by assuring a strong balance sheet on
which to build. We are excited about 1998 and beyond.
We are pleased to report the addition of three new directors to our First
Charter Corporation board and three new directors to the board of First Charter
National Bank as a result of our merger with Carolina State Bank. Charles F.
Harry, III, former Chairman of the Board, and John J. Godbold, Jr., former
President and Chief Executive Officer of Carolina State Bank, along with T. Carl
Dedmon became directors of the Corporation at the effective date of the merger.
In addition, Dr. Joe B. Godfrey of Forest City, James M. Rose, Sr. of Shelby
and Larry D. Hamrick, Sr. of Kings Mountain were each elected to the Board of
Directors of First Charter National Bank. The board of Carolina State Bank was
characterized by its aggressive look to
2
<PAGE>
1997 ANNUAL REPORT
the future, and we welcome these dynamic directors to First Charter and look
forward to working with them.
Our plans for 1998 and following are ambitious. We are in the midst of a
strategic planning process at First Charter, and we are committed more than ever
to the concept of a community-based financial services company. The roadmap we
follow is our strategic plan, and we revisit it regularly to test its premises
and to sharpen our strategic vision. Although we know that we cannot be all
things to all people, we are constantly evaluating the breadth of our products
and services and the means by which those products and services are provided to
assure that we are in fact your best lifetime financial partner.
Bankers and those who analyze banking companies for the investing public look
to the efficiency ratio as a measure for present and future profitability
potential. Our 1997 efficiency ratio at 53.1% compares favorably with peer
banks, and so in 1998 we have chosen to make certain critical investments for
the future and for the long range value of our company to our shareholders.
Specifically, in 1998 we intend to invest in several new positions at the
Corporation, including a Director of Marketing, a Human Resources Director, a
Commercial Sales Manager, a Database Marketing Manager, and many more. The
hiring and nurturing of strong leadership is the single most important
ingredient to future success, and we are firmly committed to find, challenge and
keep the finest management talent that we can.
Continuing investments in new technologies will play a major role in the
strategic direction of First Charter Corporation. Our customers truly do define
convenience, and we are working diligently to provide all possible convenient
ways to do business with First Charter National Bank and Bank of Union. Whether
the customer prefers our financial services centers or one of our many ATMs or
the flexibility of our 24-hour First Phone service or PC home banking, we intend
to provide the solution. What we do know about our existing customers and our
customers of the future is that their needs and wants are quite diverse and our
services must be every bit as broad and flexible.
In 1998 we will relocate into a new Bank of Union financial services center
in Matthews to serve an already strong base of customers there. In addition, we
plan to open a de novo Bank of Union center in Mint Hill on NC Highway 51 near
the center of town. Both of these new facilities reflect our commitment to these
growing communities of eastern Mecklenburg County and to our strong belief that
a convenient physical presence is still an important means of delivering banking
services to our customers.
The future is bright for your First Charter Corporation. Over the past five
years, the value of your First Charter investment has increased almost fivefold.
This is an impressive record, but our charge is to make it continue. As we work
to fulfill our strategic vision, our driving motivation will be to take
advantage of that bright future to assure a superior return to you as
shareholders of our fine company.
(picture appears here of Board of Directors)
Sincerely,
/s/ Lawrence M. Kimbrough
Lawrence M. Kimbrough
President and Chief Executive Officer
3
<PAGE>
FIRST CHARTER CORPORATION
First Charter Corporation Board of Directors
William R. Black, M.D.
Oncologist
Michael R. Coltrane
President and Chief Executive Officer,
CT Communications, Inc.
Vice Chairman,
First Charter Corporation
J. Roy Davis, Jr.
Owner and Chief Executive Officer,
S&D Coffee, Inc.
Chairman,
First Charter Corporation
T. Carl Dedmon
President,
N/S Carolina Storage Systems, Inc.
James B. Fincher
Owner and President,
Mineral Springs Milling and Farm Supplies, Inc.
John J. Godbold
Executive Vice President,
First Charter National Bank
H. Clark Goodwin
President and Chief Executive Officer,
Bank of Union
Charles F. Harry, III
President,
Grover Enterprises
Frank H. Hawfield, Jr.
Owner and President,
Firestone Home and Auto Supply Store
J. Knox Hillman, Jr.
Owner and Chief Executive Officer,
Shuford Insurance Agency, Inc.
Branson C. Jones
Industry Consultant and Advisor,
Oiles America Corporation
Lawrence M. Kimbrough
President and
Chief Executive Officer,
First Charter Corporation and
First Charter National Bank
Jerry E. McGee
President,
Wingate University
Hugh H. Morrison
President,
E. L. Morrison Co., Inc.
Thomas R. Revels
President and
Chief Executive Officer,
Novant/Presbyterian Health Services
Bank of Union Board of Directors
J. Roy Davis, Jr.
Owner and Chief Executive Officer,
S&D Coffee, Inc.
Chairman,
First Charter Corporation
Theodore C. Dellinger
Owner and Chief Executive Officer,
Dellinger, Inc.
William C. Deskins, M.D.
Family Practice,
Monroe Family Medical Center, P.A.
James B. Fincher
Owner and President,
Mineral Springs Milling and Farm Supplies, Inc.
H. Clark Goodwin
President and Chief Executive Officer,
Bank of Union
Frank H. Hawfield, Jr.
Owner and President,
Firestone Home and Auto Supply Store
Lawrence M. Kimbrough
President and
Chief Executive Officer,
First Charter Corporation and
First Charter National Bank
Joseph L. Little
Retired
Jerry E. McGee
President,
Wingate University
David C. McGuirt
Executive Vice President
and Corporate Secretary,
Bank of Union
David H. Stewart, Jr.
General Manager,
Berkshire Weaving, Inc.
Lane D. Vickery
Vice President,
Scott Wholesale Co.
Philip L. Wally
Executive Vice President/ General Manager,
Union Electric Membership Corporation
First Charter National Bank Board of Directors
Jane B. Brown
Private Investor
Grady S. Carpenter
President,
Security Oil Company, Inc.
J. Roy Davis, Jr.
Owner and Chief Executive Officer,
S&D Coffee, Inc.
Chairman,
First Charter Corporation
Joe B. Godfrey, M.D.
Family Practice
Larry D. Hamrick, Sr.
Owner,
Warlick and Hamrick Associates,
Insurance and Real Estate
Branson C. Jones
Industry Consultant and Advisor,
Oiles America Corporation
Lawrence M. Kimbrough
President and
Chief Executive Officer,
First Charter Corporation and
First Charter National Bank
Robert F. Lowrance
Owner and President,
A&A Realty Company
Ellen Linn Messinger
Private Investor
Hugh H. Morrison
President,
E. L. Morrison Co., Inc.
T. David Propst
President,
Earl's Tire Store, Inc.
James M. Rose, Sr.
President,
Leasing Services, Inc.
Robert L. Wall
Retired
James B. Widenhouse
Private Investor
4
<PAGE>
1997 ANNUAL REPORT
Independent Auditors' Report
The Board of Directors
First Charter Corporation
We have audited the accompanying consolidated balance sheets of First Charter
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1997. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of First Charter
Corporation and subsidiaries at December 31, 1997 and 1996, and the results of
their operations and cash flows for each of the years in the three-year period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Charlotte, North Carolina
January 23, 1998
5
<PAGE>
FIRST CHARTER CORPORATION
First Charter Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands) 1997 1996
Assets
<S> <C> <C>
Cash and due from banks ................................................................ $ 33,077 $ 34,517
Interest bearing bank deposits ......................................................... 7,975 10,855
Federal funds sold ..................................................................... -- 4,510
Investment securities, market value of $13,979 in 1996 ................................. -- 13,940
Securities available for sale:
U.S. Government obligations ....................................................... 22,333 39,095
U.S. Government agency obligations ................................................ 45,863 11,583
Mortgage-backed securities ........................................................ 9,676 14,513
State and municipal obligations, nontaxable ....................................... 85,532 72,050
Other ............................................................................. 13,627 6,424
------- -------
Total securities available for sale .......................................... 177,031 143,665
------- -------
Loans .................................................................................. 524,076 456,709
Less: Unearned income............................................................... (273) (193)
Allowance for loans losses.................................................... (8,004) (6,528)
------- -------
Loans, net.......................................................................... 515,799 449,988
------- -------
Premises and equipment, net............................................................. 15,949 13,954
Other assets............................................................................ 11,863 8,828
------ -----
Total assets................................................................... $761,694 $680,257
======== ========
Liabilities and Shareholders' Equity
Deposits, domestic :
Noninterest bearing demand ........................................................ $ 94,434 $ 94,160
Interest bearing:
NOW accounts .................................................................. 95,343 89,693
Time .......................................................................... 365,442 329,129
Certificates of deposit greater than $100 ..................................... 66,135 56,874
-------- --------
Total deposits ........................................................... 621,354 569,856
Other borrowings ....................................................................... 53,279 32,895
Other liabilities ...................................................................... 9,257 5,785
-------- --------
Total liabilities ............................................................. 683,890 608,536
------- --------
Shareholders' equity:
Common stock - no par value; authorized,
25,000,000 shares; issued and outstanding,
9,268,573 shares in 1997 and 9,197,266 shares in 1996 ............................. 49,514 43,101
Unrealized gains on securities available for sale, net ................................. 3,188 1,688
Retained earnings ...................................................................... 25,102 26,932
------ ------
Total shareholders' equity .................................................... 77,804 71,721
------ ------
Total liabilities and shareholders' equity .................................... $761,694 $680,257
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
1997 ANNUAL REPORT
First Charter Corporation and Subsidiaries
Consolidated Statements of Income
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in thousands, except per share amounts) 1997 1996 1995
Interest income:
<S> <C> <C> <C>
Interest and fees on loans........................... $ 46,427 $ 41,170 $ 36,619
Federal funds sold................................... 160 266 483
Interest bearing bank deposits....................... 433 460 593
Securities available for sale........................ 8,113 8,304 3,179
Investment securities:
Taxable.......................................... 766 707 2,852
Non-taxable...................................... 55 -- 2,209
------ ------ -----
Total interest income........................ 55,954 50,907 45,935
------ ------ ------
Interest expense:
Deposits ............................................ 22,812 21,143 18,481
Federal funds purchased and securities
sold under agreements to repurchase.............. 1,256 1,006 727
Federal Home Loan Bank borrowings.................... 683 648 628
------ ------ ------
Total interest expense...................... 24,751 22,797 19,836
------ ------ ------
Net interest income.................... 31,203 28,110 26,099
Provision for loan losses................................. 2,702 1,540 1,991
----- ----- -----
Net interest income after provision for loan losses.. 28,501 26,570 24,108
------ ------ ------
Noninterest income:
Trust income......................................... 1,901 1,490 1,556
Service charges on deposit accounts.................. 3,928 3,291 2,909
Insurance and other commissions...................... 867 569 408
Securities available for sale transactions, net...... 832 243 4
Investment securities transactions, net.............. -- -- (29)
Other................................................ 1,924 1,678 1,430
----- ----- ----
Total noninterest income ........................ 9,452 7,271 6,278
----- ----- -----
Noninterest expense:
Salaries and fringe benefits......................... 11,415 10,538 9,549
Occupancy and equipment.............................. 3,815 2,923 2,670
Other ............................................... 10,412 5,893 6,962
------ ----- -----
Total noninterest expense ....................... 25,642 19,354 19,181
------ ------ ------
Income before income taxes ...................... 12,311 14,487 11,205
Income taxes ............................................ 3,910 4,418 2,901
----- ----- -----
Net income....................................... $ 8,401 $ 10,069 $ 8,304
============== ============== ==============
Basic net income per share ...................... $ 0.91 $ 1.10 $ 0.95
============== ============== ==============
Weighted average common shares .................. 9,236,786 9,183,738 8,779,066
Diluted net income per share ................... $ 0.90 $ 1.09 $ 0.94
============== ============== ============
Weighted average common and common
equivalent shares........................... 9,339,060 9,234,946 8,846,355
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
FIRST CHARTER CORPORATION
First Charter Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
Unrealized
Gains (Losses)
on Securities
Common Stock Retained Available for
(Dollars in thousands) Shares Amount Earnings Sale, Net Total
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance December 31, 1994................. 7,076,165 $ 39,553 $ 15,013 $ (474) $ 54,092
Net income for 1995....................... -- -- 8,304 -- 8,304
Cash dividends of $.43 per share.......... -- -- (2,618) -- (2,618)
Purchase and retirement of
common stock ......................... (40,781) (567) (61) -- (628)
Stock options exercised and Dividend
Reinvestment Plan stock issued........ 43,614 577 -- -- 577
Pre-merger transactions of pooled bank.... 247,352 2,632 -- -- 2,632
Unrealized gain on securities
available for sale, net .............. -- -- -- 2,212 2,212
--------- ------ ------ ----- ------
Balance December 31, 1995................. 7,326,350 42,195 20,638 1,738 64,571
Net income for 1996....................... -- -- 10,069 -- 10,069
Cash dividends of $.50 per share.......... -- -- (3,775) -- (3,775)
Purchase and retirement of
common stock ......................... (22,858) (486) -- -- (486)
Stock options exercised and Dividend
Reinvestment Plan stock issued........ 88,057 1,390 -- -- 1,390
Pre-merger transactions of pooled bank.... 205 2 -- -- 2
Unrealized loss on securities
available for sale, net............... -- -- -- (50) (50)
--------- ------ ------ ----- ------
Balance December 31, 1996................. 7,391,754 43,101 26,932 1,688 71,721
Net income for 1997....................... -- -- 8,401 -- 8,401
Cash dividends of $.53 per share.......... -- -- (4,246) -- (4,246)
Purchase and retirement of
common stock ......................... (64,118) (1,126) (193) -- (1,319)
Stock options exercised and Dividend
Reinvestment Plan stock issued........ 69,560 1,263 17 -- 1,280
6-for-5 stock split....................... 1,260,172 5,809 (5,809) -- --
Pre-merger transactions of pooled bank.... 611,205 467 -- -- 467
Unrealized gain on securities
available for sale, net............... -- -- -- 1,500 1,500
--------- --------- ---------- --------- --------
Balance December 31, 1997................. 9,268,573 $ 49,514 $ 25,102 $ 3,188 $ 77,804
========= ========= ========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
1997 ANNUAL REPORT
First Charter Corporation and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
(Dollars in thousands) 1997 1996 1995
Cash flows from operating activities:
<S> <C> <C> <C>
Net income................................................. $ 8,401 $ 10,069 $ 8,304
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses.............................. 2,702 1,540 1,991
Depreciation and amortization.......................... 2,158 1,494 1,143
Premium amortization and (discount accretion), net..... (233) 58 (189)
Net loss on investment securities transactions......... -- -- 29
Net gain on securities available for sale transactions. (832) (243) (4)
Net loss (gain) on sale of premises and equipment...... (12) 4 43
Origination of mortgage loans held for sale............ (11,843) (11,011) (22,960)
Proceeds from sale of mortgage loans available for sale 10,671 10,946 22,805
Decrease (increase) in other assets.................... (2,170) 276 (221)
Increase (decrease) in other liabilities............... 1,971 (985) 1,664
----- ---- -----
Net cash provided by operating activities 10,813 12,148 12,605
------ ------ ------
Cash flows from investing activities:
Proceeds from sales of investment securities............... -- -- 1,725
Proceeds from sales of securities available for sale....... 33,585 6,091 17,753
Proceeds from maturities and issuer calls of
investment securities, net............................. 1,500 -- 34,898
Proceeds from maturities of securities available for sale.. 32,092 43,165 18,696
Purchase of investment securities.......................... (1,813) (4,948) (47,515)
Purchase of securities available for sale.................. (81,256) (41,525) (43,738)
Net increase in loans...................................... (67,774) (43,133) (64,197)
Proceeds from sales of premises and equipment.............. 254 144 304
Purchase of premises and equipment......................... (4,295) (3,701) (2,132)
------- -------- -------
Net cash used by investing activities.................. (87,707) (43,907) (84,206)
------- -------- --------
Cash flows from financing activities:
Net increase in demand, NOW,
money market, and savings accounts..................... 22,367 28,071 25,149
Net increase in certificates of deposit.................... 29,132 26,350 39,300
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings........................ 20,383 (6,819) 13,716
Purchase of common stock...................................... (1,319) (486) (628)
Proceeds from issuance of common stock........................ 1,280 1,390 577
Pre-merger transactions of pooled bank........................ 467 2 2,632
Dividends paid................................................ (4,246) (3,775) (2,618)
------- ------- ------
Net cash provided by financing activities.............. 68,064 44,733 78,128
------- ------ ------
Net increase (decrease) in cash and cash equivalents (8,830) 12,974 6,527
Cash and cash equivalents at beginning of period....... 49,882 36,908 30,381
------ ------ ------
Cash and cash equivalents at end of period............. $ 41,052 $ 49,882 $ 36,908
========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest............................................... $ 20,020 $ 22,378 $ 19,589
========== =========== ===========
Income taxes........................................... $ 4,915 $ 4,677 $ 3,828
========== =========== ===========
Supplemental disclosure of non-cash transactions:
Transfers of loans, premises and equipment
to other real estate owned............................. $ 434 $ 889 $ 12
========== =========== ===========
Investment securities transferred to available for sale....... $ 14,825 $ -- $ 95,498
========== =========== ===========
Unrealized gain (loss) in value of securities available for sale
(net of tax effect of $960, ($33), and $1,414.
