<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-----------------------------------------
Commission file number 0-15829
------------------------------------------------
FIRST CHARTER CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1355866
-------------- ----------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
22 Union Street, North, Concord, North Carolina 28025
- --------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(704) 786-3300
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
18,072,652 shares of Common Stock, no par value, outstanding as of
November 16, 1998.
1
<PAGE> 2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1998 1997
------------- ------------
(Dollars in thousands)
<S> <C> <C>
ASSETS
Cash and due from banks ............................................................ $ 35,944 $ 35,392
Federal funds sold ................................................................. 26,305 8,195
Interest bearing bank deposits ..................................................... 5,522 15,143
Securities available for sale:
U.S. Government obligations ................................................... 10,253 22,333
U.S. Government agency obligations ............................................ 140,858 120,739
Mortgage-backed securities .................................................... 42,701 59,548
State and municipal obligations, nontaxable ................................... 87,868 85,532
Other ......................................................................... 29,283 27,413
------------------------------
Total securities available for sale ...................................... 310,963 315,565
------------------------------
Loans .............................................................................. 1,406,982 1,261,764
Less: Unearned income ......................................................... (175) (273)
Allowance for loan losses (15,375) (15,263)
------------------------------
Loans, net .................................................................... 1,391,432 1,246,228
------------------------------
Premises and equipment, net ........................................................ 28,876 26,057
Other assets ....................................................................... 33,263 26,061
------------------------------
Total assets ............................................................. $1,832,305 $1,672,641
==============================
LIABILITIES AND SHAREHOLDERS' EQUITY Deposits, domestic:
Noninterest bearing demand .................................................... $ 116,348 $ 103,004
Interest bearing:
NOW accounts ............................................................. 109,074 111,566
Time ..................................................................... 672,358 698,196
Certificates of deposit greater than $100,000 ............................ 195,216 146,496
------------------------------
Total deposits ..................................................... 1,092,996 1,059,262
Other borrowings ................................................................... 464,753 350,079
Other liabilities .................................................................. 31,296 19,391
------------------------------
Total liabilities ........................................................ 1,589,045 1,428,732
------------------------------
SHAREHOLDERS' EQUITY:
Common stock - no par value; authorized, 25,000,000 shares; issued and
outstanding, 18,466,982 shares at 9/30/98
and 19,068,298 shares at 12/31/97 ............................................ 121,500 139,712
Unearned ESOP loan and unvested restricted stock ................................... -- (21,234)
Retained earnings .................................................................. 115,372 119,899
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net ........................ 6,388 5,532
------------------------------
Total shareholders' equity ............................................... 243,260 243,909
------------------------------
Total liabilities and shareholders' equity ............................... $1,832,305 $1,672,641
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
2
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------------
SEPTEMBER 30, September 30,
(Dollars in thousands, except per share amounts) 1998 1997
------------- -------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans........................................ $ 29,548 $ 25,953
Federal funds sold................................................ 316 355
Interest bearing bank deposits.................................... 51 297
Securities available for sale..................................... 4,713 4,535
Investment securities held to maturity............................ - 223
-----------------------------
Total interest income.................................... 34,628 31,363
-----------------------------
INTEREST EXPENSE:
Deposits.......................................................... 11,715 11,926
Federal funds purchased and securities
sold under agreements to repurchase........................... 1,836 2,176
Federal Home Loan Bank and other borrowings....................... 4,588 2,227
-----------------------------
Total interest expense................................... 18,139 16,329
-----------------------------
Net interest income................................... 16,489 15,034
PROVISION FOR LOAN LOSSES.............................................. 655 733
-----------------------------
Net interest income after provision for loan losses............... 15,834 14,301
-----------------------------
NONINTEREST INCOME:
Trust income...................................................... 492 450
Service charges on deposit accounts............................... 1,078 1,021
Insurance and other commissions................................... 471 190
Securities available for sale transactions, net................... 5 3,341
Other............................................................. 653 639
-----------------------------
Total noninterest income..................................... 2,699 5,641
-----------------------------
NONINTEREST EXPENSE:
Salaries and fringe benefits...................................... 5,988 5,493
Occupancy and equipment........................................... 1,522 1,300
Merger expenses................................................... 18,192 --
Other............................................................. 3,597 2,737
-----------------------------
Total noninterest expense.................................... 29,299 9,530
-----------------------------
Income (loss) before income taxes............................ (10,766) 10,412
INCOME TAXES........................................................... (1,318) 3,720
-----------------------------
Net income (loss)............................................ $ (9,448) $ 6,692
==============================
Basic net income (loss) per share...................................... $ (0.52) $ 0.37
==============================
Weighted average common shares......................................... 18,304,490 18,244,912
Diluted net income (loss) per share.................................... $ (0.51 ) $ 0.36
==============================
Weighted average common and common
equivalent shares................................................. 18,657,474 18,365,680
Cash dividends declared................................................ $ 0.15 $ 0.13
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 3
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
-------------------------------
SEPTEMBER 30, September 30,
(Dollars in thousands, except per share amounts) 1998 1997
------------ -------------
<S> <C> <C>
INTEREST INCOME:
Interest and fees on loans........................................ $ 86,736 $ 74,118
Federal funds sold................................................ 802 786
Interest bearing bank deposits.................................... 166 574
Securities available for sale..................................... 14,199 15,194
Investment securities held to maturity............................ -- 665
-------------------------------
Total interest income.................................... 101,903 91,337
-------------------------------
INTEREST EXPENSE:
Deposits.......................................................... 34,541 34,518
Federal funds purchased and securities
sold under agreements to repurchase........................... 5,288 6,037
Federal Home Loan Bank and other borrowings....................... 12,781 6,024
-------------------------------
Total interest expense................................... 52,610 46,579
-------------------------------
Net interest income................................... 49,293 44,758
PROVISION FOR LOAN LOSSES.............................................. 1,917 1,729
-------------------------------
Net interest income after provision for loan losses............... 47,376 43,029
-------------------------------
NONINTEREST INCOME:
Trust income...................................................... 1,439 1,280
Service charges on deposit accounts............................... 3,186 3,011
Insurance and other commissions................................... 1,095 758
Securities available for sale transactions, net................... 1,962 3,774
Other............................................................. 2,795 1,725
-------------------------------
Total noninterest income..................................... 10,477 10,548
-------------------------------
NONINTEREST EXPENSE:
Salaries and fringe benefits...................................... 17,624 16,276
Occupancy and equipment........................................... 4,332 3,806
Merger expenses................................................... 18,192 --
Other............................................................. 8,844 8,838
-------------------------------
Total noninterest expense.................................... 48,992 28,920
-------------------------------
Income before income taxes................................... 8,861 24,657
INCOME TAXES........................................................... 5,505 8,562
-------------------------------
Net income................................................... $ 3,356 $ 16,095
===============================
Basic net income per share............................................. $ 0.18 $ 0.88
===============================
Weighted average common shares......................................... 18,311,489 18,222,094
Diluted net income per share........................................... $ 0.18 $ 0.87
===============================
Weighted average common and common
equivalent shares................................................. 18,693,390 18,579,027
Cash dividends declared................................................ $ 0.45 $ 0.38
===============================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 4
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, September 30,
(Dollars in thousands) 1998 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................................................ $ 3,356 $ 16,095
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Provision for loan losses ......................................................... 1,917 1,739
Depreciation and amortization ..................................................... 2,176 1,800
Premium amortization and discount accretion, net .................................. 240 65
Net gain on securities available for sale transactions ............................ (1,962) (3,774)
