<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 0-15829
FIRST CHARTER CORPORATION
(Exact name of registrant as specified in its charter)
North Carolina 56-1355866
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
22 Union Street North, Concord, North Carolina 28025
(Address of principal executive offices) (Zip Code)
(704) 786-3300
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
17,566,729 shares of Common Stock, no par value, outstanding as of
November 15, 1999.
<PAGE> 2
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
First Charter Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
- --------------------------------------------------------------------------------
(Dollars in thousands) (Unaudited)
- --------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks $ 36,867 $ 41,884
Federal funds sold -- 6,402
Interest bearing bank deposits 4,978 11,713
Securities available for sale, cost of
$342,227 at September 30, 1999 and
$321,357 at December 31, 1999 342,037 331,799
Loans 1,384,714 1,422,676
Less: Unearned income (229) (155)
Allowance for loan losses (16,837) (15,554)
----------------------------------
Loans, net 1,367,648 1,406,967
----------------------------------
Premises and equipment, net 31,906 30,603
Other assets 36,443 34,989
----------------------------------
Total assets $ 1,819,879 $ 1,864,357
==================================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits, domestic:
Noninterest bearing demand $ 127,711 $ 119,519
Interest bearing 1,008,895 1,003,516
----------------------------------
Total deposits 1,136,606 1,123,035
Other borrowings 426,704 469,944
Other liabilities 28,119 25,406
----------------------------------
Total liabilities 1,591,429 1,618,385
----------------------------------
Shareholders' equity:
Common stock - no par value; authorized
50,000,000 shares, issued and outstanding
17,565,195 shares at 9/30/99 and
18,442,202 shares at 12/31/98 99,790 121,416
Retained earnings 128,759 118,078
Accumulated other comprehensive income:
Unrealized gain (loss) on securities
available for sale, net (99) 6,478
----------------------------------
Total shareholders' equity 228,450 245,972
----------------------------------
Total liabilities and
shareholders' equity $ 1,819,879 $ 1,864,357
==================================
</TABLE>
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<PAGE> 3
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 data) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans $ 28,594 $ 29,548
Federal funds sold 8 316
Interest bearing bank deposits 36 51
Securities available for sale 4,913 4,713
-----------------------------
Total interest income 33,551 34,628
-----------------------------
Interest expense:
Deposits 10,897 11,715
Federal funds purchased and securities
sold under agreements to repurchase 310 1,836
Federal Home Loan Bank and other
borrowings 5,141 4,588
-----------------------------
Total interest expense 16,348 18,139
-----------------------------
Net interest income 17,203 16,489
Provision for loan losses 375 655
-----------------------------
Net interest income after provision for
loan losses 16,828 15,834
-----------------------------
Noninterest income:
Trust income 583 492
Service charges on deposit accounts 1,159 1,078
Insurance and other commissions 952 471
Securities available for sale
transactions, net 225 5
Gain on sale of property 1,752 --
Other 702 653
-----------------------------
Total noninterest income 5,373 2,699
-----------------------------
Noninterest expense:
Salaries and fringe benefits 6,374 5,988
Occupancy and equipment 1,883 1,522
Merger expense -- 18,192
Other 3,392 3,597
-----------------------------
Total noninterest expense 11,649 29,299
-----------------------------
Income (loss) before
income taxes 10,552 (10,766)
Income taxes (benefit) 3,434 (1,318)
-----------------------------
Net income (loss) $ 7,118 $ (9,448)
=============================
Net income (loss) per share:
Basic $ 0.40 $ (0.52)
Diluted $ 0.40 $ (0.51)
Weighted average shares:
Basic 17,670,835 18,304,490
Diluted 17,763,070 18,657,474
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
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 data) 1999 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Loans $ 86,907 $ 86,736
Federal funds sold 117 802
Interest bearing bank deposits 237 166
Securities available for sale 14,289 14,199
----------------------------
Total interest income 101,550 101,903
----------------------------
Interest expense:
Deposits 33,140 34,541
Federal funds purchased and securities
sold under agreements to repurchase 2,333 5,288
Federal Home Loan Bank and other
borrowings 14,522 12,781
----------------------------
Total interest expense 49,995 52,610
----------------------------
Net interest income 51,555 49,293
Provision for loan losses 2,600 1,917
----------------------------
Net interest income after provision
for loan losses 48,955 47,376
----------------------------
Noninterest income:
Trust income 1,683 1,439
Service charges on deposit accounts 3,331 3,186
Insurance and other commissions 2,935 1,095
Securities available for sale
transactions, net 843 1,962
Gain on sale of loans 1,757 --
Gain on sale of property 1,752 --
Other 2,213 2,795
----------------------------
Total noninterest income 14,514 10,477
----------------------------
Noninterest expense:
Salaries and fringe benefits 17,980 17,624
Occupancy and equipment 5,463 4,332
Merger expense -- 18,192
Other 10,801 8,844
----------------------------
Total noninterest expense 34,244 48,992
----------------------------
Income before
income taxes 29,225 8,861
Income taxes 9,413 5,505
----------------------------
Net income $ 19,812 $ 3,356
============================
Net income per share:
Basic $ 1.09 $ 0.18
Diluted $ 1.09 $ 0.18
Weighted average shares:
Basic 18,125,195 18,311,489
Diluted 18,204,647 18,693,390
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
ESOP and Accumulated
Common Stock Unvested Other
---------------------- Retained Restricted Comprehensive