for 1997, 1996, and 1995, respectively)................... $ 1,500 $ (50) $ 2,212
========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
FIRST CHARTER CORPORATION
First Charter Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies
The following is a description of the more significant accounting and
reporting policies which First Charter Corporation (the "Corporation") and its
subsidiaries, First Charter National Bank ("First Charter ") and Bank of Union
("Union") (collectively referred to as the "Banks"), follow in preparing and
presenting their consolidated financial statements. In consolidation, all
significant intercompany accounts and transactions have been eliminated. All
historical financial data has been adjusted to reflect the acquisition of
Carolina State Bank ("CSB") in 1997 and the acquisition of Bank of Union in
1995, each of which was accounted for as a pooling of interests (Note 2).
(a) Securities - The Corporation accounts for investment securities under
the provisions of the Financial Accounting Standards Board (FASB)'s Statement of
Financial Accounting Standards (Standard) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." At December 31, 1997 all of the
Corporation's securities are categorized as available-for-sale and, accordingly,
are reported at fair value, with any unrealized gains or losses, net of taxes,
shown as a separate component of shareholders' equity. The Corporation intends
to hold these available-for-sale securities for an indefinite period of time but
may sell them prior to maturity.
Gains and losses on sales of securities are recognized when realized on a
specific identification basis. Premiums and discounts are amortized into
interest income using a level yield method.
(b) Loans - Loans are carried at their principal amount outstanding.
Interest income is recorded as earned on an accrual basis. The determination to
discontinue the accrual of interest is based on a review of each loan.
Generally, interest is discontinued on loans 90 days past due as to principal or
interest unless in management's opinion collection of both principal and
interest is assured by way of collateralization, guarantees or other security
and the loan is in the process of collection. Loans are returned to accrual
status when management determines, based on an evaluation of the underlying
collateral together with the borrower's payment record and financial condition,
that the borrower has the ability and intent to meet the contractual obligations
of the loan agreement.
In accordance with Standard No. 114, "Accounting by Creditors for
Impairment of a Loan," management considers a loan to be impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due according to contractual terms of the loan agreement.
Factors that influence management's judgment include, but are not limited to,
loan payment pattern, source of repayment, and value of collateral. A loan would
not be considered impaired if an insignificant delay in loan payment occurs and
management expects to collect all amounts due. The major sources for
identification of loans to be evaluated for impairment include past due and
nonaccrual reports, internally generated lists of loans of certain risk grades,
and regulatory reports of examination.
The Corporation uses the allowance method to provide for loan losses.
Accordingly, all loan losses are charged to the allowance for loan losses and
all recoveries are credited to it. The provision for loan losses is based on
past loan loss experience and other factors which, in management's judgment,
deserve current recognition in estimating possible loan losses. Such other
factors considered by management include the growth and composition of the loan
portfolio, the relationship of the allowance for loan losses to outstanding
loans, and economic conditions.
Allowances for loan losses related to loans that are identified as impaired
in accordance with Standard No. 114 are based on discounted cash flows using the
loans' initial interest rates or the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller-balanced, homogenous loans that
are collectively evaluated for impairment (residential mortgage and consumer
installment loans) are excluded from this impairment evaluation in accordance
with Standard No. 114, and their allowance is calculated in accordance with the
allowance for loan losses policy discussed above.
10
<PAGE>
1997 ANNUAL REPORT
Management considers the December 31, 1997 allowance for loan losses
adequate to cover inherent losses in the Banks' loan portfolios. Management
believes it has established the allowance in accordance with generally accepted
accounting principles and in consideration of the current economic environment.
While management uses the best information available to make evaluations, future
additions to the allowance may be necessary based on changes in economic and
other conditions. Additionally, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the recognition of additions to the allowance
based on their judgments of information available to them at the time of their
examinations.
Mortgage loans held for sale are valued at the lower of cost or market as
determined by outstanding commitments from investors or current investor yield
requirements, calculated on the aggregate loan basis.
(c) Depreciation - Depreciation and amortization of premises and equipment
are computed using the straight-line method over the estimated useful lives. The
useful lives range from three to seven years for furniture and equipment, from
fifteen to forty years for buildings and over the terms of the respective
leases.
(d) Foreclosed Properties - Foreclosed properties are included in other
assets and represent real estate acquired through foreclosure or deed in lieu
thereof and are carried at the lower of cost (principal balance of the former
loan plus costs of obtaining title and possession) or fair value, less estimated
costs to sell. Generally such properties are appraised annually and the carrying
value, if greater than the appraised value, is adjusted with a charge to income.
(e) Income Taxes - Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using the
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(f) Loan Fees and Costs - Nonrefundable loan fees and certain direct costs
associated with originating or acquiring loans are deferred and recognized over
the life of the related loans as an adjustment to interest income.
(g) Cash Flows - For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and federal funds sold.
Generally, federal funds are sold for one-day periods.
(h) Derivative Financial Instruments - All derivative financial instruments
held by the Corporation are held for purposes other than trading. The
Corporation uses interest rate floors for interest rate risk management.
Interest rate floors are designated as a hedge against variable rate commercial
loans. The net interest payable or receivable on floors is accrued and
recognized as an adjustment to interest income or interest expense of the
related asset or liability. Premiums paid for purchased floors are amortized
over the shorter of the term of the floor or the related asset or liability.
Upon the early termination of floors, the net proceeds received or paid,
including premiums, are deferred and included in other assets or liabilities and
amortized over the shorter of the remaining contract life or the maturity of the
related asset or liability. Upon disposition or settlement of the asset or
liability being hedged, deferral accounting is discontinued and any other
related premium is recognized in earnings.
(i) Net Income Per Share - In February 1997, the FASB issued Standard No.
128, "Earnings Per Share," which applies to all entities with publicly held
common stock or potential common stock. This statement replaces the presentation
of primary earnings per share ("EPS") with a presentation of basic EPS. It also
requires dual presentation of basic and diluted EPS on the face of the income
statement for all entities with complex capital structures, and it requires a
reconciliation of the numerator and denominator of the basic EPS computation to
the numerator and denominator of the diluted EPS computation. Standard No. 128
requires restatement of all prior-period EPS data presented. The Corporation
adopted this statement for the year ended December 31, 1997. Therefore, the EPS
data for the years ended December 31, 1996 and 1995 have been restated to comply
with this statement.
11
<PAGE>
FIRST CHARTER COPORATION
Basic net income per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding for the year.
Diluted net income per share reflects the potential dilution that could occur if
the Corporation's common stock equivalents, which consist of dilutive stock
options, were exercised. The numerators of the basic net income per share
computations are the same as the numerators of the diluted net income per share
computations for all periods presented. A reconciliation of the denominator of
the basic net income EPS computations to the denominator of the diluted EPS
computations is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
1997 1996 1995
<S> <C> <C> <C>
Basic EPS denominator:
Weighted average number of common shares
outstanding................................. 9,236,786 9,183,738 8,779,066
Dilutive effect arising from assumed exercise
of stock options........................... 102,274 51,208 67,289
------- ------ ------
Diluted EPS denominator....................... 9,339,060 9,234,946 8,846,355
========= ========= =========
</TABLE>
Income per share for periods prior to 1997 has been restated to reflect the
6-for-5 stock split declared in the second quarter of 1997.
(j) Stock-Based Compensation - Standard No. 123, "Accounting for
Stock-Based Compensation", was issued by the FASB in October 1995. Standard No.
123 requires that the fair value of employee stock-based compensation plans be
recorded as a component of compensation expense in the statement of income as of
the date of grant of awards related to such plans or that the impact of such
fair value on net income and earnings per share be disclosed on a pro forma
basis in a footnote to the financial statements for awards granted after
December 15, 1994, if the accounting for such awards continues to be in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB 25). The Corporation adopted Standard No. 123 on
January 1, 1996 and has elected to continue accounting for stock-based
compensation under the provisions of APB 25. The pro forma impact on net income
and earnings per share is disclosed in Note 15.
(2) Mergers
(a) On August 15, 1997, the Corporation entered into an Agreement and Plan
of Merger with CSB, pursuant to which CSB merged with and into First Charter
(the "Merger"). On December 22, 1997, the Merger was completed and was accounted
for as a pooling of interests. Accordingly, all current and prior years'
financial statements have been restated to combine the accounts of CSB with
those of the Corporation.
As of December 22, 1997, there were 1,663,992 shares of CSB common stock
outstanding. Each share of CSB common stock was converted into 1.023 shares of
the Corporation's common stock.
CSB was a North Carolina-chartered commercial bank providing general
banking services through a network of four branch offices located in Shelby,
Kings Mountain, Boiling Springs and Forest City, North Carolina, which are now
branches of First Charter. At December 31, 1996, CSB had total assets of
approximately $133 million and total deposits of approximately $115 million. In
the fourth quarter of 1997, the Corporation recognized $3,355,680 of costs
associated with the acquisition of CSB. The primary components of these
merger-related expenses were transaction and professional expenses and various
severance-related obligations.
12
<PAGE>
1997 ANNUAL REPORT
Separate results of operations of the combined entities for the nine months
ended September 30, 1997, and years ended December 31, 1996 and 1995 were as
follows (dollars in thousands, except per share data):
<TABLE>
<CAPTION>
Nine Months Ended
September 30, Years Ended December 31,
--------------------------- -------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
Previously Reported Previously Reported Previously Reported
------------------- ------------------- -------------------
Corp- Corp- Corp-
oration CSB Restated oration CSB Restated oration CSB Restated
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net interest income..... $18,891 $4,069 $22,960 $23,313 $4,797 $28,110 $21,984 $4,115 $26,099
Net income ........ 7,401 717 8,118 8,853 1,216 10,069 7,003 1,301 8,304
Basic income
per share ............. 0.97 0.44 0.88 1.17 0.76 1.10 0.94 1.02 0.95
Diluted income
per share ............. 0.97 0.44 0.87 1.17 0.76 1.09 0.93 1.02 0.94
</TABLE>
(b) On December 21, 1995, the Corporation completed its acquisition of Union, in
which a newly formed subsidiary of the Corporation merged with Union and Union
became a wholly owned subsidiary of the Corporation. The acquisition of Union
was accounted for as a pooling of interests.
Union is a state-chartered commercial bank organized under the laws of
North Carolina in 1985. At December 31, 1995, Union had total assets of
approximately $147 million and total deposits of approximately $129 million.
Union provides general banking services through a network of five branch offices
located in Union and Mecklenburg Counties, North Carolina. Through its
subsidiary, BOU Financial, Inc., Union also offers discount brokerage services,
insurance and annuity sales and financial planning services. In the fourth
quarter of 1995, the Corporation recognized $1,062,150 of costs associated with
the acquisition of Union. These costs included legal, accounting, investment
banking, regulatory filings, proxy printing and solicitation expenses.
(3) Financial Statement Presentations and Related Matters
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements, as
well as the amounts of income and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications of certain amounts in the 1996 and 1995 consolidated
financial statements have been made to conform with the financial statement
presentation for 1997. Such reclassifications had no effect on the net income or
shareholders' equity as previously reported.