Net loss on sale of other real estate ............................................. (416) --
Net loss (gain) on sale of premises and equipment ................................. 10 (143)
Origination of mortgage loans held for sale ....................................... (62,473) (7,620)
Proceeds from sale of mortgage loans available for sale ........................... 55,903 6,757
Decrease (increase) in other assets ............................................... (7,593) 2,609
Decrease in other liabilities ..................................................... 7,185 5,212
--------------------------
Net cash provided (used) by operating activities ........................... (1,657) 22,740
--------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale .................................. 27,230 124,700
Proceeds from maturities of securities available for sale ............................. 81,876 43,352
Purchase of investment securities ..................................................... -- (1,840)
Proceeds from maturities and issuer calls of investment securities, net ............... -- 1,500
Purchase of securities available for sale ............................................. (101,348) (47,737)
Net increase in loans ................................................................. (144,123) (137,281)
Proceeds from sale of other real estate ............................................... 3,800 --
Proceeds from sales of premises and equipment ......................................... 44 1,569
Purchase of premises and equipment .................................................... (5,048) (4,332)
--------------------------
Net cash used by investing activities ........................................... (137,569) (20,069)
--------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand, NOW, money market
and savings accounts ................................................................ 39,986 (16,389)
Net increase (decrease) in certificates of deposit .................................... (6,252) 54,369
Net increase in securities sold under repurchase
agreements and other borrowings ..................................................... 114,674 52,406
Net increase in advances for taxes and insurance ...................................... 4,720 --
Purchase and retirement of common stock .............................................. (16,895) (1,298)
Proceeds from issuance of common stock ................................................ 2,090 1,012
Decrease (increase) in ESOP and Restricted stock trusts ............................... 17,827 (17,428)
Dividends paid ........................................................................ (7,883) (84,959)
--------------------------
Net cash provided (used) by financing activities .................................... 148,267 (12,287)
--------------------------
Net decrease (increase) in cash and cash equivalents ................................ 9,041 (9,616)
Cash and cash equivalents at beginning of period .................................... 58,730 83,443
--------------------------
Cash and cash equivalents at end of period .......................................... $ 67,771 $ 73,827
==========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period
for:
Interest ............................................................................ $ 45,614 $ 60,614
==========================
Income taxes ........................................................................ $ 8,957 $ 5,985
==========================
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Transfer of loans and premises and equipment
to other real estate owned .......................................................... $ 3,572 $ 1,452
==========================
Unrealized gain in value of securities available for sale (net of tax effect
of $578 and $754 for September 30, 1998 and
September 30, 1997, respectively) ................................................... $ 856 $ 1,179
==========================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 5
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
Unearned
ESOP Accumulated
Common Stock and Unvested Other
---------------------- Retained Restricted Comprehensive
Dollars in thousands) Shares Total Earnings Stock Income Total
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
First Charter Corporation .............. 9,268,573 $ 49,514 $ 25,102 $ -- $3,188 $ 77,804
HFNC Financial Corp. ................... 17,192,500 90,198 94,797 (21,234) 2,344 166,105
Adjustments for pooling-of-interests ... (7,392,775) -- -- -- -- --
-------------------------------------------------------------------------------
Balance December 31, 1997 .............. 19,068,298 $139,712 $119,899 $(21,234) $5,532 $243,909
Net income through September 30, 1998 .. -- -- 3,356 -- -- 3,356
Cash dividends of $0.45 per share ...... -- -- (7,883) -- -- (7,883)
Purchase and retirement of common stock. (698,574) (16,895) -- -- -- (16,895)
Stock options exercised and Dividend
Reinvestment Plan stock issued ..... 148,305 2,090 -- -- -- 2,090
Shares released from ESOP and
Restricted stock trusts ............ -- (1,709) -- 19,536 -- 17,827
Shares retired following termination
of MRRP ............................ (51,047) (1,698) -- 1,698 -- --
Unrealized gain on securities
available for sale, net ............ -- -- -- -- 856 856
-------------------------------------------------------------------------------
Balance September 30, 1998 ............. 18,466,982 $121,500 $115,372 $ -- $6,388 $243,260
===============================================================================
</TABLE>
See accompanying notes to consolidated financial statements .
6
<PAGE> 6
FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997 (UNAUDITED)
1. The accompanying consolidated financial statements present the consolidated
financial condition and results of operations of First Charter Corporation
(the "Corporation") and its subsidiaries. The Corporation's two most
significant subsidiaries are First Charter National Bank ("FCNB") and Home
Federal Savings and Loan Association ("Home Federal"), both of which are
engaged in commercial banking in Mecklenburg, Cabarrus and surrounding
counties in North Carolina.
The information furnished in this report reflects all adjustments which
are, in the opinion of management, necessary to present a fair
statement of the financial condition and the results of operations for
the interim periods. All such adjustments were of a normal recurring
nature.
2. All financial data has been restated to reflect the Corporation's merger
with HFNC Financial Corp. ("HFNC") in September 1998 and Carolina State
Bank in December 1997, each of which was accounted for as a
pooling-of-interests. In certain instances, amounts reported in the prior
periods' consolidated financial statements have been reclassified to
present them in the format selected for 1998. Such reclassifications have
no effect on net income or shareholders' equity as previously reported.
3. First Charter Corporation (the "Corporation") calculates its basic and
diluted income per share in accordance with the Financial Accounting
Standards Board (FASB) Standard No. 128, "Earnings per Share." Basic net
income per share is computed by dividing net income by the weighted average
number of shares of common stock outstanding for the year. Diluted net
income per share reflects the potential dilution that could occur if the
Corporation's common stock equivalents, which consist of dilutive stock
options, were exercised. The numerators of the basic net income per share
computations are the same as the numerators of the diluted net income per
share computations for all the periods presented. A reconciliation of the
denominator of the basic net income per share computations to the
denominator of the diluted net income per share computations is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------ ------------- ------------- ------------
<S> <C> <C> <C> <C>
Basic EPS denominator:
Weighted average number of
common shares outstanding .. 18,304,490 18,244,912 18,311,489 18,222,094
Dilutive effect arising from
assumed exercise of
stock options ..... 352,984 120,768 381,901 356,933
----------- ---------- ---------- ----------
Diluted EPS denominator ........ 18,657,474 18,365,680 18,693,390 18,579,027
=========== ========== ========== ==========
</TABLE>
4. On January 1, 1998 the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income". As
required by the SFAS No. 130, prior year information has been modified to
conform with the new presentation. Comprehensive income includes net income
and all changes to the Corporation's equity, with the exception of
transactions with shareholders ("other comprehensive income"). The
Corporation's only component of other comprehensive income is the change in
unrealized gains and losses on securities available for sale.
The Corporation's total comprehensive income (loss) for the three months
ended September 30, 1998 and 1997 was $(8,326,000) and $6,200,000,
respectively. For the nine months ended September 30, 1998 and 1997, the
Corporation recorded comprehensive income of $4,212,000 and $17,274,000,
respectively.
7
<PAGE> 7
Information concerning the Corporation's other comprehensive income for the
three and nine months ended September 30, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
September 30, September 30, September 30, September 30,
(Dollars in thousands) 1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Unrealized gains on
available for sale securities......... $ 1,922 $ 2,535 $ 3,443 $ 5,697
Less:
Reclassification of gains
recognized in net income....... 5 3,341 1,962 3,774
Income tax expense/(benefit)
relating to unrealized gains on
available for sale securities..... 795 (314) 625 744
------- ------- ------- -------
Other comprehensive income (loss).. $ 1,122 $ (492) $ 856 $ 1,179
======= ======= ======= =======
</TABLE>
5. The Corporation and HFNC entered into a definitive agreement and plan
of merger (the "Merger Agreement") dated as of May 17, 1998, as amended
and restated as of July 29, 1998, pursuant to which HFNC merged with
and into the Corporation (the "Merger"). On September 30, 1998 the
Merger was completed and was accounted for as a pooling-of-interests.
Accordingly, all current and prior periods' consolidated financial
statements have been restated to combine the accounts of HFNC with
those of the Corporation.
As of September 30, 1998, there were 17,192,500 shares of HFNC common
stock outstanding. Each share of HFNC common stock was converted into
0.57 shares of the Corporation's common stock.
HFNC, a North Carolina corporation, was a savings and loan holding
company organized in August 1995 in connection with the conversion of
Home Federal from mutual to stock form (the "Conversion"). The
Conversion was effected on December 28, 1995, at which time Home
Federal converted to a federal stock savings and loan association and
became a wholly-owned subsidiary of HFNC. Home Federal conducted its
business from its main office, eight branch offices, and a loan
origination office, all located in Mecklenburg County, North Carolina.
During 1999 Home Federal will be merged into FCNB, at which time Home
Federal's offices will become FCNB branch locations. At June 30, 1998,
HFNC had total consolidated assets of approximately $1,007.3 million,
total consolidated loans of approximately $806.4 million, total
consolidated deposits of approximately $430.5 million, and total
consolidated shareholders' equity of $170.9 million.