(Dollars in thousands) Shares Amount Earnings Stock Income Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 19,068,298 $ 139,712 $ 119,899 $ (21,234) $ 5,532 $ 243,909
Comprehensive income:
Net income through September 30, 1998 -- -- 3,356 -- -- 3,356
Unrealized gain on securities available
for sale, net -- -- -- -- 856 856
---------
Total comprehensive income 4,212
Cash dividends -- -- (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
Pre-merger transactions of pooled bank (51,047) (3,407) -- 21,234 -- 17,827
---------------------------------------------------------------------------------
Balance, September 30, 1998 18,466,982 $ 121,500 $ 115,372 $ -- $ 6,388 $ 243,260
=================================================================================
Balance, December 31, 1998 18,442,202 $ 121,416 $ 118,078 $ -- $ 6,478 $ 245,972
Comprehensive income:
Net income through September 30, 1999 -- -- 19,812 -- -- 19,812
Unrealized loss on securities
available for sale, net -- -- -- -- (6,577) (6,577)
----------
Total comprehensive income 13,235
Cash dividends -- -- (9,131) -- -- (9,131)
Shares issued in connection with
insurance agency acquisition 68,551 1,273 -- -- -- 1,273
Purchase and retirement of common stock (994,148) (23,389) -- -- -- (23,389)
Stock options exercised 48,590 490 -- -- -- 490
---------------------------------------------------------------------------------
Balance, September 30, 1999 17,565,195 $ 99,790 $ 128,759 $ -- $ (99) $ 228,450
=================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,812 $ 3,356
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 2,600 1,917
Depreciation 2,967 2,176
Premium amortization and discount accretion, net 137 240
Net gain on securities available for sale transactions (843) (1,962)
Net gain on sale of other real estate (540) (416)
Gain on sale of mortgage loans (1,757) --
Net (gain) loss on sale of premises and equipment (1,730) 10
Origination of mortgage loans held for sale (20,487) (62,473)
Proceeds from sale of mortgage loans available for sale 172,699 55,903
Decrease (increase) in other assets 3,281 (7,593)
Increase in other liabilities 2,711 11,905
------------------------------
Net cash provided by operating activities 178,850 3,063
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 12,380 27,230
Proceeds from maturities of securities available for sale 38,739 81,876
Purchase of securities available for sale (71,282) (101,348)
Net increase in loans (117,375) (144,123)
Proceeds from sales of other real estate 3,500 3,800
Proceeds from sales of premises and equipment 2,970 44
Purchase of premises and equipment (5,510) (5,048)
------------------------------
Net cash used by investing activities (136,578) (137,569)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand, money market and savings accounts 33,027 39,986
Net decrease in certificates of deposit (19,456) (6,252)
Net increase (decrease) in securities sold under repurchase
agreements and other borrowings (43,240) 114,674
Purchase and retirement of common stock (23,389) (16,895)
Proceeds from issuance of common stock 1,763 2,090
Decrease in ESOP and Restricted stock trusts -- 17,827
Dividends paid (9,131) (7,883)
------------------------------
Net cash provided (used) by financing activities (60,426) 143,547
------------------------------
Net increase (decrease) in cash and cash equivalents (18,154) 9,041
Cash and cash equivalents at beginning of period 59,999 58,730
------------------------------
Cash and cash equivalents at end of period $ 41,845 $ 67,771
==============================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 48,806 $ 45,614
==============================
Income taxes $ 4,898 $ 8,957
==============================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfer of loans and premises and equipment
to other real estate owned $ 2,696 $ 3,572
==============================
Unrealized gain (loss) in value of securities available for sale
(net of tax benefit (expense) of $4,055 and ($578) for
September 30, 1999 and September 30, 1998, respectively) $ (6,577) $ 856
==============================
Issuance of stock in purchase acquisition $ 1,273 $ --
==============================
Transfer of loans held for investment to held for sale $ 147,555 $ --
==============================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 AND 1998 (UNAUDITED)
1. The accompanying consolidated financial statements present the
consolidated financial condition and results of operations of First
Charter Corporation (the "Corporation") and its wholly owned
subsidiary, First Charter National Bank (the "Bank"), a commercial bank
operating in Mecklenburg, Cabarrus, Union, Rowan, Rutherford and
Cleveland counties of North Carolina. In addition, through its
subsidiary First Charter Brokerage Services, the Bank offers discount
brokerage services, insurance and annuity sales and financial planning
services pursuant to a third party arrangement with UVEST Investment
Services. The Bank also operates three other subsidiaries: First
Charter Insurance Services, Inc., First Charter Realty Investment,
Inc., and FCNB Real Estate, Inc. First Charter Insurance Services, Inc.
is a North Carolina corporation formed to meet the insurance needs of
businesses and individuals throughout the Charlotte metropolitan area.
First Charter Realty Investment, Inc. is a Delaware corporation
organized as a holding company for FCNB Real Estate Inc, a real estate
investment trust organized in North Carolina.
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect reported amounts of assets
and liabilities and disclosure of contingent liabilities at the date of
the financial statements, as well as the amounts of income and expenses
during the reporting period. Actual results could differ from those
estimates.
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, 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 1999. Such reclassifications have no
effect on net income or shareholders' equity as previously reported.