13
<PAGE>
FIRST CHARTER CORPORATION
(4) Securities Available for Sale
Securities available for sale at December 31, 1997 and 1996 are summarized
as follows:
<TABLE>
<CAPTION>
Gross Gross
(Dollars in thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------------------------------------------------------
1997
<S> <C> <C> <C> <C>
U.S. Government obligations...................... $ 22,072 $ 267 $ 6 $ 22,333
U.S. Government agency obligations............... 45,856 43 36 45,863
Mortgage-backed securities....................... 9,596 130 50 9,676
State, county and municipal obligations.......... 83,796 1,897 161 85,532
Equity securities................................ 10,485 3,142 -- 13,627
------ ----- ---- ------
Total ...................................... $ 171,805 $ 5,479 $ 253 $ 177,031
============== ============ =========== ===============
1996
U.S. Government obligations...................... $ 38,732 $ 408 $ 45 $ 39,095
U.S. Government agency obligations............... 11,578 31 26 11,583
Mortgage-backed securities....................... 14,525 151 163 14,513
State, county and municipal obligations.......... 71,172 1,480 602 72,050
Equity securities................................ 4,893 1,542 11 6,424
----- ----- -- -----
Total ...................................... $ 140,900 $ 3,612 $ 847 $ 143,665
============== ============ =========== ===============
</TABLE>
A schedule of debt securities by contractual maturity at December 31, 1997
is shown below on an amortized cost basis and on a market value basis. Actual
maturities could differ from contractual maturities due to call or prepayment
provisions.
Amortized Market
(Dollars in thousands) Cost Value
---- -----
Debt securities available for sale:
Due in one year or less....................... $ 13,283 $ 13,319
Due from one to five years.................... 53,195 54,190
Due from five to ten years.................... 68,277 68,900
Due after 10 years............................ 16,979 17,319
Mortgage-backed securities.................... 9,586 9,676
------- -------
Total............................................ $ 161,320 $ 163,404
======= =======
Securities with an aggregate carrying value of $70,354,000 at December 31,
1997 were pledged to secure public deposits, securities sold under agreements to
repurchase and Federal Home Loan Bank borrowings. Proceeds from the sale of
securities available for sale were $33,585,000 in 1997, $6,091,000 in 1996, and
$17,753,000 in 1995. Gross gains of $844,000 and gross losses of $12,000 were
realized in 1997. Gross gains of $265,000 and gross losses of $22,000 were
realized in 1996. Gross gains of $71,000 and gross losses of $67,000 were
realized in 1995. At December 31, 1997, the Banks owned stock in the Federal
Home Loan Bank of Atlanta with book and market values of $4,714,000, which is
included in equity securities and classified as available for sale.
14
<PAGE>
1997 ANNUAL REPORT
(5) Investment Securities
During December 1995, the entire portfolio of First Charter Corporation
investment securities, with an amortized cost of $82,034,110 and unrealized
gains of $1,510,027, was transferred to securities available for sale, in
accordance with FASB's implementation guide for Standard 115, "Accounting for
Certain Investments in Debt and Equity Securities". In addition, following the
acquisition of CSB in 1997, First Charter transferred CSB's investment
securities with amortized cost of $13,464,188 and unrealized gains $27,073 to
securities available for sale.
Proceeds from the sale of investment securities were $1,725,292 in 1995. In
1995, mortgage-backed securities were sold, all of which had paydowns of more
than 85% of the original purchase amount. Gross gains of $18,418 and gross
losses of $46,972 were realized in 1995.
The amortized cost and estimated market values of securities held to
maturity at December 31, 1996, are presented below:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
(Dollars in thousands) Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. Government obligations......... $13,940 $39 -- $13,979
=============================================================
</TABLE>
(6) Loans
The Corporation's primary market area includes the states of North and
South Carolina, and predominately centers on the Metro region of Charlotte,
North Carolina. At December 31, 1997, the majority of the total loan portfolio,
as well as a substantial portion of the commercial and real estate loan
portfolios, were to borrowers within this region. The diversity of the region's
economic base tends to provide a stable lending environment. An area of
significant concentration of credit risk has not been specified due to the
diverse industrial base in the region.
<TABLE>
<CAPTION>
Loans at December 31, 1997 and 1996 are as follows:
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural................................... $ 80,656 $ 63,552
Real estate - construction............................................... 76,429 47,133
Real estate - commercial................................................. 133,185 128,406
Real estate - residential................................................ 171,003 148,999
Installment.............................................................. 62,803 68,619
------ ------
Total............................................................... $ 524,076 $ 456,709
=============== ===============
Nonaccrual loans included above.......................................... $ 2,105 $ 1,630
Other real estate........................................................ 1,418 759
Loans 90 days or more past due and still
accruing included above............................................. 2,109 685
----- ---
Total problem assets................................................ $ 5,632 $ 3,074
=============== ===============
</TABLE>
It is the Corporation's policy to review each prospective credit in order
to determine acceptable repayment terms, levels of collateral required, if any,
and any such other conditions as may be appropriate to secure the credit prior
to commitment. The type of collateral ranges from highly liquid assets, such as
cash on deposit, to unimproved real estate.
15
<PAGE>
FIRST CHARTER CORPORATION
Interest income that would have been recorded on nonaccrual loans and
restructured loans for the years ended December 31, 1997, 1996, and 1995, had
they performed in accordance with their original terms, amounted to
approximately $225,000, $174,000, and $330,000, respectively. Interest income on
all such loans included in the results of operations for 1997, 1996, and 1995
amounted to approximately $22,000, $42,000, and $82,000, respectively.
In accordance with Standards No. 114 and No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures," the recorded
investment in impaired loans was $2,216,380 (of which $2,062,173 was on
nonaccrual) and $1,954,924 (of which $1,367,029 was on nonaccrual) for 1997 and
1996, respectively. The recorded investment of all impaired loans for both years
had related allowances for loan losses. The related allowance for loan losses on
these loans was $764,538 and $724,248 for 1997 and 1996, respectively. The
average recorded investment in impaired loans for 1997 was $2,363,335, and the
income recognized during 1997 was $29,453, none of which was recognized using
the cash method of income recognition. The average recorded investment in
impaired loans for 1996 was $2,473,719, and the income recognized during 1996
was $181,905, of which $75,562 was recognized using the cash method of income
recognition. The average recorded investment in impared loans for 1995 was
$3,778,224, and the income recognized during 1995 was $101,746, of which
$62,294, was recognized using the cash method of income recognition.
Other real estate increased to $1,418,000 at December 31, 1997 from
$759,000 at December 31, 1996. The components of other real estate at December
31, 1997 consisted of (i) three construction loans totaling $556,000, (ii) ten
residential loans totaling $239,000, (iii) one commercial loan totaling
$250,000, and (iv) property reclassified from premises and equipment which was
originally purchased for construction of a branch location totaling $373,000.
The components of other real estate at December 31, 1996 consisted of (i) two
construction loans totaling $304,000, (ii) one residential loan totaling $7,000,
and (iii) property reclassified from premises and equipment which was originally
purchased for construction of a branch location totaling $448,000.
The following is a reconciliation of loans outstanding to executive
officers, directors and their associates for the year ended December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C> <C> <C>
Balance at December 31, 1996................................................................. $ 11,000
New loans.................................................................................... 3,040
Principal repayments......................................................................... (6,993)
------
Balance at December 31, 1997................................................................. $ 7,047
======
</TABLE>
In the opinion of management, these loans are made on substantially the
same terms, including interest rates and collateral, as those prevailing at the
time for comparable transactions with other borrowers. Such loans, in the
opinion of management, do not involve more than the normal risks of
collectibility.
(7) Allowance for Loan Losses
The following is a summary of the changes in the allowance for loan losses
for each of the years in the three-year period ended December 31, 1997:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance............................................. $ 6,528 $ 6,056 $ 5,056
Add:
Provision charged to operations............................... 2,702 1,540 1,991
----- ----- -----
9,230 7,596 7,047
------ ------ -----
Less:
Loan charge-offs.............................................. 1,626 1,466 1,207
Less loan recoveries........................................ 400 398 216
----- ----- -----
Net loan charge-offs..................................... 1,226 1,068 991
----- ----- ---
Ending balance................................................ $ 8,004 $ 6,528 $ 6,056
======== ========= =========
</TABLE>
16
<PAGE>
1997 ANNUAL REPORT
(8) Premises and Equipment
Premises and equipment at December 31, 1997 and 1996 are summarized as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Land............................................................................ $ 5,093 $ 4,259
Buildings....................................................................... 8,870 8,378
Furniture and equipment......................................................... 12,277 10,338
Leasehold improvements.......................................................... 892 686
------ ------
27,132 23,661
Less accumulated depreciation and amortization.................................. 11,183 9,707
------ -----
Premises and equipment, net $ 15,949 $ 13,954
============== ============
</TABLE>
(9) Deposits
A summary of deposit balances at December 31, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Noninterest bearing demand...................................................... $ 94,434 $ 94,160
NOW accounts.................................................................... 95,343 89,693
Time:
Insured money market accounts............................................... 63,580 42,807
Savings deposits............................................................ 117,317 121,643
Certificates of deposit..................................................... 250,680 221,553
------- -------
Total........................................................................... $ 621,354 $ 569,856
=========== ===========
</TABLE>
The aggregate amount of certificates of deposit with denominations greater
than $100,000 was $66,135,000 and $56,873,000 at December 31, 1997 and 1996,
respectively, and the related interest expense was approximately $4,003,000 and
$3,264,000 in 1997 and 1996, respectively.
At December 31, 1997, the scheduled maturities of all time deposits,
including certificates of deposit greater than $100,000, are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1998...................................... $ 317,794
1999...................................... 105,545
2000...................................... 7,989
2001...................................... 65
2002 and after............................ 184
--------
$ 431,577
============
</TABLE>
17
<PAGE>
FIRST CHARTER CORPORATION
(10) Other Borrowings
The following is a schedule of securities sold under repurchase agreements,
federal funds purchased and Federal Home Loan Bank ("FHLB") borrowings:
<TABLE>
<CAPTION>
Interest Maximum
Balance Rate Average Outstanding
as of as of Average Interest at Any
(Dollars in thousands) December 31, December 31, Balance Rate Month-end
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1997
Federal funds purchased and securities
sold under agreements
to repurchase ................. $ 26,346 5.03% $ 25,963 4.93% $ 28,855
FHLB borrowings..................... 26,933 6.54% 10,627 6.43% 26,934
------ ------ ------
Total ......................... $ 53,279 $ 36,590 $ 55,789
============== ============= ==============
1996
Federal funds purchased and securities
sold under agreements
to repurchase ................. $ 21,728 4.76% $ 21,773 4.61% $ 25,150
FHLB borrowings..................... 11,167 6.15% 10,385 6.24% 11,290
------ ------ ------
Total.......................... $ 32,895 $ 32,158 $ 36,440
============== ============= ==============
</TABLE>
At December 31, 1997, the Banks had two available lines of credit with
the FHLB totaling $52.5 million with $26,933,275 outstanding. The outstanding
amounts consist of $24,400,000 maturing in 1998, $260,417 maturing in 1999,
$1,142,858 maturing in 2001, $600,000 maturing in 2003, and $530,000 maturing in
2011. In addition, the Banks are required to pledge collateral to secure the
advances as described in the line of credit agreements. The collateral consists
of FHLB stock and qualifying 1-4 family residential mortgage loans.
Federal funds purchased represent unsecured overnight borrowings from other
financial institutions by the Banks. Securities sold under agreement to
repurchase represent short-term borrowings by the Banks with maturities ranging
from 1 to 89 days collateralized by a portion of the Corporation's securities of
the United States government or its agencies, which have been delivered to a
third party custodian for safekeeping.
(11) Derivative Financial Instruments
Off-balance sheet derivative financial instruments, such as interest rate
swaps, interest rate floor and cap arrangements and interest rate futures and
option contracts, are available to the Corporation to assist in managing
interest rate risks. As of December 31, 1997, the Corporation has only used
interest rate floors. Interest rate floors are used to protect certain
designated variable rate financial instruments from the downward effects of
their repricing in the event of a decreasing rate environment. The Corporation
is using this financial instrument as a hedge against variable rate loans. The
total cost of this arrangement was $130,000, which is expensed on a
straight-line basis for the life of the instrument. The Corporation expensed
$26,000 related to this financial instrument for each of the years ended
December 31, 1997, 1996 and 1995. During part of 1997, the index rate was below
the floor rate, and the Corporation recognized $12,000 as additional interest
income on its variable rate loans. The fair value of this financial instrument
was $91,000 compared to a book value of $52,000 at December 31, 1997 and a fair
value of $276,000 compared to a book value of $78,000 at December 31, 1996. The
table below summarizes the Corporation's off-balance sheet derivative financial
instrument at December 31, 1997.
Interest rate floor agreements at December 31, 1997:
<TABLE>
<CAPTION>
Current
Notional Floor Index Maturity
(Dollars in thousands) Amount Rate Rate Date
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest rate floors.................................... $ 20,000 8.50% 8.50% 1/23/2000
======== ==== ==== =========
</TABLE>
18
<PAGE>
1997 ANNUAL REPORT
(12) Other Noninterest Expense
Components of other noninterest expense in excess of one percent of the
aggregate amount of total interest income and total noninterest income are as
follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advertising............................................. $ 1,039 $ 644 $ 582
Data processing......................................... 744 465 260
Professional services................................... 1,416 1,109 1,043
FDIC insurance.......................................... 70 21 530
Stationery and supplies................................. 844 904 737
Merger related.......................................... 3,356 -- 1,062
All other items......................................... 2,943 2,750 2,748
----- ----- -----
Total............................................... $ 10,412 $ 5,893 $ 6,962
=============== ============= =============
</TABLE>
(13) Income Tax
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
(Dollars in thousands) Current Deferred Total
- --------------------------------------------------------------------------------------------------------------
Year ended December 31, 1997
<S> <C> <C> <C>
Federal................................................. $ 4,848 $ (1,394) $ 3,454
State................................................... 742 (286) 456
----- ------ -----
Total.............................................. $ 5,590 $ (1,680) $ 3,910
======== ======== ========
Year ended December 31, 1996
Federal................................................. $ 3,768 $ 71 $ 3,839
State................................................... 545 34 579
----- --- -----
Total.............................................. $ 4,313 $ 105 $ 4,418
======== ========= ========
Year ended December 31, 1995
Federal................................................. $ 3,414 $ (831) $ 2,583
State................................................... 477 (159) 318
----- ---- -----
Total.............................................. $ 3,891 $ (990) $ 2,901
======== ======== ========
</TABLE>
Income tax expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to pretax income as a result of the following:
<TABLE>
1997 1996 1995
% of %of %of
Pretax Pretax Pretax
(Dollars in thousands) Amount Income Amount Income Amount Income
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
<S> <C> <C> <C>
Income before income taxes.............. $ 12,311 $ 14,487 $ 11,025
Tax at federal income tax rate.......... 4,309 35.0% 5,070 35.0% 3,922 35.0%
Reasons for differences:
Tax exempt income.................. (1,199) (9.7) (1,088) (7.5) (805) (7.2)
Nondeductible merger expense....... 459 3.7 -- -- 330 3.0
State income tax, net of
federal benefit................ 296 2.4 376 2.6 207 1.8
Change in deferred tax assets
valuation allowance............ -- -- -- -- (637) (5.7)
Other.............................. 45 0.4 60 0.4 (116) (1.0)
----- --- -- --- ---- ----
Total.......................... $ 3,910 31.8% $ 4,418 30.5% $ 2,901 25.9%
========= ==== ========== ==== ========== ====
</TABLE>
19
<PAGE>
FIRST CHARTER CORPORATION
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1997 and 1996 are presented below.