Separate results of operations of the combined entities for the three
and six months ended June 30, 1998 and 1997 were as follows (dollars in
thousands, except per share data):
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------------------------------------------------------------
1998 1997
---------------------------------- ------------------------------------
Previously Reported Previously Reported
Corp- Corp-
oration HFNC Restated oration HFNC Restated
<S> <C> <C> <C> <C> <C> <C>
Net interest income ... $ 8,161 $ 7,672 $15,833 $ 7,155 $ 7,081 $14,236
Net income .......... 3,190 3,444 6,634 2,814 2,033 4,847
Basic income
per share ........... 0.34 0.22 0.36 0.31 0.13 0.27
Diluted income
per share ........... 0.34 0.21 0.35 0.30 0.12 0.26
</TABLE>
8
<PAGE> 8
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------------------------------------------
1998 1997
------------------------------------- ----------------------------------------
Previously Reported Previously Reported
Corp- Corp-
oration HFNC Restated oration HFNC Restated
<S> <C> <C> <C> <C> <C> <C>
Net interest income.. $15,940 $15,541 $31,481 $13,929 $14,752 $28,681
Net income............... 6,201 6,602 12,803 5,500 3,904 9,404
Basic income
per share................... 0.66 0.42 0.70 0.60 0.25 0.52
Diluted income
per share................... 0.66 0.41 0.68 0.59 0.24 0.50
</TABLE>
6. In connection with the Merger, the Corporation recorded merger-related
expenses and restructuring charges of approximately $17,632,000. The
following table indicates the primary components of these charges,
including the amounts incurred through September 30, 1998, and the
amounts remaining as accrued expenses in other liabilities at September
30, 1998:
<TABLE>
<CAPTION>
Total Incurred Remaining
Merger and through accrual at
Restructuring September 30, September 30,
(Dollars in thousands) Charges 1998 1998
<S> <C> <C> <C>
ESOP and MRRP termination costs........ $ 8,528 - $ 8,528
Severance costs........................ 1,000 - 1,000
Contract termination costs............. 3,069 - 3,069
Investment banker costs................ 2,471 $ (601) 1,870
Professional costs..................... 1,599 (630) 969
Other merger expenses.................. 965 (199) 766
Total.................................. $17,632 $(1,430) $16,202
</TABLE>
The ESOP and MRRP termination costs are related to the accelerated
vesting of benefits offered under these two plans pursuant to the
requirements of the respective plans following a change in control.
Management expects to settle these liabilities in the fourth quarter of
1998 or the first quarter of 1999 after the completion of all necessary
regulatory filings. The severance costs include accruals for payments
to be made in connection with the involuntary termination of
approximately 25 employees who had been notified that their positions
were redundant within the combined organizations and therefore no
longer needed. Management expects that most of these payments will be
made during the fourth quarter of 1998 or the first quarter of 1999.
The contract termination costs are primarily comprised of payments
required to be made to certain executives of Home Federal pursuant to
their employment contracts. The Corporation does not currently
anticipate any material merger expenses in the fourth quarter of 1998
or the first quarter of 1999.
In addition to the charges related to the Home Federal merger, the
Corporation incurred approximately $560,000 of merger expenses
associated with its integration of Bank of Union ("Union") into FCNB
during the third quarter of 1998.
7. On July 17, 1998, the Corporation and HFNC announced that in
conjunction with the Merger, they intended to purchase in the open
market up to 750,000 shares of the Corporation's common stock, or on an
equivalent basis, shares of HFNC common stock. This amount represents
approximately 7.7% of the shares of the Corporation's common stock
issued in the Merger. Such purchases would be made in accordance with
Regulation M and could be discontinued at any time.
As of August 7, 1998, the Corporation completed its repurchases
totaling 125,117 shares of its common stock and 1,004,000 shares
(572,280 shares on an equivalent basis) of HFNC common stock.
9
<PAGE> 9
8. In June 1995, a lawsuit was initiated against Home Federal by a borrower's
affiliated companies in which the plaintiffs alleged that Home Federal
wrongfully set-off certain funds in an account being held and maintained by
Home Federal. In addition, the plaintiffs alleged that as a result of the
wrongful set-off, Home Federal wrongfully dishonored a check in the amount
of $270,000. Plaintiffs further alleged that the actions on behalf of Home
Federal constituted unfair and deceptive trade practices, thereby entitling
plaintiffs to recover treble damages and attorneys' fees. Home Federal
denied any wrongdoing and filed a motion for summary judgment. Upon
consideration of the motion, the United States Bankruptcy Judge entered a
Recommended Order Granting Summary Judgement, recommending the dismissal of
all claims asserted against Home Federal. In October 1997, the United
States District Court entered an order granting summary judgment in favor
of Home Federal. The plaintiff has appealed the order of summary judgment
and the case is presently pending in the Fourth Circuit Court of Appeals.
In December 1996, Home Federal filed a suit against the borrower and his
company and against the borrower's wife, daughter, and a company owned by
his wife and daughter, alleging transfers of assets to the wife, daughter,
and their company in fraud of creditors, and asking that the fraudulent
transfers be set aside. The objective of the lawsuit is to recover assets
which may be used to satisfy a portion of the judgments obtained in favor
of Home Federal prior to litigation. The borrower's wife filed a
counterclaim against Home Federal alleging that she borrowed $750,000 from
another financial institution, secured by a deed of trust on her principal
residence, the proceeds of which were paid to Home Federal for application
on a debt owed by one of her husband's corporations, claiming that officers
of Home Federal promised to resume making loans to her husband's
corporation after the payment. Home Federal and its officers vigorously
deny all of her allegations. Home Federal filed a motion for summary
judgment and dismissal of the counterclaim. The motion for summary judgment
was heard in the Superior Court division of the Mecklenburg County General
Court of Justice in April 1998; however, an order has not been entered. In
June 1998, Home Federal removed this case to the United States Bankruptcy
Court for the Western District of North Carolina, Charlotte Division, due
to the fact that the defendant was the debtor in a pending bankruptcy case.
Home Federal believes it has strong defenses to the defendant's
counterclaim.
In February 1997, two companies affiliated with those referred to in the
first paragraph above filed an additional action against two executive
officers of Home Federal and against an officer of another financial
institution. The action was removed from the state court to the United
States Bankruptcy Court for the Western District of North Carolina. At the
same time, the borrower, who is affiliated with all of these companies,
also filed an action in the Superior Court of Mecklenburg County, North
Carolina against the two executive officers of Home Federal and against an
officer of another financial institution. The Complaints in both actions
assert virtually identical claims. The plaintiffs in both lawsuits allege
that the officers of both financial institutions engaged in a conspiracy to
wrongfully declare loans to be in default so as to eliminate those
companies as borrowers of Home Federal. Plaintiffs claim actual damages,
treble damages, and punitive damages together with interest, attorneys'
fees, and other costs. Plaintiffs allege misrepresentation, breach of
fiduciary duty, constructive fraud, interference with business expectancy,
wrongful bank account set-off, and unfair and deceptive acts and practices.
The action pending in the bankruptcy court has been stayed. All defendants
filed motions for summary judgment in the state court action which were
granted, and the lawsuits were dismissed in January 1998 by the Superior
Court of Mecklenburg County. The plaintiff appealed the order granting
summary judgment to the North Carolina Court of Appeals. In July 1998, the
defendants removed the state court case to the United States Bankruptcy
Court for the Western District of North Carolina, Charlotte Division, due
to the fact that the plaintiff was a debtor in a pending bankruptcy case.
As a result of the removal, the North Carolina Court of Appeals entered an
order staying further proceedings in the North Carolina Court of Appeals in
August 1998. Home Federal has agreed to indemnify both of its officers with
respect to costs, expense, and liability which might arise in connection
with both of these cases.
In July 1997, the above borrower and affiliated companies filed an
additional action against HFNC, Home Federal, and the other financial
institution referred to in the paragraph above, alleging that previous
judgments in favor of Home Federal and the other financial institution
obtained in prior litigation were obtained by the perpetration of fraud on
the Bankruptcy Court, U.S. District Court, and the Fourth Circuit
10
<PAGE> 10
Court of Appeals. The plaintiffs are seeking to have the judgments set
aside on that basis. All defendants filed motions for summary judgment and
dismissal which were granted, and the lawsuit was dismissed on September
24, 1998. The borrower, individually, has appealed the Order dismissing the
lawsuit to the Fourth Circuit Court of Appeals. That appeal is pending.
Management continues to deny any liability in the above-described cases and
continue to vigorously defend against the claims. However, there can be no
assurance of the ultimate outcome of the litigation, or the range of
potential loss, if any.