3. The Corporation calculates its basic and diluted income per share in
accordance with the Financial Accounting Standards Board ("FASB")
Statement 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 potential common stock, which consist of stock options,
are issued. 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:
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<PAGE> 8
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS denominator:
Weighted average number of
common shares outstanding 17,670,835 18,304,490 18,125,195 18,311,489
Dilutive effect arising from
assumed exercise of
stock options 92,235 352,984 79,452 381,901
-----------------------------------------------------------------
Diluted EPS denominator 17,763,070 18,657,474 18,204,647 18,693,390
=================================================================
</TABLE>
The Corporation paid cash dividends of $0.17 and $0.15 per share during
the quarters ended September 30, 1999 and 1998, respectively.
4. The Corporation reports comprehensive income in accordance with
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income". Comprehensive income includes net income and all
changes to the Corporation's equity, with the exception of transactions
with shareholders ("other comprehensive income"). The Corporation's
only component of other comprehensive income is the change in
unrealized gains and losses on available for sale securities. The
Corporation's total comprehensive income (expense) for the three months
ended September 30, 1999 and 1998 was $5.5 million and $(8.3) million,
respectively. For the nine months ended September 30, 1999 and 1998,
the Corporation recorded comprehensive income of $13.2 million and $4.2
million, respectively.
5. On November 7, 1999, the Corporation and Carolina First Bancshares,
Inc. ("Carolina First") entered into an Agreement and Plan of Merger
("Merger Agreement"), pursuant to which Carolina First will be merged
(the "Merger") into the Corporation. The Board of Directors of the
Corporation and the Board of Directors of Carolina First approved the
Merger Agreement and the transactions related thereto at separate
meetings held on November 7, 1999. In accordance with the terms of the
Merger Agreement, (i) each share of the $2.50 par value common stock of
Carolina First (excluding shares held by Carolina First or the
Corporation or their respective companies, in each case other than in a
fiduciary capacity or as a result of debts previously contracted) will
be converted into 2.267 shares (the "Exchange Ratio") of the no par
value common stock of the Corporation. The Merger will be accounted for
as a pooling-of-interests. For more information regarding the Merger
Agreement and the Merger, see the Corporation's Press Release and
supplemental Analysts Materials filed on Form 8-K dated November 8,
1999.
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 the Bank, its wholly owned banking subsidiary.
The following discussion and analysis should be read in conjunction with the
consolidated financial statements of the Corporation
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<PAGE> 9
and the notes thereto included in this report. In addition, the following
discussion contains certain forward-looking statements. See "Factors that May
Affect Future Results".
LIQUIDITY
The Bank derives the major source of its liquidity from its 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 and repurchase agreements at correspondent
banks and the ability to borrow from the Federal Reserve Bank ("FRB") discount
window. In addition to these sources, the Bank is a member of the Federal Home
Loan Bank ("FHLB") System, which provides access to FHLB lending sources. At
September 30, 1999, the Bank had a line of credit with the FHLB of $460.0
million, with $90.4 million available. Another source of liquidity is the
securities in the available for sale portfolio, which may be sold in response to
liquidity needs. Management believes the Bank's sources of liquidity are
adequate to meet operating needs and deposit withdrawal requirements.
Due to increases in certain interest rates during the first quarter of
1999, and the resulting impact on the Corporation's interest rate risk, the
Corporation classified $147.6 million in lower-yielding mortgage loans as held
for sale during late March 1999. On March 24, 1999, the Bank entered into
agreements for the sale of these loans, with the sales closing in April. The
loans were sold with servicing rights retained. The Corporation recognized a
gain of approximately $1.8 million on the sales transactions during the second
quarter of 1999.
CAPITAL RESOURCES
At September 30, 1999, total shareholders' equity was $228.5 million,
representing a book value of $13.01 per share, compared to $246.0 million, or a
book value of $13.34 per share at December 31, 1998. The reduction in
shareholders' equity is primarily the result of the Corporation's stock
repurchase plan and a reduction in the value of the securities available for
sale portfolio; see further discussion at "RESULTS OF OPERATIONS AND FINANCIAL
CONDITION -- FINANCIAL CONDITION".
At September 30, 1999, the Corporation and the Bank were in compliance
with all existing capital requirements and the most recent notifications from
the Corporation's and Bank's various regulators categorized the Corporation and
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no events or conditions since those notifications
that management believes have changed either of the entities' categories. The
Corporation's capital requirements are summarized in the table below:
<TABLE>
<CAPTION>
Risk-Based Capital
------------------------------------------------------
Leverage Capital Tier 1 Capital Total Capital
- ---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Percentage (1) Amount Percentage (2) Amount Percentage (2)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Actual $225,093 11.24% $225,093 17.23% $241,428 18.48%
Required 71,200 4.00 52,252 4.00 104,504 8.00
Excess 153,893 7.24 172,841 13.23 136,924 10.48
</TABLE>
-9-
<PAGE> 10
(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 Bank by regulatory authorities which, if they were to be
implemented, would have a material adverse effect on the Corporation's or the
Bank's liquidity, capital resources, or operations.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
FINANCIAL CONDITION
Total assets at September 30, 1999 amounted to $1.82 billion, compared
to $1.86 billion at December 31, 1998. Gross loans at September 30, 1999
amounted to $1.38 billion, down from $1.42 billion at December 31, 1998. The
decline of $38.0 million was due to the sale of $147.6 million of 30-year fixed
rate loans in April, 1999. These sales were discussed at "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
LIQUIDITY". The proceeds of these sales, combined with maturities and paydowns
on securities, were utilized to meet loan demand, with the excess used to reduce
borrowed funds. Strong loan growth since December 31, 1998, however, has offset
a significant portion of the effect of the loan sale. A significant amount of
this loan growth has been in the commercial portfolio.