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Deferred Tax Assets:
<S> <C> <C>
Provision for loan losses..................................................... $ 3,179 $ 2,555
Accrued expenses deductible when paid for tax purposes........................ 1,062 254
Other......................................................................... 171 105
----- -----
Total gross deferred tax assets............................................. 4,412 2,914
Less valuation allowance...................................................... -- --
----- -----
Deferred tax asset, net of valuation allowance.............................. 4,412 2,914
----- -----
Deferred Tax Liabilities:
Unrealized gain on securities available for sale.............................. (2,038) (1,077)
Deferred loan fees............................................................ (188) (172)
Fixed assets primarily due to difference in depreciation...................... (127) (122)
Loan loss reserve recapture................................................... (516) (661)
Other......................................................................... (78) (136)
------- ------
Total gross deferred tax liability........................................ (2,947) (2,168)
------ ------
Net deferred tax asset........................................................ $ 1,465 $ 746
=========== ==========
</TABLE>
A portion of the current year change in the net deferred tax asset relates
to unrealized gains and losses on securities available for sale. The related
current period deferred tax expense of $961,000 has been recorded directly to
shareholders' equity. The balance of the change in the net deferred tax asset
results from the current period deferred tax benefit of $1,680,000.
There was no valuation allowance for deferred tax assets as of January 1,
1996. There was no change in the total valuation allowance during 1997 and 1996.
It is management's belief that realization of the deferred tax asset is more
likely than not.
Tax returns for 1994 and subsequent years are subject to examination by
taxing authorities.
(14) Retirement Plan Contributions
The Corporation has a qualified Retirement Savings Plan (401(k) Plan) for
all eligible employees of First Charter and Union. Pursuant to the Savings Plan,
an eligible employee may elect to defer between 1% and 10% of compensation. In
the discretion of the Board of Directors, the Corporation may contribute an
amount necessary to match all or a portion of a participant's elective deferrals
in an amount to be determined by the Board of Directors from time to time, up to
a maximum of 6% of a participant's compensation. In addition, the Corporation
may contribute an additional amount to each participant's Savings Plan account
as determined in the discretion of the Board of Directors. The Corporation
adopted a qualified Money Purchase Pension Plan effective January 1, 1997 for
all eligible employees of First Charter and Union. Pursuant to the Money
Purchase Plan, the Corporation contributes annually to each participant's Plan
account an amount equal to 3% of the participant's compensation. Prior to 1997,
such contributions were made to the Savings Plan. The Corporation's aggregate
contribution to the Savings Plan and Money Purchase Pension Plan was $626,941,
$559,566 and $408,421 for 1997, 1996 and 1995, respectively.
20
<PAGE>
1997 ANNUAL REPORT
(15) Common Stock
On May 21, 1997, the Board of Directors of the Corporation declared a
6-for-5 stock split payable on July 15, 1997 to shareholders of record on June
20, 1997. All per share data in the consolidated financial statements has been
retroactively adjusted for the stock split.
On December 15, 1997, the shareholders of the Corporation approved Amended
and Restated Articles of Incorporation for the Corporation which included
amendments to, among other things, (i) increase the number of shares of common
stock that the Corporation is authorized to issue from 10,000,000 to 25,000,000
and (ii) eliminate the concept of par value in connection with the Corporation's
common stock. These changes have been reflected in the accompanying consolidated
financial statements.
The Corporation maintains the Dividend Reinvestment and Stock Purchase Plan
(the "DRIP"), pursuant to which 240,000 shares (as adjusted to reflect the stock
splits) of common stock of the Corporation have been reserved for issuance.
Shareholders may elect to participate in the DRIP and have dividends on shares
of common stock reinvested and may make optional cash payments of up to $2,500
per calendar quarter to be invested in common stock of the Corporation. Pursuant
to the terms of the DRIP, upon reinvestment of the dividends and optional cash
payments, either the Corporation can issue new shares valued at the then current
market value of the common stock or the administrator of the DRIP can purchase
shares of common stock in the open market. During 1997, the Corporation issued
56,995 shares and the administrator of the DRIP purchased 2,250 shares on the
open market.
Under the terms of the First Charter Corporation Comprehensive Stock Option
Plan (the "Comprehensive Plan"), stock options (which can be incentive stock
options or non-qualified stock options) may be periodically granted to key
employees of the Corporation or its subsidiaries. The terms and vesting
schedules of options granted under the Comprehensive Plan generally shall be
determined by the Compensation Committee of the Board of Directors of the
Corporation (the "Compensation Committee"). No options, however, may be
exercisable prior to six months following the grant date, and certain additional
restrictions, including the term and exercise price, apply with respect to any
incentive stock options. In May 1996, the shareholders of the Corporation
approved an increase in the number of shares reserved for issuance under the
Comprehensive Plan from 288,000 shares (as adjusted for the stock split) to
480,000 shares (as adjusted for the stock split). Accordingly, on January 1,
1996, the summary stock option activity table, included in this Note, has been
adjusted to reflect an increase of 192,000 shares available for grant.
In April 1995, the shareholders approved the First Charter Corporation
Restricted Stock Award Program (the "Restricted Stock Plan"). Awards of
restricted stock may be made under the Restricted Stock Plan at the discretion
of the Compensation Committee of the Board of Directors of the Corporation,
which shall determine the key participants, the number of shares awarded to
participants, and the vesting terms and conditions applicable to such awards. A
maximum of 360,000 shares of common stock (as adjusted to reflect the stock
split) are reserved for issuance under the Restricted Stock Plan. There have
been no shares granted to date under this plan.
In April 1997, the shareholders approved the First Charter Corporation
Stock Option Plan for Non-Employee Directors (the "Director Plan"). Under the
Director Plan, non-statutory stock options may be granted to non-employee
Directors of the Corporation and its subsidiaries. The terms and vesting
schedules of any options granted under the Director Plan generally shall be
determined by the Compensation Committee of the Board of Directors of the
Corporation. The exercise price for each option granted, however, shall be the
fair market value of the common stock as of the date of grant. A maximum of
180,000 shares (as adjusted to reflect the stock split) are reserved for
issuance under the Director Plan.
21
<PAGE>
FIRST CHARTER CORPORATION
Periodically, the Corporation adopts an Employee Stock Purchase Plan (the
"ESPP"), pursuant to which stock options are granted to employees, based on
their eligibility and compensation, at a price not less than 90% of the fair
market value of the shares at the date of grant. The option and vesting period
is generally for a term of two years. A maximum of 180,000 shares (as adjusted
to reflect the stock split) are reserved for issuance under the 1996 ESPP and
180,000 shares (as adjusted to reflect stock split) are reserved for issuance
under the 1998 ESPP, which was approved by the shareholders of the Corporation
in April 1997.
At December 31, 1997, as described above, the Corporation has various
stock-based compensation plans. The Corporation adopted Standard No. 123,
"Accounting for Stock-Based Compensation" on January 1, 1996, and elected to
continue to measure compensation cost relative to these plans using APB 25. The
disclosure of the pro forma net income and earnings per share as if the fair
value based accounting method of Standard No. 123 had been used to account for
stock-based compensation is required only for awards granted after December 31,
1994, and is provided below. Consequently, the effects of applying Standard No.
123 pro forma disclosures during the initial phase-in period may not be
representative of the effects on reported net income in future years.
The following table presents the pro forma effect on net income and basic
diluted income per share of applying the fair value provisions of Standard No.
123 discussed above:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
Net income:
<S> <C> <C> <C>
As reported............................. $ 8,401 $ 10,069 $ 8,304
Pro forma............................... $ 8,110 $ 9,898 $ 8,108
Basic income per share:
As reported............................. $ 0.91 $ 1.10 $ 0.95
Pro forma............................... $ 0.88 $ 1.08 $ 0.92
Diluted income per share:
As reported............................. $ 0.90 $ 1.09 $ 0.94
Pro forma .............................. $ 0.87 $ 1.07 $ 0.92
</TABLE>
The fair value of each option granted during 1997, 1996 and 1995 was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------
1996 Employee Stock Purchase Plan 1997 1996 1995
--------------------------------- ------------------------------------------------------------
<S> <C> <C> <C>
Dividend yield.......................... -- 2.9% N/A
Risk free interest rates................ -- 5.11% N/A
Expected lives.......................... -- 2 years N/A
Volatility.............................. -- 25% N/A
Comprehensive Stock Option Plan
-------------------------------
Dividend Yield.......................... 3.0% 2.9% 2.9%
Risk free interest rates................ 5.88 to 6.89% 6.14% 5.45% and 7.10%
Expected lives.......................... 6 years 6 years 6 years
Volatility.............................. 23% 21% 32%
Director Plan
-------------
Dividend Yield.......................... 3.0% N/A N/A
Risk free interest rates................ 6.57 and 6.67% N/A N/A
Expected lives.......................... 6 years N/A N/A
Volatility.............................. 23% N/A N/A
</TABLE>
22
<PAGE>
1997 ANNUAL REPORT
The following is a summary of activity under the Comprehensive Plan,
Director Plan and the 1996 and 1993 ESPP's during the periods indicated. All
options outstanding have been adjusted to reflect the 1997 stock split.
<TABLE>
<CAPTION>
Option Balance at Balance at
1997 Price January 1, Grants Exercises Forfeits December 31, Exercisable
- --------------------------------------------------------------------------------------------------------------------
Incentive Stock Options
<S> <C> <C> <C> <C> <C> <C> <C>
Options............ $3.64 6,360 -- 2,880 -- 3,480 3,480
............. $ 5.34 18,720 -- 4,265 -- 14,455 14,455
............. $ 8.75 32,416 -- 3,072 288 29,056 29,056
............. $12.26 29,291 -- 952 448 27,891 22,225
............. $12.29 2,640 -- -- -- 2,640 1,584
............. $12.40 3,187 -- -- -- 3,187 1,594
............. $17.60 -- 6,000 -- -- 6,000 1,200
............. $17.92 106,320 3,600 576 1,344 108,000 54,288
............. $25.00 -- 37,200 -- -- 37,200 --
Available for grant -- 224,720 (46,800) -- 2,080 180,000 --
Director Plan
Options............ $17.71 -- 14,400 720 -- 13,680 3,860
............. $18.85 -- 26,400 100 -- 26,300 7,460
Available for grant -- 180,000 (40,800) -- -- 139,200 --
1996 Employee Stock
Purchase Plan
Options ........... $16.50 27,916 -- 23,097 4,819 -- --
1996
- --------------------------------------------------------------------------------------------------------------------
Incentive Stock Options
Options ........... $ 3.64 10,992 -- 4,632 -- 6,360 6,360
............ $ 5.34 24,384 -- 4,896 768 18,720 18,720
............ $ 8.75 36,631 -- 3,000 1,215 32,416 25,183
............ $12.26 32,640 -- 982 2,367 29,291 17,514
............ $12.29 2,640 -- -- -- 2,640 1,056
............ $12.40 3,984 -- 797 -- 3,187 797
............ $17.92 61,560 46,320 -- 1,560 106,320 24,000
Available for grant -- 265,130 (46,320) -- 5,910 224,720 --
1996 Employee Stock
Purchase Plan
Options............ $16.50 -- 30,926 -- 3,010 27,916 27,916
1995
- --------------------------------------------------------------------------------------------------------------------
Incentive Stock Options
Options............ $ 3.64 17,040 -- 5,856 192 10,992 7,632
............. $ 5.34 34,176 -- 8,256 1,536 24,384 18,047
............. $ 8.75 44,128 -- 5,929 1,568 36,631 20,951
............. $12.26 34,720 -- 640 1,440 32,640 13,056
............. $12.29 -- 2,640 -- -- 2,640 528
............. $12.40 -- 3,984 -- -- 3,984 797
............. $17.92 -- 61,560 -- -- 61,560 --
Available for grant -- 136,578 (68,184) -- 4,736 73,130 --
1993 Employee Stock
Purchase Plan
Options............ $ 8.44 30,888 -- 26,087 4,801 -- --
</TABLE>
At December 31, 1997, there were 564 shares outstanding and exercisable
under the former Bank of Union Stock Option Plan with an average exercise price
of $6.35 and 58,104 shares outstanding and exercisable under the former Carolina
State Bank Option Plan with an average exercise price of $7.50, both of which
are not included in the table above.
23
<PAGE>
FIRST CHARTER CORPORATION
(16) Commitments, Contingencies and Off-Balance-Sheet Risk
The Corporation is party to various financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit, and involve, to varying degrees,
elements of credit and interest rate risk in excess of the amounts recognized in
the consolidated financial statements. The Corporation uses the same credit
policies in making commitments and conditional obligations as it does for
instruments reflected in the consolidated financial statements. The
creditworthiness of each customer is evaluated on a case-by-case basis.
At December 31, 1997, the Corporation's exposure to credit risk was
represented by preapproved but unused lines of credit for loans totaling
$159,709,000 and standby letters of credit aggregated $2,553,000. The amount of
collateral obtained if deemed necessary by the Corporation upon extension of
credit is based on management's credit evaluation of the borrower at that time.
The Corporation generally extends credit on a secured basis. Collateral obtained
may include, but may not be limited to, accounts receivable, inventory and
commercial and residential real estate. Management expects that these
commitments can be funded through normal operations.
The Corporation and the Banks are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated operations, liquidity or financial position of the Corporation or
the Banks.
The Banks grant primarily commercial and installment loans to customers
throughout their market areas. The Corporation's primary market area includes
the states of North and South Carolina, and predominately centers on the Metro
region of Charlotte, North Carolina. The real estate loan portfolio can be
affected by the condition of the local real estate markets.