11
<PAGE> 11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The consolidated balance sheets of the Corporation represent account
balances for the Corporation and its wholly-owned banking subsidiaries FCNB and
Home Federal, as well as several other less significant subsidiaries.
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Corporation and the notes
thereto included in this report. In addition, the following discussion contains
certain forward-looking statements. See "Factors that May Affect Future
Results".
MERGER OF HFNC FINANCIAL CORP.
The Corporation and HFNC entered into a definitive agreement and plan
of merger (the "Merger Agreement") dated as of May 17, 1998, as amended and
restated as of July 29, 1998, for the Merger of HFNC with and into the
Corporation (the "Merger"). In the Merger, the Corporation exchanged 0.57 of a
share of common stock, no par value per share, of the Corporation (the
"Corporation's common stock") for each outstanding share of common stock, $.01
par value per share, of HFNC (the "HFNC common stock"). On the date of the
Merger, 16,989,000 shares of HFNC common stock were issued and outstanding.
The Corporation incurred one-time pre-tax merger and related charges of
$17.6 million ($14.0 million, net of tax effects) in connection with the Merger.
Dissolution of the HFNC Employee Stock Option Plan (the "ESOP") and the HFNC
Management Recognition and Retention Plan (the "MRRP") (representing
$8.5 million of the $17.6 million) along with professional fees associated with
the transaction (including fixed financial advisor fees as well as attorneys'
and accountants' fees) represented the largest portion of the expenses and
charges, as well as estimated expenses associated with various severance-related
obligations.
On July 17, 1998, the Corporation and HFNC announced that in
conjunction with the Merger, they intended to purchase in the open market up to
750,000 shares of the Corporation's common stock, or on an equivalent basis,
shares of HFNC common stock. This amount represents approximately 7.7% of the
shares of the Corporation's common stock issued in the Merger. Such purchases
would be made in accordance with Regulation M and could be discontinued at any
time.
The Merger qualified as a tax-free reorganization and was accounted
for as a pooling-of-interests. As of August 7, 1998, the Corporation completed
its repurchases totaling 125,117 shares of its common stock and 1,004,000 shares
(572,280 shares on an equivalent basis) of HFNC common stock.
MERGER OF BANK OF UNION
On September 10, 1998, one of the Corporation's wholly-owned banking
subsidiaries Bank of Union merged with and into First Charter National Bank
("FCNB").
LIQUIDITY
FCNB and Home Federal (the "Banks") derive the major source of their
liquidity from their core deposit base. Liquidity is further provided by loan
repayments, maturities in the investment portfolios, the ability to secure
public deposits, the availability of federal fund lines at correspondent banks
and the ability to borrow from the Federal Reserve Bank ("FRB") 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 September
30, 1998, the Banks had two available lines of credit with the FHLB totaling
$398.0 million, with $29.2 million available. Another source of liquidity is the
securities available for sale portfolios. These securities may be sold in
response to liquidity needs, or the banks may borrow funds through securities
sold under repurchase agreements. Management believes the Banks' sources of
liquidity are adequate to meet operating needs and deposit withdrawal
requirements.
12
<PAGE> 12
CAPITAL RESOURCES
At September 30, 1998, total shareholders' equity was $243,260,011, or
$13.17 per share, compared to $243,909,742, or $12.79 per share at December 31,
1997.
At September 30, 1998, the Corporation and the Banks were in compliance
with all existing capital requirements. The Corporation's capital requirements
are summarized in the table below:
<TABLE>
<CAPTION>
Risk-Based Capital
-----------------------------------------------------
Leverage Capital Tier 1 Capital Total Capital
------------------------------------------------------------------------------------
Amount Percentage (1) Amount Percentage (2) Amount Percentage (2)
------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Actual...... $236,325 13.05% $236,325 19.56% $251,428 20.81%
Required.. 72,434 4.00 48,331 4.00 96,662 8.00
Excess...... 163,891 9.05 187,994 15.56 154,776 12.81
</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 requirements applicable to it.
(2) Percentage of risk-weighted assets.
REGULATORY RECOMMENDATIONS
Management is not presently aware of any current recommendations to the
Corporation or to the Banks by regulatory authorities which, if they were to be
implemented, would have a material adverse effect on the Corporation's
liquidity, capital resources, or operations.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Net income for the first nine months of 1998 was $17.7 million, or
$0.95 diluted earnings per share, before nonrecurring pretax charges of $18.2
million primarily associated with the merger of HFNC. Excluding the nonrecurring
charges in 1998, as well as nonrecurring securities gains recognized by HFNC of
$3.3 million in 1997, diluted earnings per share for the first nine months of
1998 increased 25.0%, compared to 1997. On an annualized basis, the
Corporation's 1998 results, excluding these nonrecurring items, produced a
return on average assets of 1.34% and a return on average equity of 9.37%,
compared to 1.20% and 7.28%, respectively, in 1997.
Net income for the three month period ended September 30, 1998 was $4.9
million, excluding the nonrecurring charges, compared to $4.7 million in 1997,
which excludes the aforementioned nonrecurring securities gains of $3.3 million
($2.0 million after tax). Excluding these nonrecurring items, diluted earnings
per share for the quarter was $0.26 in 1998, compared to $0.25 in 1997,
representing an increase of 4.0%.
Net loss for the three month period ended September 30, 1998 was
$9,448,000, or $0.52 basic net loss per share versus net income of $6,692,000,
or $0.37 basic net income per share for the comparable period in 1997. Net
income for the nine month period ended September 30, 1998 was $3,356,000, or
$0.18 basic net income per share versus $16,095,000, or $0.88 basic net income
per share for the comparable period in 1997. The decreases for the three and
nine months ended September 30, 1998 are primarily attributable to expenses
related to the merger of HFNC. On an annualized basis, year to date results
represent a return on average assets of 0.25% versus 1.37% and a return on
average equity of 1.78% versus 8.33%, for the periods ended September 30, 1998
and 1997, respectively.
13
<PAGE> 13
Total assets at September 30, 1998 were $1,832,304,769 compared to
$1,672,641,526 at December 31, 1997. Strong loan demand continued during the
first nine months of 1998. As a result, gross loans increased 11.5% to
$1,406,981,885 from $1,261,763,998 at December 31, 1997. Total deposits
increased 3.2% to $1,092,996,175 from $1,059,262,091 at December 31, 1997.
Securities available for sale totaled $310,962,946 at September 30,
1998 for a decrease of approximately $4.6 million from December 31, 1997. The
decrease was primarily due to sales of U.S. Government and mortgage-backed
securities. Proceeds were used to reduce FHLB borrowings, fund loan growth and
purchase additional securities. The carrying value of securities available for
sale was $10,496,783 above their amortized cost at September 30, 1998 which
represents gross unrealized gains of $10,996,448 and gross unrealized losses of
$499,665.
For the three and nine month periods ended September 30, 1998, net
interest income before provision for loan losses increased approximately
$1,455,000 and $4,535,000, respectively, over the comparable periods in 1997.
The increase is primarily attributable to an increase in the level of interest
earning assets. The net interest margin was 3.94% at September 30, 1998 compared
to 3.99% at September 30, 1997. The average yield on interest-earning assets was
8.18% at September 30, 1998 compared to 8.29% at September 30, 1997, and the
average rate paid on interest-bearing liabilities was 5.05% at September 30,
1998 compared to 5.14% at September 30, 1997.
Management assesses interest rate risk based on an earnings simulation
model. The Corporation's balance sheet is liability sensitive, meaning that in a
given period there will be more liabilities than assets subject to immediate
repricing as market rates change. Because immediately rate sensitive
interest-bearing liabilities exceed immediately rate sensitive assets, the
earnings position could improve in a declining rate environment and could
deteriorate in a rising rate environment, depending on the correlation of rate
changes in these two categories.
The provision for loan losses for the three months ended September 30,
1998 was $655,000, compared to $733,000 for the three months ended September 30,
1997. The provision for loan losses for the nine months ended September 30, 1998
was $1,917,000, compared to $1,729,000 for the nine months ended September 30,
1997. The increase in the provision for the nine months ended September 30, 1998
was due to the growth in the loan portfolio as well as higher levels of net loan
charge-offs. Net charge-offs were approximately $528,000 and $1,805,000 for the
three and nine months ended September 30, 1998, respectively, compared to net
charge-offs of $194,000 and $1,261,000 for the same periods in 1997,
respectively. The increase in net charge-offs was primarily due to loans
acquired through the merger of Carolina State Bank in December 1997 and in the
opinion of management are not necessarily indicative of worsening trends in
asset quality. In addition, during the nine months ended September 30, 1998, the
Corporation had an increase in recoveries when compared to the same nine month
period in 1997. Recoveries for the nine months ended September 30, 1998 were
$453,000 compared to recoveries of $284,000 for the same period in 1997.