Securities available for sale totaled $342.0 million at September 30,
1999, representing an increase of approximately $10.2 million, or 3.1%, from
December 31, 1998. The carrying value of securities available for sale was
approximately $190 thousand below their amortized cost at September 30, 1999,
which represents gross unrealized gains of $6.8 million and gross unrealized
losses of $7.0 million.
Total deposits increased slightly to $1.14 billion, compared to $1.12
billion at December 31, 1998. Other borrowings declined $43.2 million, or 9.2%,
to $426.7 million at September 30, 1999 from $469.9 million at December 31,
1998. This decline was due to the partial use of the loan sale proceeds to
reduce borrowed funds, as discussed above. Shareholders' equity declined to
$228.5 million from $246.0 million at December 31, 1998, due to the repurchase
of the Corporation's common stock and to a reduction in the value of the
securities available for sale portfolio. The Corporation announced in a press
release on April 27, 1999 its intent to repurchase up to one million shares of
its common stock. As of September 30, 1999, the Corporation has repurchased and
retired 994,148 shares. The securities available for sale portfolio has declined
in value from an unrealized net gain of $6.5 million at December 31, 1998 (net
of tax) to an unrealized net loss at September 30, 1999 of $99,000 (net of tax).
This reduction in value has occurred primarily in the U.S. government agency
securities and the tax free securities due to increases in interest rates during
the period.
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<PAGE> 11
RESULTS OF OPERATIONS
Net income for the three month period ended September 30, 1999 was $7.1
million, or $0.40 diluted income per share, compared to a loss of $9.4 million,
or $0.51 diluted loss per share for the comparable period in 1998. The third
quarter 1998 net loss was due to $18.2 million in merger expenses, primarily
associated with the Corporation's September 1998 merger with HFNC Financial
Corp. Other components of the change in net income between the two quarterly
periods were a $714,000 increase in net interest income, a $280,000 decrease in
the provision for loan losses, and a $2.6 million increase in noninterest
income, offset somewhat by an increase in noninterest expense (excluding the
merger costs) of $542,000, and an increase in income tax expense of $4.8
million.
During the nine month period ended September 30, 1999, net income
increased to $19.8 million, compared to net income of $3.4 million during the
same period in 1998. The increase was also primarily due to the $18.2 million in
merger expenses recognized in the 1998 period. Other components of the increase
between the two nine-month periods were an increase in net interest income of
$2.3 million, and an increase in noninterest income of $4.0 million, offset by
an increase in the provision for loan losses of $683,000, an increase in
noninterest expense (excluding the merger costs) of $3.4 million, and an
increase in income tax expense of $3.9 million. On an annualized basis, year to
date results represent a return on average assets of 1.46% versus 0.25% and a
return on average equity of 11.34% versus 1.78%, for the nine-month periods
ended September 30, 1999 and 1998, respectively.
For the three month period ended September 30, 1999, net interest
income increased $714,000 over the comparable period in 1998 due to a decrease
in total interest expense of $1.8 million, mitigated by a decrease in total
interest income of $1.1 million. As discussed at "Results Of Operations And
Financial Condition--Financial Condition", the Bank sold $147.6 million of
30-year fixed rate mortgage loans in April, 1999, using the proceeds to reduce
borrowed funds and to fund new lending. These sales reduced both interest income
and interest expense. However, increased commercial lending has offset a
significant portion of the loans sold, mitigating much of the reduction in
interest income resulting from the April loan sales and contributing to the
increase in net interest income. Average loan balances during the 1999 quarter
declined slightly to $1.37 billion from $1.38 billion in the prior year quarter.
Average loan yields during the quarter also declined somewhat to 8.31% during
the 1999 quarter from 8.51% in the prior year quarter, largely resulting from a
75 basis point decline in the prime rate of interest during the last quarter of
1998, which affected a significant portion of the Bank's loan rates. Prime rate
increases during the 1999 quarter have begun to narrow this difference. More
than offsetting the reduction in interest income was the Bank's reduction in the
cost of deposits. While average deposits increased 1.7% over the 1998 quarter,
to $1.14 billion for the quarter ended September 30, 1999, the average cost of
deposits declined to 3.80%, from 4.15% in the prior year quarter as a result of
controlling the renewal rates of higher rate certificates of deposit and
reducing the rate paid on many checking accounts from 2.50% to 0.65%. In
addition, average balances of interest bearing liabilities other than deposits,
consisting of FHLB advances and repurchase agreements, declined $39.6 million,
or 12.5%, from the 1998 quarter. This decline was due to the reduction of these
borrowed funds using a portion of the proceeds from the previously mentioned
loan sales. Interest on such borrowed funds declined 15.1% during the 1999
quarter to $5.5 million, from $6.4 million in the 1998 quarter.