Average daily Federal Reserve balance requirements for the year ended
December 31, 1997 amounted to $2,624,637.
(17) Fair Value of Financial Instruments
Fair value estimates of financial instruments are made at a specific point
in time, based on relevant market information and information about the
financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Corporation's entire
holdings of a particular financial instrument. Because no market exists for a
significant portion of the Corporation's financial instruments, fair value
estimates are based on judgments regarding future expected loss experience,
current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates are subjective in nature and
involve uncertainties and matters of significant judgment and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates. Where information regarding the market value of a financial
instrument is available, those values are used, as is the case with investment
securities and residential mortgage loans. In these cases, an open market exists
in which those financial instruments are actively traded.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, First Charter has a substantial trust
department that contributes net fee income annually. The trust department is not
considered a financial instrument, and its value has not been incorporated into
the fair value estimates. Other significant assets and liabilities that are not
considered financial assets or liabilities include the mortgage broker
operations and premises and equipment. In addition, tax ramifications related to
the realization of the unrealized gains and losses can have a significant effect
on fair value estimates and have not been considered in any of the estimates.
24
<PAGE>
1997 ANNUAL REPORT
The Corporation's fair value methods and assumptions are as follows:
Cash and due from banks, federal funds sold, income earned-not
collected, interest bearing bank deposits, and accrued interest payable
- the carrying value is a reasonable estimate of fair value due to the
short term nature of these financial instruments.
Available for sale securities and investment securities - fair value is
based on available quoted market prices or quoted market prices for
similar securities if a quoted market price is not available.
Loans - the carrying value for variable rate loans that are performing
is a reasonable estimate of fair value due to contractual interest
rates based on prime. Fair value for fixed rate loans is estimated
based upon discounted future cash flows using discount rates comparable
to rates currently offered for such loans. The fair value of
nonperforming loans is based on the book value of each loan, less an
applicable reserve for credit losses. The reserve for credit losses is
determined on a loan by loan basis for nonperforming assets based on
one or a combination of the following: external appraisals, internal
assessments using available market information and specific borrower
information, or discounted cash flow analysis.
Deposit accounts -the fair value of certificates of deposit is
estimated using rates currently offered for deposits of similar
remaining maturities. The fair value of all other deposit account types
is the amount payable on demand at year-end.
Short-term borrowings - the carrying value is a reasonable estimate of
fair value because these instruments are generally payable in 90 days
or less.
Long term obligations - the fair value is estimated based upon
discounted future cash flows using a discount rate comparable to the
current market rate for such borrowings.
Commitments to extend credit and standby letters of credit - the large
majority of commitments to extend credit and standby letters of credit
are at variable rates and/or have relatively short terms to maturity.
Therefore, the fair value of these financial instruments is considered
to approximate the carrying value.
Based on the limitations, methods, and assumptions noted above, the
following table presents the carrying amounts and fair values of the
Corporation's financial instruments at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial Assets:
<S> <C> <C> <C> <C>
Cash and due from banks................................. $ 33,077 $ 33,077 $ 34,517 $ 34,517
Interest bearing bank deposits.......................... 7,975 7,975 10,855 10,855
Federal funds sold...................................... -- -- 4,510 4,510
Investment securities................................... -- -- 13,940 13,979
Securities available for sale........................... 177,031 177,031 143,665 143,665
Loans, net of reserve for loan losses................... 515,799 517,064 449,988 454,058
Income earned, not collected............................ 5,087 5,087 4,732 4,732
Financial Liabilities:
Deposits................................................ 621,354 619,904 569,856 570,983
Short-term borrowings................................... 50,746 50,746 27,729 27,728
Long-term obligations................................... 2,533 2,530 5,167 5,045
Accrued interest payable................................ 1,490 1,490 1,346 1,346
</TABLE>
25
<PAGE>
FIRST CHARTER CORPORATION
(18) Regulatory Matters
The Corporation and the Banks are subject to various regulatory capital
requirements administered by federal and state banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory - and possibly
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and the Banks must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and the Banks to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier I capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to adjusted average assets (as defined). Management believes, as of
December 31, 1997, that the Corporation and the Banks meet all capital adequacy
requirements to which they are subject.
As of December 31, 1997, the most recent notifications from the Federal
Reserve Board, the Office of the Comptroller of the Currency, and the North
Carolina State Banking Commission categorized the Corporation, First Charter,
and Union, respectively, as well capitalized under the regulatory framework for
prompt corrective action. To be categorized as well capitalized, each entity
must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage
ratios as set forth in the table. There are no conditions or events since that
notification that management believes have changed any of the institutions'
categories.
26
<PAGE>
1997 ANNUAL REPORT
The Corporation's and each Bank's actual capital amounts and ratios are also
presented in the table below:
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Current Prompt
Adequacy Purposes Corrective Action Provisions
Actual ----------------- ----------------------------
-------------- Minimum Minimum
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
At December 31, 1997:
Total Capital (to Risk Weighted Assets)
<S> <C> <C> <C> <C> <C> <C>
Consolidated $ 81,079 14.15 % $ 45,824 8 % $ 57,279 10 %
First Charter National Bank 55,804 13.00 34,337 8 42,921 10
Bank of Union 18,178 13.22 11,002 8 13,753 10
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 73,919 12.92 % $ 22,912 4 % $ 34,368 6 %
First Charter National Bank 50,439 11.77 17,169 4 25,753 6
Bank of Union 16,459 11.98 5,501 4 8,252 6
Tier I Capital (to Adjusted Average Assets)
Consolidated $ 73,919 10.65 % $ 27,773 4 % $ 34,716 5 %
First Charter National Bank 50,439 9.79 20,614 4 25,768 5
Bank of Union 16,459 9.37 7,027 4 8,783 5
At December 31, 1996:
Total Capital (to Risk Weighted Assets)
Consolidated $ 75,237 15.73 % $ 38,264 8 % $ 47,830 10 %
First Charter National Bank 54,506 15.03 29,015 8 36,269 10
Bank of Union 15,850 14.04 9,032 8 11,289 10
Tier I Capital (to Risk Weighted Assets)
Consolidated $ 69,230 14.47 % $ 19,138 4 % $ 28,706 6 %
First Charter National Bank 49,948 13.74 14,544 4 21,816 6
Bank of Union 14,439 12.79 4,516 4 6,774 6
Tier I Capital (to Adjusted Average Assets)
Consolidated $ 69,230 10.65 % $ 26,002 4 % $ 32,502 5 %
First Charter National Bank 49,948 11.02 18,130 4 22,663 5
Bank of Union 14,439 9.31 5,626 4 7,032 5
</TABLE>
(19) First Charter Corporation (Parent Company)
The principal assets of the Parent Company are its investment in the Banks,
and its principal source of income is dividends from the Banks. Certain
regulatory and other requirements restrict the lending of funds by the Banks to
the Parent Company and the amount of dividends which can be paid to the Parent
Company. In addition, certain regulatory agencies may prohibit the payment of
dividends by the Banks if they determine that such payment would constitute an
unsafe or unsound practice. At December 31, 1997, the Banks had available
undivided profits of approximately $19,140,000 for payment of dividends without
obtaining prior regulatory approval.
27
<PAGE>
FIRST CHARTER CORPORATION
The Parent Company's balance sheet data as of December 31, 1997 and 1996 and
related income and cash flow statement data for each of the years in the
three-year period ended December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
Balance sheet data:
<S> <C> <C> <C>
Cash................................................. $ 357 $ 1,398
Securities available for sale........................ 8,569 4,072
Investment in subsidiaries........................... 68,866 65,943
Receivable from subsidiaries......................... 1,700 1,200
Fixed assets......................................... 316 553
Other assets......................................... 528 19
------ ------
$ 80,336 $ 73,185
====== ======
Accrued liabilities.................................. $ 2,532 $ 1,464
Shareholders' equity................................. 77,804 71,721
------ ------
$ 80,336 $ 73,185
====== ======
Income statement data:
Dividends from subsidiaries.......................... $ 5,900 $ 4,600 $ 3,750
Other operating income (expense)..................... 578 308 (713)
--- --- ----
Income before equity in undistributed net
income of subsidiaries........................... 6,478 4,908 3,037
Equity in undistributed net income of subsidiaries... 1,923 5,161 5,267
----- ----- -----
Net income ...................................... $ 8,401 $ 10,069 $ 8,304
============= =============== ==============
Cash flow statement data:
Cash flows from operating activities:
Net income............................................ $ 8,401 $ 10,069 $ 8,304
Net gain on securities available for sale transactions (752) (265) --
Increase (decrease) in accrued liabilities........... 440 (486) 750
Decrease (increase) in other assets.................. (508) 2 (1)
Increase in receivable from subsidiaries............. (500) (405) (195)
Increase in investment in subsidiaries............... (2,408) (5,163) (7,899)
------ ------ ------
Net cash provided by operating activities................... 4,673 3,752 959
----- ----- ---
Cash flows from investing activities:
Purchase of securities available for sale............ (3,444) (762) (906)
Proceeds from sale of securities available for sale.. 1,311 733 --
Purchase of premises and equipment................... (2) -- (1)
Proceeds from sale of premises and equipment......... 239 30 5
--- -- -
Net cash provided (used) by investing activities............ (1,896) 1 (902)
----- --- ----
Cash flows from financing activities:
Purchase of common stock............................. (1,319) (486) (628)
Proceeds from issuance of common stock upon
exercise of stock options........................ 1,280 1,390 577
Pre-merger transactions of pooled bank............... 467 2 2,632
Cash dividends paid.................................. (4,246) (3,775) (2,618)
------ ------ ------
Net cash used by financing activities................ (3,818) (2,869) (37)
Net increase (decrease) in cash.................. (1,041) 884 20
Cash at beginning of year........................ 1,398 514 494
----- ------ ------
Cash at end of year........ ......................... $ 357 $ 1,398 $ 514
============ ============== ===========
</TABLE>
28
<PAGE>
1997 ANNUAL REPORT
(20) Selected Quarterly Financial Information (Unaudited)
<TABLE>
<CAPTION>
1997
- ----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(Dollars in thousands, except income per share) Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income............................ $ 12,990 $ 13,805 $ 14,458 $ 14,701 $ 55,954
Total interest expense........................... 5,807 6,043 6,443 6,458 24,751
----- ----- ----- ----- ------
Net interest income.............................. 7,183 7,762 8,015 8,243 31,203
Provision for loan losses........................ 409 607 796 890 2,702
Total noninterest income......................... 2,214 2,257 2,118 2,863 9,452
Total noninterest expense........................ 5,138 5,363 5,617 9,524 25,642
----- ----- ----- ----- ------
Net income before income taxes................... 3,850 4,049 3,720 692 12,311
Income taxes..................................... 1,164 1,235 1,102 409 3,910
----- ----- ----- --- -----
Net income....................................... $ 2,686 $ 2,814 $ 2,618 $ 283 $ 8,401
========= ========= ========= ========= ========
Per share data:
Basic income per share........................... $ 0.29 $ 0.31 $ 0.28 $ 0.03 $ 0.91
========= ========= ========= ========= ========
Diluted income per share......................... $ 0.29 $ 0.30 $ 0.28 $ 0.03 $ 0.90
========= ========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
1996
- ----------------------------------------------------------------------------------------------------------------
First Second Third Fourth
(Dollars in thousands, except income per share) Quarter Quarter Quarter Quarter Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total interest income............................ $ 12,371 $ 12,556 $ 12,908 $ 13,072 $ 50,907
Total interest expense........................... 5,577 5,638 5,774 5,808 22,797
----- ----- ----- ----- ------
Net interest income.............................. 6,794 6,918 7,134 7,264 28,110
Provision for loan losses........................ 451 425 341 323 1,540
Total noninterest income......................... 1,614 1,972 1,749 1,936 7,271
Total noninterest expense........................ 4,435 4,732 5,006 5,181 19,354
----- ----- ----- ----- ------
Net income before income taxes................... 3,522 3,733 3,536 3,696 14,487
Income taxes..................................... 1,081 1,187 1,022 1,128 4,418
----- ----- ----- ----- -----
Net income....................................... $ 2,441 $ 2,546 $ 2,514 $ 2,568 $ 10,069
========= ========= ========= ========= ========
Per share data:
Basic income per share........................... $ 0.27 $ 0.28 $ 0.27 $ 0.28 $ 1.10
========= ========= ========= ========= ========
Diluted income per share......................... $ 0.27 $ 0.27 $ 0.27 $ 0.28 $ 1.09
========= ========= ========= ========= ========
</TABLE>
29
<PAGE>
FIRST CHARTER CORPORATION
First Charter Corporation and Subsidiaries
Management's Discussion and Analysis of Financial
Condition and Results of Operations
First Charter Corporation (the "Corporation") is a multi-bank holding
company established as a North Carolina Corporation in 1983, with two wholly
owned bank subsidiaries, First Charter National Bank ("First Charter") and Bank
of Union ("Union") (collectively referred to as the "Banks"). The Corporation's
principal executive offices are located in Concord, North Carolina. First
Charter is a full-service bank and trust company with sixteen offices located in
Cabarrus, Rowan, Cleveland, Rutherford and northern Mecklenburg Counties, North
Carolina. Union is a full-service bank with five offices located in Union and
southern Mecklenburg Counties, North Carolina.
Union was acquired by the Corporation on December 21, 1995. In
addition, on December 22, 1997, the Corporation acquired Carolina State Bank
("CSB") through the merger of CSB into First Charter. CSB was a state-charted
commercial bank with four banking offices in Cleveland and Rutherford Counties,
North Carolina. These offices now operate as First Charter offices. Each of the
acquisitions was accounted for as a pooling of interests and, accordingly, all
financial data for the periods prior to the respective dates of acquisition has
been restated to combine the accounts of Union and CSB with those of the
Corporation.
In connection with the acquisition of CSB, each share of CSB common
stock was converted into 1.023 shares of the Corporation's common stock, with
cash paid in lieu of the issuance of fractional shares. As of December 22, 1997,
a total of 1,663,992 shares of CSB common stock were issued and outstanding, and
there were outstanding employee stock options to purchase 56,800 shares. At
December 31, 1996, CSB had total assets of approximately $133 million and total
deposits of approximately $115 million. In the fourth quarter of 1997, the
Corporation recognized pretax charges of $3.4 million associated with completing
the acquisition of CSB.