At September 30, 1998 and December 31, 1997, the allowance for loan
losses as a percentage of gross loans, excluding loans held for sale, was 1.09%
and 1.21%, respectively. The decrease in this percentage during 1998 is largely
attributable to the charge-off of certain loans acquired in the December 1997
merger with Carolina State Bank. As part of the continual grading process used
to monitor the credit quality of the loan portfolio, an analysis is performed
monthly independently from any analysis in conjunction with the origination of
loans. Based on this review, management believes the allowance to be adequate;
however, future adjustments may be necessary if economic and other conditions
differ substantially from management's assumptions.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Banks' allowances for loan losses
and losses on real estate owned. Such agencies may require the Banks to
recognize additions to the allowances based on their judgments about information
available to them at the time of their examination.
14
<PAGE> 14
The following table presents changes in the allowance for loan losses
for the nine months ended September 30, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
For the Nine Months Ended
---------------------------------
September 30, September 30,
(Dollars in thousands) 1998 1997
- ----------------------------------------------------------------------------
<S> <C> <C>
Beginning balance................... $15,263 $14,409
Provision charged to operations..... 1,917 1,729
Loan charge-offs.................... (2,258) (1,545)
Less loan recoveries............. 453 284
------- -------
Net loan charge-offs........ 1,805 1,261
------- -------
Ending balance $15,375 $14,877
======= =======
</TABLE>
At September 30, 1998, the recorded investment in loans that were
considered to be impaired was $4,446,415 (of which $4,126,860 was on nonaccrual
status) compared to the recorded investment in impaired loans of $4,725,248 (of
which $4,571,041 was on nonaccrual status) at December 31, 1997. The related
allowance for loan losses on these loans was $1,441,292 and $1,281,139 at
September 30, 1998 and December 31, 1997, respectively. The average recorded
investment in impaired loans for the nine months ended September 30, 1998 and
1997 was $4,674,661 and $6,000,485, respectively. For the nine months ended
September 30, 1998 and 1997, the Corporation recognized interest income on
impaired loans of $71,105 and $31,654, respectively.
Total problem assets at September 30, 1998 were $11,451,000 or 0.81% of
gross loans, compared to $12,821,000 or 1.02% at December 31, 1997. The
components of nonperforming and problem assets are presented in the table below:
<TABLE>
<CAPTION>
September 30, December 31,
(Dollars in thousands) 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C>
Nonacccrual loans ..................... $ 6,093 $ 6,119
Restructured loans .................... 577 587
Other real estate ..................... 3,420 4,006
------- -------
Total non-performing assets ....... 10,090 10,712
Loans 90 days or more
past due and still accruing ......... 1,361 2,109
------- -------
Total problem assets .................. $11,451 $12,821
======= =======
</TABLE>
Interest income that would have been recorded on nonaccrual loans for the
nine months ended September 30, 1998 and 1997, had they performed in accordance
with their original terms, amounted to approximately $403,161 and $513,496,
respectively. Interest income recorded on nonaccrual loans for the nine months
ended September 30, 1998 and 1997 was $61,250 and $57,914, respectively.
Noninterest income for the three and nine month periods ended September 30,
1998 decreased approximately $2,942,000 or 52.15% and $71,000 or 0.01%,
respectively, over the comparable periods in 1997. The major component of this
decrease in these periods was the reduced level of securities available for sale
gains in 1998 which was partially offset by increases in trust, service charge,
brokerage service commissions, mortgage loan income and a gain recognized on the
sale of FCNB's merchant card program.
Noninterest expense for the three and nine month periods ended September
30, 1998, excluding nonrecurring merger related charges of $18.2 million
primarily associated with the merger with HFNC, increased approximately
$1,577,000 or 16.55%, and $1,880,000 or 6.50%, respectively, over the comparable
periods in 1997. The increase in these periods was primarily attributable to
higher salaries and fringe benefits due to a greater number of full-time
equivalents and commissions paid on increased mortgage and brokerage service
volumes. Occupancy and equipment expense also increased due to depreciation
expense for ongoing additions in computer network technology, costs associated
with several departmental moves in Concord, costs to maintain those new
locations and the addition of a new mortgage loan origination office by Home
Federal. Additional increases were
15
<PAGE> 15
incurred in professional services, data processing and postage expenses. The
major components of merger expenses are dissolution of the HFNC ESOP and the
HFNC MRRP, professional fees associated with the transaction (including fixed
financial advisor fees as well as attorneys' and accountants' fees) and expenses
associated with various severance-related obligations. (Reference note number 6
to Interim Consolidated Financial Statements).
Total income tax benefit for the three month period ended September 30,
1998 was approximately $1,318,000, compared to total income tax expense of
$3,720,000, over the same period in 1997. For the nine month period ended
September 30, 1998, total income tax expense decreased approximately $3,057,000
or 35.70% from the comparable period in 1997. The changes over the three and
nine month periods ended September 30, 1998 are attributable to decreases in
taxable income primarily caused by costs associated with the merger of HFNC in
September 1998.
16
<PAGE> 16
YEAR 2000 CONSIDERATION
Year 2000 Compliance
The "Year 2000 Issue" is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other machinery as the Year 2000
approaches. These problems generally arise because most computer hardware and
software historically have used only two digits to identify the applicable
year. Since there may be no accommodation for the full four-digit year,
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This error could result in
system failure or miscalculations causing disruption of operations, including
among other things a temporary inability to process customer transactions,
properly accrue interest income and expense or engage in similar normal
business activities. In addition, non-banking systems, such as security
alarms, telephones, vaults, etc. are also subject to malfunction due to their
dependence upon software that utilizes special codes and conventions using the
date field.
State of Readiness
The Corporation recognizes the potentially severe implications of the Year
2000 Issue. The Board of Directors of the Corporation has approved a Year 2000
Action Plan ("Action Plan") that has been developed in accordance with the
Federal Financial Institutions Examination Council ("FFIEC") guidelines. The
Action Plan consists of five phases: (1) awareness, (2) assessment, (3)
remediation, (4) validation, and (5) implementation. The Corporation has
completed phases 1 and 2 of its Action Plan. In completing phase 2, the
Corporation performed a thorough inventory of its IT and non-IT systems to
identify all potential Year 2000 exposed systems and equipment. The items
identified in the inventory were then categorized as "mission-critical" or
"non-mission-critical" depending on the Corporation's dependence on the system
or equipment to perform daily operations and conduct business. This
classification allowed the Corporation to prioritize its efforts in remediating
systems and dealing with third party vendors.
The Corporation is currently working in phases 3, 4 and 5 of the Action
Plan. Since the Corporation generally does not perform in-house programming of
its core operating systems, it is dependent on its third-party vendors for
modifications or conversions of its existing systems to correct the effects of
the Year 2000 Issue. Accordingly, the vast majority of phases 3 and 4 involve
receiving system upgrades and installing and testing them in the Corporation's
operating systems and equipment. The Corporation is soliciting written
documentation from all of its software and hardware vendors, as well as the
providers of facilities using imbedded chip technology, with respect to its
Year 2000 compliance status. Upgrades to existing systems and equipment are
currently being installed and tested, such that the Corporation believes that
it may be substantially complete with phases 3 and 4 by December 31, 1998.
The merger with HFNC is not expected to significantly impact the Action
Plan or the Corporation's state of readiness for Year 2000 compliance. The
Corporation is incorporating all of Home Federal's IT and non-IT systems in all
phases of its Year 2000 Action Plan. The Corporation currently plans to
convert all but one of Home Federal's operating systems to the Corporation's
operating systems in March of 1999. The Corporation does not currently plan to
convert Home Federal's mortgage loan system to the Corporation's loan
application system until after January 1, 2000. Accordingly, Home Federal's
mortgage loan operating system, which is operated by a third party service
bureau, is being included in the Corporation's efforts in phases 3, 4 and 5 of
the Action Plan.