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<PAGE> 12
Net interest income for the nine month period ended September 30, 1999
increased $2.3 million, or 4.6%, over the comparable prior year period. Factors
contributing to this increase are similar to the factors discussed above
relative to the quarter ended September 30, 1999, except that the loan sales in
April 1999 impacted the nine month period to a lesser extent due to the length
of time these loans were outstanding.
Management continues to assess interest rate risk based on an earnings
simulation model. The Corporation's balance sheet is liability sensitive,
meaning that in a given period there will be more liabilities than assets
subject to immediate repricing as market rates change. Assuming a 300 basis
point gradual change in interest rates over a twelve-month period, the
Corporation's sensitivity to interest rate risk has declined from approximately
6.5% of net interest income at December 31, 1998 to approximately 1.9% at
September 30, 1999. This decrease in sensitivity was largely due to the
aforementioned sales of 30-year fixed rate mortgage loans. 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. In the future, the Corporation is
considering the limited use of interest rate swaps, caps, or floors to assist in
interest rate risk management.
The provision for loan losses for the quarter ended September 30, 1999
was $375,000, compared to $655,000 for the quarter ended September 30, 1998. The
provision for loan losses for the nine months ended September 30, 1999 was $2.6
million, compared to $1.9 million for the nine months ended September 30, 1998.
The increase in the provision for the nine months ended September 30, 1999 was
partially due to the aforementioned growth in commercial lending during the
early part of 1999, as commercial loans typically require a higher reserve level
than home mortgages. Commercial loans are secured with commercial real estate,
accounts receivable, or inventory, compared to home mortgage loans which are
generally secured by first mortgages on single family residences. Historically,
commercial loans have had a higher charge-off ratio than home mortgage loans.
Both of these factors have resulted in commercial loans being assigned a larger
reserve factor (generally 1.25% to 1.50%) in the Corporation's allowance for
loan losses model when compared to home mortgage loans (generally 0.25%). The
provision for the quarter ended September 30, 1999 declined from the prior year
level due to lower net commercial loan growth during the quarter. Total
nonperforming assets at September 30, 1999 have declined 14.6% from the prior
year level, while charge-offs have decreased during 1999 compared to the first
nine months of 1998 and recoveries of loans previously charged off have
increased in the current year. At September 30, 1999 and December 31, 1998, the
allowance for loan losses as a percentage of gross loans (the "allowance
percentage") was 1.22% and 1.09%, respectively. As noted previously, the current
year increase in the allowance percentage is due to the growing proportion of
commercial loans in the Corporation's loan portfolio.
Net charge-offs during the nine months ended September 30, 1999
decreased to $948,000, compared to net charge-offs of $1.8 million for the same
period in 1998. During the first three months of 1998, a higher level of loans
were charged-off related to loans from the Carolina State Bank (acquired by the
Bank in December 1997) loan portfolio, which had been previously provided for in
the allowance for loan losses.
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<PAGE> 13
As part of the continual grading process used to monitor the credit
quality of the loan portfolio, an analysis is performed monthly that is
independent from any analysis performed 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 Bank's allowance for loan losses.
Such agencies may require the Bank to recognize additions to the allowance based
on their judgments about information available to them at the time of their
examination.
The following table presents changes in the allowance for loan losses
for the nine months ended September 30, 1999, and 1998, respectively.
September 30, September 30,
(Dollars in thousands) 1999 1998
------------------------------------------------------------------------------
Beginning balance $ 15,554 $ 15,263
Provision charged to operations 2,600 1,917
Allowance related to loans sold (369) --
Loan charge-offs (1,485) (2,258)
Less loan recoveries 537 453
---------- -----------
Net loan charge-offs (948) (1,805)
---------- -----------
Ending balance $ 16,837 $ 15,375
========== ===========
At September 30, 1999, the recorded investment in loans that were
considered to be impaired under the FASB Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" and No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures," was $7.3 million (of
which $6.3 million has been placed on nonaccrual status) compared to the
recorded investment in impaired loans of $3.9 million (of which $2.8 million was
on nonaccrual status) at December 31, 1998. The increase since December 1998 was
primarily due to one developer (with total balances of approximately $1.9
million) whose sales have been slower than projected, causing the borrower to
become delinquent in loan payments to the Bank. An increased level of
slow-paying and impaired loans is anticipated with increased levels of
commercial lending due to the higher risk associated with such loans, with this
increased level of risk reflected in the loan loss provision computations. The
related allowance for loan losses on impaired loans was $2.6 million and $1.3
million at September 30, 1999 and December 31, 1998, respectively. The average
recorded investment in impaired loans for the nine months ended September 30,
1999, and 1998 was $6.2 million and $4.7 million, respectively. For the nine
months ended September 30, 1999, and 1998, the Corporation recognized interest
income recorded on impaired loans of $57,000 and $71,000, respectively.