Through their branch locations, the Banks provide a wide range of
banking products, including checking accounts; NOW accounts; "Money Market Rate"
accounts; certificates of deposit; individual retirement accounts; overdraft
protection; commercial, consumer, agriculture, real estate, residential mortgage
and home equity loans; personal and corporate trust services; safe deposit
boxes; and automated banking. In addition, through BOU Financial, Inc., a
subsidiary of Union, the Banks also offer discount brokerage services, insurance
and annuity sales and financial planning services pursuant to a third party
arrangement with UVEST Investment Services.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Corporation and the notes
thereto included elsewhere in this report. In addition, the following discussion
contains certain forward-looking statements. See "Factors that May Affect Future
Results."
30
<PAGE>
1997 ANNUAL REPORT
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
1997 VERSUS 1996
Overview
The Corporation earned $8.4 million or $0.91 basic income per share in
1997, a 16.5% decrease from $10.1 million or $1.10 basic income per share in
1996. Excluding the nonrecurring charges associated with the acquisition of CSB,
1997 earnings per share increased 8.8% compared to 1996. Key factors
contributing to the increase in net income, excluding the nonrecurring charges,
were an increase of 11% in net interest income and an increase in noninterest
income of 30%. These increases were partially offset by an increase of 75.5% in
the provision for loan losses and an increase of 15% in noninterest expense.
Earnings in 1997, excluding the nonrecurring charges, equate to a return on
average assets of 1.57% for 1997, compared to 1.55% for 1996, and a return on
average equity of 14.40% in 1997, versus 14.77% in 1996.
Total assets at December 31, 1997, were $762 million, up 12.0% from the
level at year-end 1996. Gross loans increased 15% to $524 million and total
deposits increased 9% to $621 million.
The following sections discuss the Corporation's strategy and status in
the areas of liquidity, asset-liability management and capital resources.
Liquidity
Liquidity is the ability to maintain cash flows adequate to fund
operations and meet obligations and other commitments on a timely and
cost-effective basis. Liquidity is provided by the ability to attract deposits,
flexible repricing schedules in a sizable portion of the loan portfolio, current
earnings, a strong capital base and the ability to use alternative funding
sources that complement normal sources. Management's asset-liability policy is
to maximize the net interest income while continuing to provide adequate
liquidity to meet continuing loan demand and withdrawal requirements and to
service normal operating expenses.
If additional funding sources were needed, the Banks have access to
federal fund lines at correspondent banks and borrowings from the Federal
Reserve discount window. In addition to these sources, the Banks are members of
the Federal Home Loan Bank ("FHLB") System, which provides access to FHLB
lending sources. At December 31, 1997, the Banks had two available lines of
credit with FHLB totaling $52.5 million with $25.6 million available.
Another source of liquidity is the securities available for sale
portfolio. See "Balance Sheet Analysis Securities Available for Sale" for a
further discussion. Management believes the Banks' sources of liquidity are
adequate to meet loan demand, operating needs and deposit withdrawal
requirements.
Asset-Liability Management and Interest
Rate Sensitivity
The primary objective of the Corporation's asset-liability management
strategy is to reduce the risk of a significant decrease in net interest income
caused by interest rate changes without unduly penalizing current earnings. One
method used to manage interest rate sensitivity is to measure, over various time
periods, the interest rate
31
<PAGE>
FIRST CHARTER CORPORATION
sensitivity positions, or gaps; however, this method addresses only the
magnitude of timing differences and does not address earnings or market value.
Management uses an earnings simulation model to assess the amount of earnings at
risk due to changes in interest rates. This model is updated quarterly and is
based on a range of interest rate scenarios. Under the Corporation's policy, the
limit for interest rate risk is 10% of net interest margin when considering an
increase or decrease in interest rates of 300 basis points over a twelve-month
period. Management believes this method more accurately measures interest rate
risk. These targeted guidelines were achieved during 1997.
The Banks' balance sheets are liability sensitive, meaning that in a
given period there will be more liabilities than assets subject to immediate
repricing as market rates change. Because immediately rate sensitive interest
bearing liabilities exceed rate sensitive assets, the earnings position could
improve in a declining rate environment and could deteriorate in a rising rate
environment, depending on the correlation of rate changes in these two
categories. At December 31, 1997 total rate sensitive liabilities due within one
year were $394.5 million compared to rate sensitive assets of $304.0 million,
for a cumulative gap of $90.5 million. Interest sensitivity of the Corporation's
balance sheet as of a specific date is not necessarily indicative of the
Corporation's position on other dates.
From time to time, the Corporation may use derivative financial
instruments including futures, forwards, interest rate swaps, option contracts,
and other financial instruments with similar characteristics. The Corporation
currently has an interest rate floor transaction arrangement which it uses as a
hedge against variable rate loans. This interest rate floor transaction has a
notional amount of $20 million and a floor rate of 8.5%, compared to the current
index of 8.5%, maturing on January 23, 2000. Additionally, the Corporation is
party to financial instruments with off-balance sheet risk in the normal course
of business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve to varying degrees elements of credit and interest
rate risk in excess of the amount recognized in the consolidated balance sheets.
Commitments to extend credit are agreements to lend to a customer so long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates and may require collateral from the
borrower if deemed necessary by the Corporation. Standby letters of credit are
conditional commitments issued by the Corporation to guarantee the performance
of a customer to a third party up to a stipulated amount and with specified
terms and conditions.
Commitments to extend credit and standby letters of credit are not
recorded as an asset or liability by the Corporation until the instrument is
exercised, see "Balance Sheet Analysis - Loans".
32
<PAGE>
1997 ANNUAL REPORT
The following table presents the scheduled maturity of market risk
sensitive instruments at December 31, 1997:
(Dollars in thousands)
<TABLE>
<CAPTION>
There
Maturing in: 1998 1999 2000 2001 2002 -after Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Debt securities..... $ 13,787 $ 8,445 $ 18,237 $ 6,503 $ 21,500 $ 92,848 $ 161,320
Loans............... 130,569 68,393 73,254 53,133 47,628 142,822 515,799
----------------------------------------------------------------------------------------
Total............ $ 144,356 $ 76,838 $ 91,491 $ 59,636 $ 69,128 $ 235,670 $ 677,119
========================================================================================
LIABILITIES
Savings, NOW
and IMMA's....... $ 370,675 $ -- $ -- $ -- $ -- $ -- $ 370,675
CD's................ 136,896 105,545 7,989 65 -- 184 250,679
Short-term
Borrowings....... 50,746 -- -- -- -- -- 50,746
Long-term
Borrowings....... -- 260 1,143 -- 600 530 2,533
----------------------------------------------------------------------------------------
Total.......... $ 558,317 $ 105,805 $ 9,132 $ 65 $ 600 $ 714 $ 674,633
========================================================================================
</TABLE>
The following table presents the average interest rate and estimated
fair value of market risk sensitive instruments at December 31, 1997:
Average Estimated
(Dollars in thousands) Total Interest Rate Fair Value
- --------------------------------------------------------------------------
ASSETS
Debt Securities.......... $161,320 7.15% $163,404
Loans.................... 515,799 9.24 517,064
-----------------------------------------
Total .............. $677,119 8.74 $680,468
=========================================
LIABILITIES
Savings, NOW
and IMMA's............. $370,675 3.32 $370,375
CD's..................... 250,679 5.69 249,229
Short-term
Borrowings............. 50,746 5.47 50,746
Long-term
Borrowings............. 2,533 6.56 2,530
-----------------------------------------
Total............... $674,633 4.37 $672,880
=========================================
===============================================================================
Capital Resources
At December 31, 1997, total shareholders' equity was $78 million, an
8.5% increase from December 31, 1996. The increase in capital is primarily
attributable to 1997 earnings. Cash dividends declared per share in 1997 were
$0.53 compared to $0.50 in 1996.
On December 15, 1997, the shareholders of the Corporation approved
Amended and Restated Articles of Incorporation for the Corporation which
33
<PAGE>
FIRST CHARTER CORPORATION
included amendments (i) increasing the number of shares of common stock that the
Corporation is authorized to issue from 10,000,000 to 25,000,000 and (ii)
eliminating the concept of par value in connection with the Corporation's common
stock. These changes have been reflected in the accompanying consolidated
financial statements.
The principal asset of the parent company is its investment in the
Banks. Thus, the parent company derives its principal source of income through
dividends from the Banks. Certain regulatory and other requirements restrict the
lending of funds by the Banks to the parent company and the amount of dividends
which can be paid to the parent company. In addition, certain regulatory
agencies may prohibit the payment of dividends by the Banks if they determine
that such payment would constitute an unsafe or unsound practice. At December
31, 1997, the Banks had available undivided profits of approximately $19.1
million for payments of dividends without obtaining prior regulatory approval.
The Corporation and the Banks must comply with regulatory capital
requirements established by the applicable federal regulatory agencies. Under
the Federal Reserve Board (the "FRB") standards, the Corporation must maintain a
minimum ratio of Tier I Capital (as defined) to total risk-weighted assets of
4.00% and a minimum ratio of Total Capital (as defined) to risk-weighted assets
of 8.00%. Tier I Capital is comprised of total shareholders' equity calculated
in accordance with generally accepted accounting principles less certain
intangible assets, less unrealized gains or losses on securities available for
sale and Total Capital is comprised of Tier I Capital plus certain adjustments,
the largest of which for the Corporation is the general allowance for loan
losses (up to 1.25% of risk weighted assets). Tier 1 Capital must consist of at
least 50% of Total Capital. Risk-weighted assets refer to the on-and off-balance
sheet exposures of the Corporation adjusted for their related risk levels using
amounts set forth in FRB regulations.
In addition to the aforementioned risk-based capital requirements, the
Corporation is subject to a leverage capital requirement, requiring a minimum
ratio of Tier I Capital (as defined previously) to total adjusted average assets
of 3% to 5%.
===============================================================================
At December 31, 1997, the Corporation and the Banks were in compliance
with all existing capital requirements. The Corporation's capital requirements
are summarized in the table below:
<TABLE>
<CAPTION>
Risk-Based Capital
---------------------------------------------------
Leverage Capital Tier 1 Capital Total Capital
- ------------------------------------------------------------------------------------------------------------------------
Amount Percentage (1) Amount Percentage (2) Amount Percentage (2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
Actual..................... $73,919 10.65% $73,919 12.92% $81,079 14.15%
Required................... 27,773 4.00 22,912 4.00 45,824 8.00
Excess.................... 46,146 6.65 51,007 8.92 35,255 6.15
</TABLE>
==============================================================================
1) Percentage of total adjusted average assets. The FRB minimum
leverage ratio requirement is 3% to 5%, depending on the
institution's composite rating as determined by its regulators. The
FRB has not advised the Corporation of any specific requirement
applicable to it.
2) Percentage of risk-weighted assets.
34
<PAGE>
1997 ANNUAL REPORT
Regulatory Recommendations
Management is not presently aware of any current recommendations to the
Corporation or to the Banks by regulatory authorities which, if they were to be
implemented, would have a material effect on the Corporation's liquidity,
capital resources, or operations.
BALANCE SHEET ANALYSIS
Securities Available for Sale
Securities available for sale are a component of the Corporation's
asset-liability management strategy and may be sold in response to liquidity
needs, changes in interest rates, changes in prepayment risk, and other factors.
They are accounted for at fair value with unrealized gains and losses recorded
as a separate component of shareholders' equity.
Pursuant to the Financial Accounting Standards Board (FASB)'s Statement
of Financial Accounting Standards (Standard) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", following the acquisition of CSB,
all investment securities at CSB were reclassified to securities available for
sale. During 1997, as maturities, sales, or paydowns occurred on securities, the
proceeds were utilized to meet loan demand and to reinvest in additional
securities. During the latter part of 1997, in anticipation of lower yields,
approximately $30 million of securities that had short-term maturities or were
subject to repayment were sold. These proceeds were reinvested primarily in U.
S. government agency securities with higher spreads to the treasury yield curve
and callable within two to five years. Additionally, throughout 1997, in-state
municipal securities (maturity range of five to fifteen years) were purchased to
enhance tax equivalent net interest income.
At December 31, 1997, securities available for sale were $177.0 million
or 23.2% of total assets, compared to $143.7 million, or 21.1% of total assets,
at year-end 1996. The fair value of these assets was approximately $5.2 million
and $2.8 millionabove their amortized cost at December 31, 1997 and 1996,
respectively. The tax equivalent average yield on the securities available for
sale portfolio was 6.87% for 1997 and 7.01% for 1996. The average life of the
portfolio was 5.89 years at December 31, 1997 compared to 5.03 years at year-end
1996.
Investment Securities
As a result of the reclassification of CSB's investment securities to
securities available for sale subsequent to the acquisition of CSB, there was no
balance in investment securities at December 31, 1997. Investment securities
totaled $13.9 million or 2.0% of total assets at December 31, 1996.
The average yield earned on investment securities in 1997 was 5.81%
compared to 5.85% in 1996, with an average maturity of 1.53 years at December
31, 1996.
Loans
As a result of continued strong loan demand during 1997, gross loans
increased 14.7% to $524.1 million at December 31, 1997, from $456.7 million at
December 31, 1996. While the Corporation does anticipate that loan growth may
increase in the future, it does not anticipate that loan growth will increase at
the same rate as experienced in the previous years.
The loan portfolio at December 31, 1997 was composed of 15.4%
commercial, financial, and agricultural loans, 14.6% real estate construction
loans, 58.0% real estate mortgage loans, and 12.0% installment loans. This
compares to a composition of 13.9%
35
<PAGE>
FIRST CHARTER CORPORATION
commercial, financial, and agricultural, 10.3% real estate construction, 60.7%
real estate mortgage, and 15.1% installment at December 31, 1996. Approximately
$15.8 million of the real estate mortgage loans are loans for which the
principal source of repayment comes from the sale of real estate. The remaining
$364.8 million of real estate mortgage loans are (i) other commercial loans for
which the primary source of repayment is derived from the ongoing cash flow of
the business and which are also collateralized by real estate - $210.9 million,
(ii) personal installment loans which are collateralized by real estate - $51.7
million, (iii) home equity loans - $46.0 million, and (iv) individual
residential mortgage loans - $56.2 million.
The Corporation's primary market area includes the states of North and
South Carolina, and predominately centers on the Metro region of Charlotte,
North Carolina. At December 31, 1997, the majority of the total loan portfolio,
as well as a substantial portion of the commercial and real estate loan
portfolio, were to borrowers within this region. The diversity of the region's
economic base tends to provide a stable lending environment. No significant
concentration of credit risk has been identified due to the diverse industrial
base in the region.