The Corporation also has developed a communication and assessment plan for
its customers. Pursuant to this plan, the Corporation is initiating contact
with its key customers to determine such customers' plans with respect to the
Year 2000 Issue and the Corporation's vulnerability to any such customer's
failure to remediate its own Year 2000 Issue. As most corporate customers
depend on computer systems that must be Year 2000 compliant, a disruption in
their businesses may result in potentially significant financial difficulties
that could affect their creditworthiness. The Corporation is assessing any
adjustments to allowance for loan losses that may be necessary to reflect the
Year 2000 issue on creditworthiness. The Corporation is also implementing
underwriting procedures to reflect the importance of the Year 2000 issue and is
evaluating new credit relationships. The Corporation is also initiating
contact with key suppliers to determine their plan with respect to the Year
2000 Issue. There can be no guarantee that customers and
17
<PAGE> 17
suppliers will convert their systems on a timely basis or in a manner that is
compatible with the Corporation's systems. Significant business interruptions
or failures by key business customers, suppliers, trading partners or
governmental agencies resulting from the effects of the Year 2000 Issue could
have a material adverse effect on the Corporation.
Year 2000 Costs
Since the Corporation relies on third party vendors for substantially all
of its IT systems, the expected cost to the Corporation of the Year 2000
project is not expected to exceed $500,000. Included in this amount are costs
for hardware, software and facilities upgrades, customer communications,
testing, and other direct, incremental costs required to pursue the Action
Plan. Not included in this estimate are the indirect costs associated with the
involvement of existing employees in daily Year 2000 Action Plan activities, an
amount which has not been quantified by management. All remediation costs will
be expensed in the period incurred and will be funded through normal operating
cash flow. Year 2000 project costs during the nine months ended September 30,
1998 were not material.
Risks of Year 2000 Issues
The Year 2000 issue is widespread throughout the entire global economy,
potentially affecting almost every company with any dependence on information
technology. The Corporation has attempted to assess the risk to the
Corporation of the most reasonably likely worst case scenarios involving Year
2000 noncompliance on the part of the Corporation or entities with which it
does significant business. Such risks generally fall into one of two
categories: internal risk, or the risk that the Corporation's IT and/or non-IT
systems will fail and will have a material impact on the Corporation's
financial condition or results of operations, and external risk, or the risk
that the IT or non-IT systems of parties external to the Corporation will fail,
resulting in a material impact on the Corporation's financial condition or
results of operations. In the opinion of management of the Corporation, the
internal risk of Year 2000 non-compliance, in a reasonable worst case scenario,
could involve the inability to perform certain routine customer transactions
for a period of time during 2000. In the opinion of management of the
Corporation, the external risk of Year 2000 non-compliance, in a reasonable
worst case scenario, could involve either (i) credit losses arising from
borrowers inability to perform under the terms of their loan agreements due to
Year 2000-related problems having a material impact on their cash flows, or
(ii) the inability to perform certain routine customer transactions due to the
Year 2000 non-compliance of parties external to the Corporation (e.g., utility
or communications vendors). To mitigate these risks, the Corporation has
performed Contingency Planning.
The costs of the Year 2000 project and the schedule for achieving Year
2000 compliance are based on management's best estimates, which were derived
using numerous assumptions of future events such as the availability of certain
resources (including internal and external resources (including appropriately
trained personnel), third-party vendor plans and other factors). However,
there can be no guarantee that these estimates will be achieved at the cost
disclosed or within the timeframes indicated, and actual results could differ
materially from these plans.
Contingency Planning
Contingency plans are being developed to mitigate the potential effects of
a disruption in normal business operations. Contingency planning includes
developing alternative solutions should a vendor not become compliant, as well
as plans for the resumption of business if, despite the Corporation's best
efforts, a business operation disruption occurs. The Corporation will have a
detailed business resumption contingency plan prior to March 31, 1999.
18
<PAGE> 18
ACCOUNTING AND REGULATORY MATTERS
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that business enterprises report information about operating segments in annual
financial statements and requires that these enterprises report selected
information about operating segments in interim financial reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 31, 1997 and requires restatement of all prior
periods presented. The implementation of the statement will not have an impact
on the consolidated financial position or consolidated results of operations of
the Corporation, but the statement could require additional disclosures to be
made.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits". The new statement revises
an employer's disclosure with respect to pension obligations and other
postretirement benefit plans but does not change the measurement or recognition
provisions of those plans. SFAS No. 132 provides additional information to
facilitate financial analysis and eliminates certain disclosures which are no
longer useful. The implementation of the statement is effective for fiscal
years beginning after December 15, 1997. The statement is not expected to have
a material impact on the consolidated financial statements of the Corporation.
In June 1998, the FASB issued Statement 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative as a hedging vehicle. The statement is
effective for fiscal quarters of fiscal years beginning after June 15, 1999.
Earlier application of all provisions of this statement is encouraged. The
Corporation plans to adopt this statement on January 1, 2000 and does not
anticipate any material effect on its consolidated financial statements.
From time to time, the FASB also issues exposure drafts for proposed
statements of financial accounting standards. Such exposure drafts are subject
to comment from the public, to revisions by the FASB and to final issuance by
the FASB as statements of financial accounting standards. Management considers
the effect of the proposed statements on the consolidated financial statements
of the Corporation and monitors the status of changes to and proposed effective
dates of exposure draft.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The foregoing discussion contains certain forward-looking statements about
the Corporation's financial condition and results of operations, which are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgment only as of the date hereof.
The Corporation undertakes no obligation to publicly revise these
forward-looking statements to reflect events and circumstances that arise after
the date hereof.
Factors that may cause actual results to differ materially from these
forward-looking statements include, but are not limited to, the passage of
unforeseen state or federal legislation or regulation applicable to the
Corporation's operations, the Corporation's ability to accurately predict the
adequacy of the loan loss allowance needs using its present risk grading
system, the ability to generate liquidity if necessary to meet loan demand, the
ability to manage unforeseen domestic and global rapid changes in interest
rates, the reliance on third party vendors to become Year 2000 compliant, and
the availability of resources for the Corporation, or its vendors and
customers, to complete their respective Year 2000 compliance effectively, and,
with respect to the Merger, the inability of First Charter to effectively
consolidate the operations of HFNC with those of First Charter or to achieve
operating efficiencies as soon as anticipated.
19
<PAGE> 19
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The following table presents the scheduled maturity of market risk
sensitive instruments at September 30, 1998:
(Dollars in thousands)
<TABLE>
<CAPTION>
There-
Maturing in: 1 Year 2 Years 3 Years 4 Years 5 Years after Total
- ------------ ---------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Debt securities ........ $ 83,353 $ 18,968 $ 11,733 $ 15,766 $ 17,472 $126,554 $ 273,846
Loans .................. 334,101 181,735 197,060 147,763 199,828 346,495 1,406,982
---------- -------- -------- -------- -------- -------- ----------
Total ................. $ 417,454 $200,703 $208,793 $163,529 $217,300 $473,049 $1,680,828
========== ======== ======== ======== ======== ======== ==========
LIABILITIES
Savings, NOW, Demand
and IMMA's ............ $ 458,097 $ 9,755 $ 9,755 $ 3,885 $ 3,885 $ 13,780 $ 499,157
CD's ................... 491,141 51,253 43,026 4,189 4,155 75 593,839
Short-term Borrowings .. 321,846 -- -- -- -- -- 321,846
Long-term Borrowings ... -- -- 857 51,000 64,550 26,500 142,907
---------- -------- -------- -------- -------- -------- ----------
Total ................. $1,271,084 $ 61,008 $ 53,638 $ 59,074 $ 72,590 $ 40,355 $1,557,749
========== ======== ======== ======== ======== ======== ==========
</TABLE>
The following table presents the average interest rate and estimated fair
value of market risk sensitive instruments at September 30, 1998:
<TABLE>
<CAPTION>
Average Estimated
(Dollars in thousands) Total Interest Rate Fair Value
- ---------------------- ---------- ------------- ----------
<S> <C> <C> <C>
ASSETS
Debt Securities ........ $ 273,846 6.06% $ 279,639
Loans .................. 1,406,982 8.11 1,427,219
---------- ---- ---------
Total ................ $1,680,828 7.76% $1,706,858
========== ==== ==========
LIABILITIES
Savings, NOW, Demand
and IMMA's ........... $ 499,157 2.77% $ 496,906
CD's ................... 593,839 5.64 595,009
Short-term Borrowings .. 321,846 5.67 323,124
Long-term Borrowings ... 142,907 5.37 143,620
---------- ---- -----------
Total................. $1,557,749 4.70% $ 1,558,659
========== ==== ===========
</TABLE>
20
<PAGE> 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
(a) In June 1995, a lawsuit was initiated against Home Federal by a
borrower's affiliated companies in which the plaintiffs alleged that Home
Federal wrongfully set-off certain funds in an account being held and
maintained by Home Federal. In addition, the plaintiffs alleged that as a
result of the wrongful set-off, Home Federal wrongfully dishonored a check
in the amount of $270,000. Plaintiffs further alleged that the actions on
behalf of Home Federal constituted unfair and deceptive trade practices,
thereby entitling plaintiffs to recover treble damages and attorneys'
fees. Home Federal denied any wrongdoing and filed a motion for summary
judgment. Upon consideration of the motion, the United States Bankruptcy
Judge entered a Recommended Order Granting Summary Judgement, recommending
the dismissal of all claims asserted against Home Federal. In October
1997, the United States District Court entered an order granting summary
judgment in favor of Home Federal. The plaintiff has appealed the order
of summary judgment and the case is presently pending in the Fourth
Circuit Court of Appeals.