Total problem assets at September 30, 1999 were $12.7 million or 0.92%
of gross loans, compared to $12.1 million or 0.85% at December 31, 1998. While
total problem assets has increased only slightly during the period, other real
estate has declined $1.7 million, offset by a $1.8 million increase in "loans 90
days or more past due and still accruing". The primary components of
-13-
<PAGE> 14
the decline in other real estate since December 31, 1998 were the disposition of
a parcel of undeveloped single family residential property ($767,000) and a
commercial building ($820,000). The former property had been obtained by
foreclosure from a large borrower who had declared bankruptcy several years
earlier. The increase in nonaccrual loans since December 31, 1999 is
attributable to one commercial relationship currently in litigation for
collection. The majority of the accruing loans more than 90 days delinquent is
home mortgage loans that are in the process of collection and one well
collateralized commercial loan currently in foreclosure proceedings. The
components of nonperforming and problem assets are presented in the table below:
September 30, December 31,
(Dollars in thousands) 1999 1998
- --------------------------------------------------------------------------------
Nonaccrual loans $ 6,375 $ 5,758
Restructured loans 389 577
Other real estate 1,857 3,537
----------- -----------
Total non-performing assets 8,621 9,872
Loans 90 days or more
past due and still accruing 4,114 2,270
----------- -----------
Total problem assets $ 12,735 $ 12,142
=========== ===========
Interest income that would have been recorded on nonaccrual loans for
the nine months ended September 30, 1999, and 1998, had they performed in
accordance with their original terms, amounted to approximately $474,000 and
$403,000, respectively. Interest income actually recorded on non-accrual loans
during the nine months ended September 30, 1999 and 1998 amounted to $141,000
and $61,000, respectively.
Noninterest income increased approximately $2.7 million and $4.0
million, respectively, for the three and nine month periods ended September 30,
1999 over the comparable periods in 1998. The increase of the 1999 quarter over
the prior year quarter is due to gains of $1.8 million from the sale of property
(with no similar gains occurred during the 1998 quarter) and to increases in
insurance and other commissions of $481,000, resulting from the expansion of
First Charter Insurance Services. The nine month period ended September 30, 1999
includes a $1.8 million gain from the sale of loans during April 1999, in
addition to the $1.8 million property gains noted during the quarter.
Noninterest income for the nine month period ended September 30, 1998 includes
$2.0 million from the nonrecurring sale of securities by HFNC prior to its
merger with First Charter and $385,000 from the Bank's sale of its merchant card
program. Noninterest income, excluding the above nonrecurring gains, amounted to
$3.6 million and $11.0 million, respectively, during the three and nine months
ended September 30, 1999, compared to $2.7 million and $8.1 million,
respectively, during the comparable 1998 periods. Excluding the above
nonrecurring items, the major component of the increases over the prior year was
income from insurance services. This resulted from the Corporation's purchase of
two insurance agencies during the fourth quarter of 1998 and one additional
agency in the first quarter of 1999.
Noninterest expense during the quarter ended September 30, 1999
amounted to $11.6 million, compared to recurring noninterest expense during the
1998 quarter of $11.1 million (excluding merger costs). The primary increase
over the 1998 quarter was a 6.4% increase in salaries and fringe benefits
resulting from additional human resources, including growth in First
-14-
<PAGE> 15
Charter Insurance Services. Noninterest expense during the nine months ended
September 30, 1999 amounted to $34.2 million, an 11.2% increase compared to
noninterest expense during the 1998 period of $30.8 million (excluding merger
costs). This expense growth was primarily composed of an increase in occupancy
expenses of $1.1 million, an increase in advertising expenses of $829,000, and
an increase in professional expenses of $434,000. The occupancy expense increase
was a result of the leasing of additional office space to accommodate growth,
with attendant upfitting and utility costs. Advertising expenses increased due
to a new brand advertising campaign designed to increase First Charter's name
recognition throughout the greater Charlotte metropolitan area. Professional
expenses increased due to Year 2000 preparation expenses, to costs incurred in
the formation of a real estate investment trust, and to costs related to the
directors' deferred compensation plan.
Total income tax expense for the three month period ended September 30,
1999 amounted to $3.4 million, compared to a net benefit of $1.3 million during
the 1998 quarter, due to a net loss during the 1998 quarter resulting from the
merger expenses. The effective tax rate for the 1999 quarter is approximately
32.5%. Total income tax expense for the nine month period ended September 30,
1999 amounted to $9.4 million, compared to $5.5 million for the same period in
1998. The effective tax rate for the 1999 nine month period is approximately
32.2%.
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 that 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 banking
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
substantially completed all phases of its Action Plan. In completing phase 2,
the Corporation performed a thorough inventory of its Information Technology
("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
-15-
<PAGE> 16
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.
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 and conversions of its existing systems to correct the effects of
the Year 2000 Issue. Accordingly, the vast majority of phases 3 and 4 involved
receiving and testing vendor solutions with the Corporation's operating systems
and equipment. The Corporation divided phase 4 validation, or testing, into its
own three step "Y2K Test Plan". In the first step of the Y2K Test Plan, the
Corporation procured written documentation from its software and hardware
vendors, as well as the providers of facilities using embedded chip technology,
with respect to its Year 2000 compliance plan. Step 1 of the Y2K Test Plan also
included the initial phase 3 remediation. Upgrades and patches were installed to
existing equipment. Step 2 of the Y2K Test Plan included testing of all the
applications in the Corporation's technology environment. For those vendors that
supply functionality as third-party processors, FFIEC proxy testing guidelines
were implemented. The Corporation recognizes the need for data and information
exchange between applications. In recognition of this constant flow of data and
information, the Corporation included a third step in its Y2K Test Plan. Step 3
was an integrated test in which applications with interfaces have been linked in
a test environment to emulate the Corporation's technology environment. Step 3
testing has been completed. Phase 5 implementation includes the business user
acceptance outlined in the FFIEC guidelines, and the Corporation has included
business user acceptance in all steps of the Y2K Test Plan. Phase 5 also
includes the Corporation's Clean Management strategy, which recognizes the need
to protect the integrity and validity of the test results by keeping the
production environment the same as the testing environment. The Corporation's
Clean Management strategy will remain in place throughout 1999 and early 2000.