In the normal course of business, there are outstanding various
commitments to extend credit which are not reflected in the consolidated
financial statements. At December 31, 1997, pre-approved but unused lines of
credit for loans totaled $159.7 million and standby letters of credit aggregated
$2.6 million. These amounts represent the Banks' exposure to credit risk, and in
the opinion of management, have no more than the normal lending risk that the
Banks commit to their borrowers. If these commitments are drawn, the Banks will
obtain collateral if it is deemed necessary based on management's credit
evaluation of the borrower. Collateral obtained varies but may include accounts
receivable, inventory, and commercial or residential real estate. Management
expects that these commitments can be funded through normal operations.
Asset Quality
Nonperforming assets, which consist of foreclosed assets, nonaccrual
loans, and restructured loans, were $3.5 million at December 31, 1997, as
compared to $2.4 million at December 31, 1996. Non-performing assets as a
percentage of loans and foreclosed assets at year-end amounted to 0.67% in 1997
and 0.52% in 1996. Total problem assets (nonperforming assets and loans 90 days
or more past due) amounted to $5.6 million at December 31, 1997 and $3.1 million
at December 31, 1996. Total problem assets as a percentage of loans and
foreclosed assets at year end was 1.07% in 1997 and 0.67% in 1996.
The components of nonperforming and problem assets are presented in the
table below:
December 31, December 31,
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------
Nonaccrual loans $2,105 $1,630
Restructured loans -- --
Other real estate 1,418 759
----- ---
Total non-
performing assets 3,523 2,389
Loans 90 days or more
past due and still
accruing 2,109 685
----- ---
Total problem assets $5,632 $3,074
====== ======
Nonaccrual loans increased primarily due to several residential
construction loans reclassified as nonaccrual from 90 days past due and still
accruing. Interest income that would have been recorded on all nonaccrual loans
for the year ended December 31, 1997, had they performed according to their
original
36
<PAGE>
1997 ANNUAL REPORT
terms, amounted to approximately $225,000, an increase of 28.7% from December
31, 1996. Interest income on nonaccrual loans included in the results of
operations for the years ended December 31, 1997 and 1996, amounted to
approximately $22,000 and $42,000, respectively.
Accruing loans 90 days or more past due increased $1.4 million, to
0.40% of gross loans at December 31, 1997, from 0.15% of gross loans at December
31, 1996. The major components of this increase are the delinquency of a
$900,000 loan, which is secured by a source of collateral equal to the value of
the loan, several 1-4 family residential mortgages totaling $342,000, and
several loans related to the CSB loan portfolio.
Management's policy for any accruing loan past due greater than 90 days
is to perform an analysis of the loan, including a consideration of the
financial position of the borrower(s) and any guarantor(s) as well as the value
of the collateral, and to make an assessment as to whether collectibility of the
principal and the interest appears probable. Based on such a review, management
has determined it is probable that the principal as well as the accruing
interest on these loans will be collected in full.
Other real estate increased to $1,418,000 at December 31, 1997 from
$759,000 at December 31, 1996. The primary reason for the $659,000 increase is
due to $456,000 of net foreclosure activity related to the CSB loan portfolio.
Seven accounts with balances ranging from $7,400 to $250,000 aggregated
$456,000.
Credit Administration and Allowance
for Loan Losses
All estimates of the loan portfolio risk, including the adequacy of the
allowance for loan losses, are subject to general and local economic conditions,
among other factors, which are unpredictable and beyond management's control.
Since a significant portion of the loan portfolio is comprised of real estate
loans and loans to area businesses, a continued risk is that the real estate
market and economic conditions could change and could result in future losses or
require increases in the provision for loan losses.
Management uses several measures to assess and control the loan
portfolio risk. For example, all loans over a certain dollar amount must receive
an in-depth review by an analyst in the Banks' Credit Administration department.
Any issues regarding risk assessments of those credits are addressed by the
Banks' loan administration and senior credit officer and factored into
management's decision to originate or renew the loan. Furthermore, large
commitments are reviewed and approved by a Senior Loan Committee comprised of
senior management, the senior credit officer and senior lending officers of the
Banks and loans above predetermined amounts are reviewed by the Loan Committee
of the respective Board of Directors. The Corporation also continues to employ
an independent third party risk assessment group to review the underwriting,
documentation and risk grading analysis and render a semiannual opinion of the
adequacy of the allowances for loan losses. This third party group reviews all
loan relationships above a certain dollar amount and a sampling of all other
credits. The third party's evaluation and report is shared with Senior
Management and the Loan and Audit Committees of the respective Banks and,
ultimately, is reported to the respective Bank and Corporation Board of
Directors.
Management uses the information developed from the procedures described
above in evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio and to
assist management in
37
<PAGE>
FIRST CHARTER CORPORATION
determining the appropriate levels of the allowance for loan losses.
As part of the continual grading process, an analysis is performed
monthly independently from any analysis in conjunction with the origination of
loans. Individual loans are assigned a risk grade based on their credit quality,
which is subject to change as conditions warrant. Any changes in those risk
assessments as determined by the outside risk assessment group is also
considered. Each grade determines the percentage of the outstanding loan balance
allocated to the loan loss reserve. Loans with the weaker credit quality are
individually analyzed to determine a specific allowance which reflects
management's best estimate of the risk associated with each credit. An estimate
of an allowance is made for all other loans in the portfolio based on their
assigned risk grade, type of loan and other matters related to credit risk. In
the allowance for loan loss analysis process, the Banks also aggregate the loans
into pools of similar credits and review the historical loss experience
associated with these pools as additional criteria to allocate the allowance to
each category. The model also takes into consideration off-balance sheet credit
risk.
The allowance for loan losses as a percentage of gross loans
outstanding was 1.53% at December 31, 1997, compared to 1.43% at year-end 1996.
Total problem assets as a percentage of gross loans outstanding was 0.59% at
December 31, 1997, compared to 0.71% at December 31, 1996.
Management considers the December 31, 1997 allowance for loan losses
adequate to cover inherent losses in the Banks' loan portfolio. Management
believes it has established the allowance in accordance with generally accepted
accounting principles and in consideration of the current economic environment.
While management uses the best information available to make evaluations, future
additions to the allowance may be necessary based on changes in economic and
other conditions. Additionally, various regulatory agencies, as an integral part
of their examination process, periodically review the Banks' allowances for loan
losses. Such agencies may require the recognition of additions to the allowances
based on their judgments of information available to them at the time of their
examinations.
Deposits
Total deposits at December 31, 1997 were $621.4 million, a 9.0%
increase from a 1996 year-end level of $569.9 million. Average noninterest
bearing demand deposits increased $4.9 million or 6.1%; average interest bearing
demand deposits increased $6.4 million or 7.7%; average insured money market
accounts increased $3.4 million or 7.2%; average savings deposits decreased $1.5
million or 1.3%; and average certificates of deposit increased $31.1 million or
14.6%. The majority of deposit growth was in certificates of deposit ("CD")
products. The increase in average CD's was primarily attributable to several CD
promotions in 1997, which raised new deposits with maturities of nine, eighteen
or twenty-four months, and to the increase in public deposits with maturities of
six months that were opened in 1997.
EARNINGS PERFORMANCE
Net Interest Income
Net interest income, the difference between total interest income and
total interest expense, is the Corporation's principal source of earnings. For
the year ended December 31, 1997, net interest income was $31.2 million, an
increase of 11.0% from net interest income of $28.1 million in 1996. The
increase is attributable to an increase in the volume of average interest
earnings assets of
38
<PAGE>
1997 ANNUAL REPORT
approximately $52.0 million and an increase in the net interest margin (tax
adjusted net interest income divided by average interest earning assets) to
5.01% in 1997 from 4.92% in 1996. The increase in net interest margin is
attributable to an increase in the prime rate of interest late in the first
quarter of 1997 and a shift in the composition of securities and loan balances.
The average yield on interest-earning assets was 8.8% in 1997 compared
to 8.7% in 1996. The average rate paid on interest-bearing liabilities was 4.6%
in 1997, compared to 4.1% in 1996. The average yield earned on loans was 9.5% in
1997, compared to 9.4% in 1996. The average rate paid on interest-bearing
deposits was 4.6% in 1997, unchanged from 4.6% in 1996. See "Asset-Liability
Management and Interest Rate Sensitivity" for additional discussion.
Provision for Loan Losses
The provision for loan losses for 1997 was $2.7 million compared to
$1.5 million in 1996. A portion of the increase in the provision was necessary
to reflect the growth in the Banks' loan portfolio and higher levels of
nonperforming assets. Additionally, a $1.4 million provision for loan losses was
recorded for the CSB loan portfolio in 1997 in recognition of increased 1997
charge-offs and portfolio growth.
Net charge-offs for 1997 were $1.2 million or .25% of average loans
compared to $1.1 million or .24% of average loans in 1996.
Noninterest Income
Noninterest income was $9.5 million in 1997 compared to $7.3 million in
1996, for an increase of 30.0%. The increase in other noninterest income is
attributable to higher securities gains due to the sale of equity securities
held by the Corporation, higher service charge income on deposit accounts
resulting from an increase in non-sufficient fund income, higher trust income
due to greater assets under management and higher commissions earned on
brokerage services resulting from increased sales volumes.
Noninterest Expense
Excluding the $3.4 million in costs associated with the acquisition of
CSB, total noninterest expense in 1997 was $22.3 million, compared to $19.4
million in 1996, representing a 15.1% increase. The increase was primarily
attributable to increases in costs associated with salaries and benefits,
occupancy and equipment and other noninterest expense.
Salaries and fringe benefits increased primarily due to higher
full-time equivalents and annual merit increases.
Occupancy and equipment increased approximately $892,000 or 30.5%. A
primary reason for the increase is due to an increase in depreciation expense in
connection with the local area network (LAN) and the wide area network (WAN)
which were added in mid-1996. This technology continues to improve the Banks'
ability to service loan and deposit customers and to gain greater operating
efficiency. Additionally, with the Banks' continued growth, additional office
space was required, thereby the Corporation entered into several leasing
agreements for office space.
Excluding the $3.4 million in costs associated with the acquisition of
CSB, other noninterest expense increased $1.2 million, or 19.7% in 1997, when
compared to 1996. The three major components of change in this category are
advertising, data processing and professional services. During 1997, the Banks
incurred additional advertising expense primarily related to costs associated
with promoting certificates of deposit and equity
39
<PAGE>
FIRST CHARTER CORPORATION
line products. Data processing and professional services costs increased due to
the aforementioned technology added in mid-1996 and throughout 1997. As the
Banks continue to grow and invest in technology, the Corporation anticipates
further increases in this area during 1998.
Total income tax expense for 1997 was $3.9 million versus $4.4 million
in 1996. The decrease is attributable to a decrease in taxable income, slightly
offset by an increase in the effective tax rate to 31.8% in 1997 from 30.5% in
1996. The change in the effective rate is primarily attributable to certain
nondeductible merger and acquisition costs incurred in 1997, which were
partially offset by an increase in tax-exempt income from municipal securities
in 1997.
RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
1996 VERSUS 1995
The Corporation earned $10.1 million, or $1.10 basic income per share,
in 1996, a 21.3% increase from $8.3 million, or $.95 basic income per share in
1995. Key factors contributing to the increase in net income were a 7.7%
increase in net interest income, a reduction in the provision for loan losses,
and the absence in 1996 of pre-tax merger related expenses of $1.1 million
incurred in 1995 in connection with the acquisition of Union. These earnings
equated to a return on average assets of 1.55% for 1996, compared to 1.45% for
1995, and a return on average equity of 14.77% in 1996, versus 14.28% in 1995.
Total assets at December 31, 1996, were $680.3 million, up 8.6% from
the level at year-end 1995. Gross loans increased 10.0% to $456.7 million and
total deposits increased 10.6% to $569.9 million at December 31, 1996 from their
levels at year-end 1995.
At December 31, 1996, securities available for sale were $143.7 million
or 21.1% of total assets compared to 24.1% of total assets at year-end 1995.
During 1996, stable interest rates and a growing economy created increased loan
demand. Maturities from both portfolios helped to fund the increased loan
demand. Concurrently, short-term agency securities (less than one year) and U.S.
Treasuries (two years to three years) were purchased to primarily maintain
liquidity while in-state municipal securities (maturity range of five to fifteen
years) were purchased to enhance tax equivalent net interest income. The fair
value of securities available for sale was approximately $2.8 million above
their amortized cost at December 31, 1996. The average yield on the securities
available for sale portfolio was 6.87% for 1996 and 6.65% for 1995. The average
life of the portfolio was 5.03 years at December 31, 1996 compared to 4.53 years
at year-end 1995.
Investment securities totaled $13.9 million or 2.0% of total assets at
December 31, 1996. The average yield earned on investment securities in 1996 was
5.87% compared to 5.73% in 1995, with an average maturity of 1.53 years at
December 31, 1996.
The loan portfolio at December 31, 1996 was composed of 13.9%
commercial, financial, and agricultural loans, 10.3% real estate construction
loans, 60.7% real estate mortgage loans, and 15.1% installment loans. This
compares to a composition of 16.0% commercial, 8.6% real estate construction,
61.5% real estate mortgage, and 13.9% installment at December 31, 1995.
Problem assets at December 31, 1996 were $3.1 million, or 0.7% of gross
loans and foreclosed properties, compared to $3.2 million or 0.8% at December
31, 1995.
40
<PAGE>
1997 ANNUAL REPORT
The components of problem assets are presented in the table below:
December 31, December 31,
(Dollars in thousands) 1996 1995
- --------------------------------------------------------
Nonaccrual loans $1,630 $2,453
Restructured loans -- 300
Other real estate 759 61
------ ------
Total non-
performing assets 2,389 2,814
Loans 90 days or more
past due and still
accruing 685 401
------- -------
Total problem assets $3,074 $3,215
======= =======
Interest income that would have been recorded on nonaccrual loans for
the years ended December 31, 1996 and 1995, had they performed according to
their original terms, amounted to approximately $174,000 and $330,000,
respectively. Interest income on nonaccrual loans included in the results of
operations for the years ended December 31, 1996 and 1995, amounted to
approximately $42,000 and $82,000, respectively.
Accruing loans 90 days or more past due increased to 0.15% of gross
loans at December 31, 1996 compared to 0.10% of gross loans at December 31,
1995.