In December 1996, Home Federal filed a suit against the borrower and his
company and against the borrower's wife, daughter, and a company owned by
his wife and daughter, alleging transfers of assets to the wife, daughter,
and their company in fraud of creditors, and asking that the fraudulent
transfers be set aside. The objective of the lawsuit is to recover assets
which may be used to satisfy a portion of the judgments obtained in favor
of Home Federal prior to litigation. The borrower's wife filed a
counterclaim against Home Federal alleging that she borrowed $750,000 from
another financial institution, secured by a deed of trust on her principal
residence, the proceeds of which were paid to Home Federal for application
on a debt owed by one of her husband's corporations, claiming that officers
of Home Federal promised to resume making loans to her husband's
corporation after the payment. Home Federal and its officers vigorously
deny all of her allegations. Home Federal filed a motion for summary
judgment and dismissal of the counterclaim. The motion for summary
judgment was heard in the Superior Court division of the Mecklenburg County
General Court of Justice in April 1998; however, an order has not been
entered. In June 1998, Home Federal removed this case to the United States
Bankruptcy Court for the Western District of North Carolina, Charlotte
Division, due to the fact that the defendant was the debtor in a pending
bankruptcy case. Home Federal believes it has strong defenses to the
defendant's counterclaim.
In February 1997, two companies affiliated with those referred to in the
first paragraph above filed an additional action against two executive
officers of Home Federal and against an officer of another financial
institution. The action was removed from the state court to the United
States Bankruptcy Court for the Western District of North Carolina. At the
same time, the borrower, who is affiliated with all of these companies,
also filed an action in the Superior Court of Mecklenburg County, North
Carolina against the two executive officers of Home Federal and against an
officer of another financial institution. The Complaints in both actions
assert virtually identical claims. The plaintiffs in both lawsuits allege
that the officers of both financial institutions engaged in a conspiracy to
wrongfully declare loans to be in default so as to eliminate those
companies as borrowers of Home Federal. Plaintiffs claim actual damages,
treble damages, and punitive damages together with interest, attorneys'
fees, and other costs. Plaintiffs allege misrepresentation, breach of
fiduciary duty, constructive fraud, interference with business expectancy,
wrongful bank account set-off, and unfair and deceptive acts and practices.
The action pending in the bankruptcy court has been stayed. All defendants
filed motions for summary judgment in the state court action which were
granted, and the lawsuits were dismissed in January 1998 by the Superior
Court of Mecklenburg County. The plaintiff appealed the order granting
summary judgment to the North Carolina Court of Appeals. In July 1998, the
defendants removed the state court case to the United States Bankruptcy
Court for the Western District of North Carolina, Charlotte Division, due
to the fact that the plaintiff was a debtor in a pending
21
<PAGE> 21
bankruptcy case. As a result of the removal, the North Carolina Court of
Appeals entered an order staying further proceedings in the North
Carolina Court of Appeals in August 1998. Home Federal has agreed to
indemnify both of its officers with respect to costs, expense, and
liability which might arise in connection with both of these cases.
In July 1997, the above borrower and affiliated companies filed an
additional action against HFNC, Home Federal, and the other financial
institution referred to in the paragraph above, alleging that previous
judgments in favor of Home Federal and the other financial institution
obtained in prior litigation were obtained by the perpetration of fraud
on the Bankruptcy Court, U.S. District Court, and the Fourth Circuit
Court of Appeals. The plaintiffs are seeking to have the judgments set
aside on that basis. All defendants filed motions for summary judgment
and dismissal which were granted, and the lawsuit was dismissed on
September 24, 1998. The borrower, individually, has appealed the Order
dismissing the lawsuit to the Fourth Circuit Court of Appeals. That
appeal is pending.
Management continues to deny any liability in the above-described cases
and continue to vigorously defend against the claims. However, there can
be no assurance of the ultimate outcome of the litigation, or the range
of potential loss, if any.
Item 2. Not applicable.
Item 3. Not applicable.
Item 4. Submission of matters to a Vote of Security Holders.
(a) First Charter Corporation's Special Meeting of Shareholders was held on
September 29, 1998.
A motion to consider and vote upon a proposal to approve the Amended and
Restated Agreement and Plan of Merger, dated as of May 17, 1998, and amended
and restated as of July 29, 1998, by and between the Corporation and HFNC,
pursuant to which HFNC would merge with and into the Corporation, was adopted
by a vote of the majority of the Corporation's issued and outstanding common
stock entitled to vote at the meeting, as follows:
<TABLE>
<CAPTION>
<S> <C>
For: 6,871,440
Against: 30,020
Abstained: 19,320
Broker Non-Votes: 787,439
</TABLE>
A motion to consider and vote upon a proposal to approve an amendment to
the Corporation's Amended and Restated Articles of Incorporation to increase
the number of authorized shares of the Corporation's common stock from
25,000,000 to 50,000,000 was adopted by a vote of the majority of the shares of
the Corporation's common stock present or represented by proxy and entitled to
vote, as follows:
<TABLE>
<S> <C>
For: 7,545,294
Against: 110,422
Abstained: 52,504
Broker Non-Votes: 0
</TABLE>
Item 5. Other Information
Not applicable.
22
<PAGE> 22
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
(per Exhibit Table
in item 601 of
Regulation S-K) Description of Exhibits
2.1 Agreement and Plan of Merger dated May 17, 1998, as Amended
and Restated as of July 29, 1998, between the Registrant and HFNC
Financial Corp. incorporated herein by reference to Exhibit A of the
Registrant's Registration Statement filed July 31, 1998 on Form S-4
(Commission File No. 333-60449).
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 fiscal year ended December 31, 1995 (Commission File
No. 0-15829).
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated Financial Data Schedule
(b) Reports on Form 8-K
(i) On May 28, 1998, the Registrant filed a Current Report on Form 8-K,
reporting pursuant to Item 5 thereof the proposed Merger of HFNC pursuant
to an Agreement and Plan of Merger entered into on May 17, 1998. On
August 4, 1998, the Registrant filed a Current Report on Form 8-K/A-1,
amending the Current Report on Form 8-K filed on May 28, 1998 to include
following historical financial statements of HFNC and certain pro forma
financial information related to the proposed Merger:
Consolidated Statements of Financial Position of HFNC as of June 30, 1997
and 1996.
Consolidated Statements of Income of HFNC for the years ended June 30,
1997, 1996 and 1995.
Consolidated Statements of Changes in Equity of HFNC for the years ended
June 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows of HFNC for the years ended June 30,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements of HFNC for the years ended
June 30, 1997 and 1996.
Reports of Deloitte & Touche LLP, independent auditors, on the
Consolidated Financial Statements of HFNC as of June 30, 1997 and 1996
and for each of the years in the three-year period ended June 30, 1997.
Unaudited Consolidated Condensed Balance Sheets of HFNC as of March 31,
1998 and June 30, 1997.
Unaudited Consolidated Condensed Statements of Income of HFNC for the
three and nine months ended March 31, 1998 and 1997.
23
<PAGE> 23
Unaudited Consolidated Statements of Changes in Shareholders' Equity of
HFNC for the nine months ended March 31, 1998 and 1997.
Unaudited Consolidated Condensed Statement of Cash Flows for the nine
months ended March 31, 1998 and 1997.