The September 1998 merger with HFNC Financial Corp. and the Bank's
related March 1999 merger with HFNC's subsidiary, Home Federal Savings and Loan
Association ("Home Federal"), have not significantly impacted the Action Plan or
the Corporation's state of readiness for Year 2000 compliance. The Corporation
has incorporated all surviving Home Federal IT and non-IT systems in all phases
of its Year 2000 Action Plan.
The Corporation also has developed a communication and assessment plan
for its customers. Pursuant to the plan, the Corporation has initiated contact
with many of 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 has also
implemented underwriting procedures to reflect the importance of the Year 2000
Issue in evaluating new credit relationships. 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.
-16-
<PAGE> 17
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 that 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 three and nine month periods ended
September 30, 1999 were $15,000 and $210,000, respectively; all such costs to
date total approximately $335,000.
Risks of Year 2000 Issues
The Year 2000 Issue is widespread throughout the entire global economy,
potentially affecting almost any 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 the management of the Corporation, the 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 developed a contingency plan as
further discussed below.
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), 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
The Corporation has developed two contingency plans: a Remediation
Contingency Plan and a Business Resumption Contingency Plan. The Remediation
Contingency Plan has been used throughout the remediation process as a plan for
selecting alternate software solutions should an existing application fail to
pass the Corporation's Year 2000 criteria. The Corporation has substantially
completed its application testing. However, should the Corporation experience
problems after January 1, 2000 it will use the Remediation Plan to consider
alternatives.
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<PAGE> 18
A Business Resumption Contingency Plan has also been developed to
mitigate the potential effects of a disruption in normal business operations, if
one should occur despite the best efforts of the Corporation. The Plan includes
preparation for the Year 2000 event with system saves, backups, and reports with
detailed customer information. The Plan also includes specific identification of
manual solutions should an automated solution be temporarily unavailable. The
Plan also includes scenarios addressing an outage of telecommunications and
electricity. As a part of the Plan, the Corporation has secured a generator for
the main operations facility. Personnel will be deployed during the morning of
January 1, 2000 to assess the ability of the Corporation to operate normally.
Resources will be assigned to all applications, financial service centers and
ATM's. The results will be compiled in a centralized area. After the
compilation, technical resources will be deployed based on a business impact
analysis and vendors will be notified. The Corporation has asked all employees
to refrain from taking vacation from December 15, 1999 to January 15, 2000. The
Corporation will have staff available the entire weekend of January 1, 2000 to
assist in any problem resolution. The Business Resumption Contingency Plan was
tested on September 9, 1999 (9/9/99), due to the significance of this date in
many programming languages. This testing of the Plan was successful.
Year 2000 Readiness Disclosure
All Year 2000 discussion is designated as Year 2000 Readiness
Disclosures. Year 2000 Readiness Disclosures are covered under the Year 2000
Information and Readiness Disclosure Act passed on October 19, 1998.
ACCOUNTING AND REGULATORY MATTERS
Statement of Financial Accounting Standards No. 133 (SFAS No. 133),
"Accounting for Derivative Instruments and Hedging Activities," establishes
accounting and reporting standards for derivatives and hedging activities. It
requires that all derivatives be included as assets or liabilities in the
balance sheet and that such instruments be carried at fair market value through
adjustments to either other comprehensive income or current earnings or both, as
appropriate. The Corporation is in the process of assessing the impact of this
Standard. The Standard was originally effective for financial statements issued
for all fiscal quarters of fiscal years beginning after June 15, 1999. The
implementation date of SFAS No. 133 has been delayed by Statement of Financial
Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" to fiscal
quarters of fiscal years beginning after June 15, 2000.
Statement of Financial Accounting Standards No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise," establishes accounting and
reporting standards for certain mortgage banking activities. It conforms the
subsequent accounting for securities retained after the securitization of other
types of assets. This Standard was adopted in the first quarter of 1999; its
effect on the Corporation has not been material.
From time to time, the FASB issues exposure drafts for proposed
statements of financial accounting standards. Such exposure drafts are subject
to comment from the public, to revisions by
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<PAGE> 19
the FASB and to final issuance by the FASB as statements of financial accounting
standards. Management considers the effect of the proposed statements on the
consolidated financial statements of the Corporation and monitors the status of
changes to and proposed effective dates of exposure drafts.
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, and
the reliance on third party vendors to become Year 2000 compliant.