Net charge-offs for 1996 were $1.1 million or 0.24% of average loans
compared to $1.0 million or 0.26% of average loans in 1995.
Other real estate increased to $758,977 at December 31, 1996 from
$61,250 at December 31, 1995. Included in other real estate is the
reclassification of property totaling $434,500 that was originally purchased for
the construction of a branch location. Management decided not to construct a
branch on this property, and therefore, the carrying value of this property was
reclassified from premises and equipment to other real estate. This property is
currently being marketed and the gain or loss from its sale is not expected to
be significant. Additionally, two residential construction loans were foreclosed
in December 1996.
Total deposits at December 31, 1996 were $569.9 million, a 10.6%
increase from a 1995 year-end level of $515.4 million. Average noninterest
bearing demand deposits increased $9.0 million or 12.7%; average interest
bearing demand deposits increased $6.8 million or 9.0%; average insured money
market accounts decreased $2.4 million or 4.9%; average savings deposits
increased $11.3 million or 10.4%; and average CD's increased $34.6 million or
19.3%. The majority of deposit growth was in CD products. The increase in
average CD's was primarily attributable to an increase in public deposits.
For the year ended December 31, 1996, net interest income was $28.1
million, an increase of 7.7% from net interest income of $26.1 million in 1995.
The increase is attributable to an increase in the level of interest earning
assets slightly offset by a decrease in the net interest margin (tax adjusted
net interest income divided by average earnings assets) to 4.92% in 1996 from
5.13% in 1995. The decline in the margin is attributable to more growth in
higher yielding deposits, such as CD's, than in lower yielding deposits, such as
NOW and savings deposits.
The average yield on interest-earning assets was 8.7% in 1996 compared
to 8.8% in 1995. The average rate paid on interest-bearing liabilities was 4.6%
in 1996, compared to 4.5% in 1995. The average yield earned on loans was 9.4% in
1996, compared to 9.7% in 1995. The average rate paid on interest-bearing
deposits was 4.6% in 1996, compared to 4.5% in 1995.
41
<PAGE>
FIRST CHARTER CORPORATION
The provision for loan losses for 1996 was $1.5 million compared to
$2.0 million in 1995. The decrease in the provision was primarily attributable
to a reduction in net charge-offs and improved asset quality. The allowance for
loan losses as a percentage of gross loans outstanding was 1.43% at December 31,
1996, compared to 1.46% at year-end 1995.
Noninterest income was $7.3 million in 1996 compared to $6.3 million in
1995. The increase in other noninterest income is attributable to higher
securities gains due to the sale of equity securities held by the Corporation,
higher service charge income on deposit accounts resulting from an increase in
non-sufficient fund income and higher mortgage loan income due to increased loan
originations.
Total noninterest expense was $19.4 million in 1996 compared to $19.2
million in 1995, a 0.9% increase. The increase was primarily attributable to
increases in costs associated with salaries and benefits, occupancy and
equipment and other noninterest expense.
Salaries and fringe benefits increased due to higher full-time
equivalents, annual merit increases and higher benefits costs.
Occupancy and equipment increased approximately $253,000 or 9.5% over
1995. This increase was primarily due to an increase in depreciation expense in
connection with the aforementioned LAN and WAN technology additions in 1996 and
in connection with the opening of a full service branch.
Other noninterest expense decreased approximately $1.1 million or 15.4%
for 1996 when compared to 1995, primarily due to the absence of merger and
acquisition expenses associated with the acquisition of Union in 1995. These
costs included legal, accounting, investment banking, regulatory filings, proxy
printing and solicitation expenses, all of which were incurred during the fourth
quarter of 1995.
Total income tax expense for 1996 was $4.4 million versus $2.9 million
in 1995. The increase is attributable both to an increase in income before
income taxes and an increase in the effective tax rate to 30.5% in 1996 from
25.9% in 1995. The change in the effective rate is primarily attributable to the
majority of merger costs for which a tax benefit was not allowed.
Accounting and Regulatory Matters
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 130, "Reporting Comprehensive Income." Statement 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains and losses) in a full set of general purpose
financial statements. Comprehensive income is the non-shareholder related change
in equity (net assets) of a company during a period from transactions and other
events. The provisions of this statement are effective for fiscal years
beginning after December 15, 1997, including interim periods, and requires
restatement of all prior periods presented. The implementation of the statement
will not have an impact on the consolidated financial position or consolidated
results of operations of the Corporation, but the statement will require
additional disclosures to be made.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which establishes standards
for the way that business enterprises report information about operating
segments in annual financial statements and requires that these enterprises
report selected information about operating
42
<PAGE>
1997 ANNUAL REPORT
segments in interim financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for periods beginning after December 15, 1997 and
requires restatement of all prior periods presented. The implementation of the
statement will not have an impact on the consolidated financial position or
consolidated results of operations of the Corporation, but the statement could
require additional disclosures to be made.
From time to time, FASB also issues exposure drafts for proposed
statements of financial accounting standards. Such exposure drafts are subject
to comment from the public, to revisions by the FASB and to final issuance by
the FASB as statements of financial accounting standards. Management considers
the effect of the proposed statements on the consolidated financial statements
of the Corporation and monitors the status of changes to issued exposure drafts
and to proposed effective dates.
Year 2000 Consideration
The Corporation utilizes many computer software programs and operating
systems throughout the organization. Some of these software applications contain
source code that is unable to appropriately interpret the upcoming calendar year
"2000". Therefore some level of modification, or even possibly replacement, of
such applications will be necessary. The Corporation is currently in the process
of completing its identification of applications that are not "Year 2000"
compliant. Given information known at this time about the Corporation's
on-going, normal course-of-business efforts to upgrade or replace business
critical systems as necessary, management has not fully determined an estimated
cost to become "Year 2000" compliant. However, at December 31, 1997, management
does not anticipate the total costs of becoming "Year 2000" compliant will have
a material adverse impact on the Corporation's liquidity or its results of
operations. The Corporation is expensing all costs associated with required
system changes as the costs are incurred. As of December 31, 1997 these costs
did not exceed $25,000.
Factors that May Affect Future Results
The foregoing discussion contains certain forward-looking statements
about the Corporation's financial condition and results of operations, which are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgment only as of the date hereof. The
Corporation undertakes no obligation to publicly revise these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
Factors that may cause actual results to differ materially from these
forward-looking statements include, but are not limited to, the passage of
unforeseen state or federal legislation or regulation applicable to the
Corporation's operations, the Corporation's ability to accurately predict the
adequacy of the loan loss allowance needs using its present risk grading system,
the ability to generate liquidity if necessary to meet loan demand, the ability
to manage unforeseen domestic and global rapid changes in interest rates, the
reliance on third party vendors to become Year 2000 compliant and, with respect
to the acquisition of CSB, the inability of the Corporation to consolidate the
operations of CSB with the Corporation in an efficient manner.
43
<PAGE>
FIRST CHARTER CORPORATION
First Charter Corporation Officers
Robert O. Bratton
Executive Vice President,
Chief Operating Officer,
Treasurer and Chief Financial Officer
Michael R. Coltrane
Vice Chairman
J. Roy Davis, Jr.
Chairman of the Board
Rose W. Edwards
Assistant Corporate Secretary
Phillip M. Floyd
Executive Vice President
Anne C. Forrest
Assistant Corporate Secretary
Robert G. Fox, Jr.
Executive Vice President
John J. Godbold, Jr.
Executive Vice President
H. Clark Goodwin
Executive Vice President
Brian A. Ingold
AVP/Senior Auditor
David E. Keul
Assistant Treasurer and
Assistant Corporate Secretary
Lawrence M. Kimbrough
President and Chief Executive Officer
James T. Mathews, Jr.
Senior Vice President
Edward B. McConnell
Executive Vice President
James W. Townsend, Jr.
Corporate Secretary
First Charter National Bank and Bank of Union Officers
William R. Adcock
Harvey E. Baker
John R. Baker
Cheryl P. Barbee
Wendy T. Barnhardt
Todd C. Bennington
Kati W. Beaver
Patricia H. Blackwell
Lisa B. Boylen
Robert O. Bratton
Lisa P. Bryant
Kenneth W. Caldwell
Julie J. Carter
Barbara J. Cherry
Elizabeth L. Cline
Deborah S. Cloninger
E. Stephen Costner
Deborah W. Craig
Carolyn M. Craver
Lisa Cunningham
William E. Davis
Deborah R. Deese
Rose W. Edwards
C. Eugene Efird
Thomas J. Elkins
David L. Ellington
Phillip M. Floyd
Anne C. Forrest
Robert G. Fox
Mavadell D. Freeman
Melba M. Funderburk
Linda S. Gibson
Jan G. Griffin
H. Clark Goodwin
JoAnn J. Hall
Sandra L. Hannagan
Angela S. Helms
R. Dwight Henry
Robin T. Hinson
Karen F. Hodge
Patricia K. Horton
D. Jean Hovis
Brian A. Ingold
Patricia C. Jamison
Donna J. Kenney
David E. Keul
Lawrence M. Kimbrough
Brenda K. Kinley
Angela R. Lovelace
Earl H. Lutz, Jr.
Sandra J. Mansur
Jerold L. Marlow
James T. Mathews
Edward B. McConnell
David C. McGuirt
Jesse F. Milliken
Nancy L. Mills
Teresa L. Mills
Michael J. Mittelman, Jr.
Lisa C. Moore
Dawn W. O'Dell
Danny H. Patton
Elizabeth G. Quesenberry
Elizabeth K. Reed
M. Jay Rhodes, Jr.
W. Farrell Richardson
Brian F. Riggins
Linda V. Ritter
Katherine L. Schiele
Tammy D. Scruggs
Greg Silliman
Brenda S. Simpson
Nancy B. Smith
A. Ray Singleton
Gordon M. Stallings
James E. Steere, III
William W. Swink
J. W. Townsend, Jr.
Matthew J. Triplett
Nancy S. Verble
Kimberly J. Wertheimer
L. Eugene Willard
Ann K. Williams
Patricia G. Witter
44
<PAGE>
1997 ANNUAL REPORT
Corporate Information
Corporate Headquarters
First Charter Corporation
22 Union Street, North
PO Box 228
Concord, NC 28026-0228
(704) 786-3300
Toll Free 1-800-422-4650
Auditors
KPMG Peat Marwick L.L.P.
Suite 2800
Two First Union Center
Charlotte, NC 28282
Corporate Counsel
Smith Helms Mulliss & Moore, L.L.P.
30th Floor
201 N. Tryon Street
Charlotte, NC 28202
Subsidiaries
First Charter National Bank
PO Box 228
Concord, NC 28026-0228
Bank of Union
201 North Charlotte Avenue
Monroe, NC 28112
Stock Listing
The NASDAQ National Market
Symbol: FCTR
Market Makers
Morgan Stanley, Dean Witter, Discover & Co.
Interstate/Johnson Lane Corporation
J.C. Bradford Co.
Wheat First Union
Legg Mason Wood Walker, Inc.
Transfer Agent
First Charter National Bank
Shareholders' Meeting
Cabarrus Country Club
Concord, NC April 28, 1998 at 5:00 p.m.
Form 10-K
Copies of First Charter Corporation's Annual Report to the Securities and
Exchange Commission, Form 10-K, may be obtained without charge by writing:
Robert O. Bratton
Chief Financial Officer
First Charter Corporation
PO Box 228
Concord, NC 28026-0228
Stock Information and Dividends
First Charter Corporation's common stock, no par value (the "Common
Stock"), is reported on The Nasdaq Stock Market as a National Market Security
under the symbol "FCTR". The following table sets forth the high and low sales
price for the Common Stock for the periods indicated, as reported. The table
also sets forth per share cash dividend information for the periods indicated
(as adjusted for the stock split). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Capital Resources" contained
elsewhere in this report for a description of limitations on the ability of the
Corporation to pay dividends.
As of February 20, 1998, there were 3,232 shareholders of record of the
Corporation's Common Stock.
Quarterly Common Stock Price Ranges and Dividends
1997 1996
- ------------------------------------------------------------------------------
Quarter High Low Dividend High Low Dividend
- ------------------------------------------------------------------------------
First $18.54 $17.71 $.125 $18.75 $16.25 $.125
- ------------------------------------------------------------------------------
Second 24.25 18.13 .125 17.08 14.79 .125
- ------------------------------------------------------------------------------
Third 24.25 22.00 .140 16.04 15.21 .125
- ------------------------------------------------------------------------------
Fourth 26.75 23.50 .140 18.75 15.21 .125
- ------------------------------------------------------------------------------
<PAGE>
FIRST CHARTER CORPORATION
22 UNION STREET NORTH
P.O. BOX 228
CONCORD, NORTH CAROLINA 28026-0228
(watermark image of FIRST CHARTER CORPORATION)
<PAGE>
Exhibit 21.1
FIRST CHARTER CORPORATION
Affiliated Companies
As of March 26, 1998
Listed below are the subsidiaries of the Company, all of which are wholly
owned and are owned directly by the Company, unless otherwise indicated.
First Charter National Bank
Bank of Union
BOU Financial, Inc. (1)
CSB Financial, Inc. (2)
- ----------
(1) Owned by Bank of Union
(2) Owned by First Charter National Bank
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
First Charter Corporation
We consent to the incorporation by reference in the Registration Statement of
First Charter Corporation (the "Corporation") on Form S-3 (No. 33-52004), the
Registration Statement of the Corporation on Form S-8 (No. 33-60949), the
Registration Statement of the Corporation on Form S-4 (No. 33-63157) as amended
by the Corporation's Post-Effective Amendment No. 1 thereto on Form S-8 and the
Registration Statement of the Corporation on Form S-8 (No. 333-43617) and the
Registration Statement of the Corporation on Form S-4 (333-35905) as amended by
the Corporation's Post-Effective Amendment No. 1 thereto on Form S-8, of our
report dated January 23, 1998, relating to the consolidated balance sheets of
First Charter Corporation and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income , shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1997,
which report appears in the December 31, 1997 Annual Report to Shareholders and
is incorporated by reference in the Form 10-K of First Charter Corporation.
KPMG Peat Marwick LLP
Charlotte, North Carolina
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 33,077
<INT-BEARING-DEPOSITS> 7,975
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
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<EXPENSE-OTHER> 25,642
<INCOME-PRETAX> 12,311
<INCOME-PRE-EXTRAORDINARY> 12,311
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