Notes to Unaudited Consolidated Condensed Financial Statements of HFNC for
certain financial periods ended March 31,1998.
Unaudited Pro Forma Condensed Balance Sheet as of March 31, 1998.
Unaudited Pro Forma Condensed Statement of Earnings for the three months
ended March 31, 1998 and 1997 and for the years ended December 31,
1997, 1996, and 1995.
Notes to the Unaudited March 31, 1998 Pro Forma Condensed Financial
Information.
On September 10, 1998, the Registrant filed a Current Report on Form
8-K/A-2, amending the Current Report on Form 8-K originally filed on May 28,
1998, as amended on August 4, 1998, to include unaudited pro forma condensed
consolidated financial statements including a balance sheet as of June 30, 1998
and statements of earnings for the three and six months ended June 30, 1998 and
1997 and the years ended December 31, 1997, 1996 and 1995. These statements
present on a pro forma basis historical results for FCC and HFNC as though the
Merger had been consummated as of January 1, 1995.
On October 1, 1998, the Registrant filed a Current Report on 8-K/A-3,
amending the Current Report on Form 8-K originally filed on May 28, 1998, as
amended on August 4, 1998 and September 10, 1998, to include HFNC Financial
Corp. and Subsidiaries Consolidated Financial Statements as of June 30, 1998
and 1997 and for each of the three years ended June 30, 1998 along with an
Independent Auditors' Report.
(ii) On October 15, 1998, the Registrant filed a Current Report on Form 8-K,
reporting pursuant to Item 5 thereof to announce its earnings for the fiscal
quarter ended September 30, 1998.
(iii) On October 23, 1998, the Registrant filed a current Report on Form 8-K,
reporting pursuant to Item 5 thereof a stock repurchase in the open market up
to 75,000 shares of First Charter common stock in connection with the pending
acquisition of an insurance agency by First Charter Insurance Services, Inc., a
wholly-owned indirect subsidiary of First Charter Corporation.
24
<PAGE> 24
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CHARTER CORPORATION
(Registrant)
Date: November 16, 1998 By /s/ Robert O. Bratton
Executive Vice President &
Principal Financial and
Accounting Officer
25
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
(per Exhibit Table
in item 601 of Sequential
Regulation S-K) Description of Exhibits Page Number
<S> <C> <C>
3.1 Amended and Restated Articles of Incorporation
of the Registrant
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
27.3 Restated Financial Data Schedule
</TABLE>
26
<PAGE> 1
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:
(1) 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;
(2) 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 of, 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;
(3) 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;
(4) 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
(5) 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.
<PAGE> 2
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 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 or other person or
otherwise dispose of all or substantially all the assets or dispose of by any
means all or substantially all of 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.
2
<PAGE> 3
ARTICLES OF AMENDMENT
OF
FIRST CHARTER CORPORATION
Pursuant to the provisions of Section 55-10-06 of the North Carolina
Business Corporation Act, First Charter Corporation ("First Charter") hereby
executes the following Articles of Amendment:
1. The name of the corporation is "First Charter Corporation."
2. The proposed amendment to the Amended and Restated Articles of
Incorporation of First Charter would delete the existing Article 4
and replace it with a new Article 4. The text of the amendment to
be adopted is as follows:
"ARTICLE 4 - The aggregate number of shares the Corporation is authorized
to issue is fifty million (50,000,000) shares of Common Stock, without par
value.''
3. The proposed amendment to the Amended and Restated Articles of
Incorporation of First Charter was adopted September 29, 1998.
4. First Charter's stockholders approved the proposed amendment at a
special meeting of the stockholders September 29, 1998, as required
by the North Carolina Business Corporation Act.
(signature page follows)
<PAGE> 4
IN WITNESS WHEREOF, the undersigned has caused these Articles of Amendment
to be executed in its name by a duly authorized officer as of the 12th day of
November, 1998.
FIRST CHARTER CORPORATION
By: /s/ David E. Keul
---------------------------
David E. Keul
Assistant Secretary
-2-
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 35,944
<INT-BEARING-DEPOSITS> 5,522
<FED-FUNDS-SOLD> 26,305
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 310,963
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,406,807
<ALLOWANCE> 15,375
<TOTAL-ASSETS> 1,832,305
<DEPOSITS> 1,092,996
<SHORT-TERM> 321,846
<LIABILITIES-OTHER> 31,296
<LONG-TERM> 142,907
0
0
<COMMON> 121,500
<OTHER-SE> 243,260
<TOTAL-LIABILITIES-AND-EQUITY> 1,832,305
<INTEREST-LOAN> 86,736
<INTEREST-INVEST> 14,199
<INTEREST-OTHER> 968
<INTEREST-TOTAL> 52,610
<INTEREST-DEPOSIT> 34,541
<INTEREST-EXPENSE> 18,069
<INTEREST-INCOME-NET> 49,293
<LOAN-LOSSES> 1,917
<SECURITIES-GAINS> 1,962
<EXPENSE-OTHER> 48,992
<INCOME-PRETAX> 3,356
<INCOME-PRE-EXTRAORDINARY> 3,356
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,356
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
<YIELD-ACTUAL> 3.94
<LOANS-NON> 6,093
<LOANS-PAST> 1,361
<LOANS-TROUBLED> 577
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,263
<CHARGE-OFFS> 2,258
<RECOVERIES> 453
<ALLOWANCE-CLOSE> 15,375
<ALLOWANCE-DOMESTIC> 15,375
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 41,481
<INT-BEARING-DEPOSITS> 17,354
<FED-FUNDS-SOLD> 14,992
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 280,541
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 14,281
<LOANS> 1,197,118
<ALLOWANCE> 14,877
<TOTAL-ASSETS> 1,595,779
<DEPOSITS> 1,051,789
<SHORT-TERM> 195,496
<LIABILITIES-OTHER> 20,329
<LONG-TERM> 86,805
0
0
<COMMON> 139,521
<OTHER-SE> 241,360
<TOTAL-LIABILITIES-AND-EQUITY> 1,595,779
<INTEREST-LOAN> 74,118
<INTEREST-INVEST> 15,194
<INTEREST-OTHER> 1,360
<INTEREST-TOTAL> 46,579
<INTEREST-DEPOSIT> 34,518
<INTEREST-EXPENSE> 9,061
<INTEREST-INCOME-NET> 44,758
<LOAN-LOSSES> 1,729
<SECURITIES-GAINS> 3,774
<EXPENSE-OTHER> 28,920
<INCOME-PRETAX> 16,095
<INCOME-PRE-EXTRAORDINARY> 16,095
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,095
<EPS-PRIMARY> .88
<EPS-DILUTED> .87
<YIELD-ACTUAL> 3.99
<LOANS-NON> 8,486
<LOANS-PAST> 1,767
<LOANS-TROUBLED> 634
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,409
<CHARGE-OFFS> 1,545
<RECOVERIES> 284
<ALLOWANCE-CLOSE> 14,877
<ALLOWANCE-DOMESTIC> 14,877
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 35,392
<INT-BEARING-DEPOSITS> 15,143
<FED-FUNDS-SOLD> 8,195
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 315,565
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,261,764
<ALLOWANCE> 15,263
<TOTAL-ASSETS> 1,672,641
<DEPOSITS> 1,059,262
<SHORT-TERM> 241,680
<LIABILITIES-OTHER> 19,391
<LONG-TERM> 108,399
0
0
<COMMON> 139,712
<OTHER-SE> 243,909
<TOTAL-LIABILITIES-AND-EQUITY> 1,672,641
<INTEREST-LOAN> 100,921
<INTEREST-INVEST> 19,581
<INTEREST-OTHER> 1,807
<INTEREST-TOTAL> 62,827
<INTEREST-DEPOSIT> 46,332
<INTEREST-EXPENSE> 16,495
<INTEREST-INCOME-NET> 60,303
<LOAN-LOSSES> 2,684
<SECURITIES-GAINS> 5,694
<EXPENSE-OTHER> 42,765
<INCOME-PRETAX> 19,171
<INCOME-PRE-EXTRAORDINARY> 19,171
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,171
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 3.95
<LOANS-NON> 6,119
<LOANS-PAST> 2,109
<LOANS-TROUBLED> 587
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 14,409
<CHARGE-OFFS> 2,261
<RECOVERIES> 431
<ALLOWANCE-CLOSE> 15,263
<ALLOWANCE-DOMESTIC> 15,263
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