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<PAGE> 20
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following table presents the scheduled maturity of market risk
sensitive instruments at September 30, 1999:
<TABLE>
<CAPTION>
(Dollars in thousands)
Maturing in: 1 Year 2 Years 3 Years 4 Years 5 Years Thereafter Total
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Debt securities $ 39,132 $ 24,121 $ 106,500 $ 99,403 $ 2,108 $ 31,247 $ 302,511
Loans 446,163 59,206 73,178 79,761 98,343 610,997 1,367,648
----------------------------------------------------------------------------------------
Total $ 485,295 $ 83,327 $ 179,678 $ 179,164 $ 100,451 $ 642,244 $1,670,159
========================================================================================
LIABILITIES
Savings, NOW, Demand
and IMMA's $ 561,827 $ -- $ -- $ -- $ -- $ -- $ 561,827
CD's 504,557 23,409 40,918 4,193 560 1,142 574,779
Short-term
borrowings 148,673 -- -- -- -- -- 148,673
Long-term
borrowings 277,376 326 40 40 40 209 278,031
----------------------------------------------------------------------------------------
Total $1,492,433 $ 23,735 $ 40,958 $ 4,233 $ 600 $ 1,351 $1,563,310
========================================================================================
</TABLE>
The following table presents the average interest rate and estimated
fair value of market risk sensitive instruments at September 30, 1999:
Carrying Average Estimated
(Dollars in thousands) Value Interest Rate Fair Value
- -------------------------------------------------------------------------------
ASSETS
Debt Securities $ 302,511 6.57% $ 302,511
Loans 1,367,648 8.16 1,355,154
----------- -----------
Total $ 1,670,159 7.87 $ 1,657,665
=========== ===========
LIABILITIES
Savings, NOW, Demand
and IMMA's $ 561,827 2.39 $ 561,423
CD's 574,779 5.33 572,131
Short-term borrowings 148,673 5.34 148,681
Long-term borrowings 278,031 5.17 264,127
----------- -----------
Total $ 1,563,310 4.25 $ 1,546,362
=========== ===========
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<PAGE> 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1995, a lawsuit was initiated against Home Federal (a former
subsidiary of the Corporation that was merged into the Bank in March 1999) 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 Fourth Circuit Court of
Appeals, on June 8, 1999 affirmed the grant of summary judgment and dismissal of
the matter.
In December 1996, Home Federal filed a suit against the borrower and
his company and against the borrower's wife, daughters, 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. The Corporation, as
successor in interest to Home Federal, and its officers vigorously deny all of
her allegations. The counterclaim seeks actual and punitive damages together
with interest and attorneys' fees. 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. The Corporation believes it has strong defenses to
the defendant's counterclaim, but counsel for the Corporation cannot, at this
time, give an opinion as to the likely outcome of this matter.
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
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<PAGE> 22
misrepresentation, breach of fiduciary duty, constructive fraud, interference
with business expectancy, wrongful bank account set-off, and unfair and
deceptive acts and practices. All defendants filed motions for summary judgments
in the action pending in the bankruptcy court, which were granted. No appeal was
taken and that matter is now concluded. All defendants also filed motions for
summary judgment in the state court action which were also granted, and that
lawsuit was 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. Thereafter, the United States Bankruptcy Court
adopted the ruling of the state court and also dismissed the lawsuit. The
plaintiff is attempting to appeal that dismissal. The Corporation, as successor
in interest to 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
sought 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 continues 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.
The Corporation and the Bank are defendants in certain other claims and
legal actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these other matters is not expected to have a material adverse effect on the
consolidated operations, liquidity or financial position of the Corporation or
the Bank.
Item 5. Other Information
On November 7, 1999, the Corporation and Carolina First Bancshares,
Inc. ("Carolina First") entered into an Agreement and Plan of Merger ("Merger
Agreement"), pursuant to which Carolina First will be merged (the "Merger") into
the Corporation. The Board of Directors of the Corporation and the Board of
Directors of Carolina First approved the Merger Agreement and the transactions
related thereto at separate meetings held on November 7, 1999. In accordance
with the terms of the Merger Agreement, (i) each share of the $2.50 par value
common stock of Carolina First (excluding shares held by Carolina First or the
Corporation or their respective companies, in each case other than in a
fiduciary capacity or as a result of debts previously contracted) will be
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<PAGE> 23
converted into 2.267 shares (the "Exchange Ratio") of the no par value common
stock of the Corporation. The Merger will be accounted for as a
pooling-of-interests. For more information regarding the Merger Agreement and
the Merger, see the Corporation's Press Release and supplemental Analysts
Materials filed on Form 8-K dated November 8, 1999.
On September 1, 1999 Messrs. Dellinger, Godfrey, Hamrick, Lowrance,
Propst, Rose, and Vickery resigned from the Board of Directors of First Charter
National Bank and Messrs. Hillman and McCaskill resigned from the Board of
Directors of the Corporation; bringing the sum of those Boards to 10 members and
14 members, respectively.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
(per Exhibit Table
in item 601 of
Regulation S-K) Description of Exhibits
3.1 Amended and Restated Articles of
Incorporation of the Corporation,
incorporated herein by reference to
Exhibit 3.1 of the Corporation's
Annual Report on Form 10-K for the
fiscal year ended December 31, 1998
(Commission File No. 0-15829).
3.2 By-laws of the Corporation, as
amended, incorporated herein by
reference to Exhibit 3.2 of the
Corporation's Annual Report on
Form 10-K for the fiscal year ended
December 31, 1995 (Commission
File No. 0-15829).
27 Financial Data Schedules
(b) Reports on Form 8-K
(i) On July 9, 1999, the Corporation filed a Current
Report on Form 8-K, reporting pursuant to Item 5
thereof its earnings for the fiscal quarter ended
June 30, 1999.
-23-
<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 15, 1999 By: /s/ Robert O. Bratton
--------------------------------
Robert O. Bratton
Executive Vice President &
Chief Operating Officer and
Chief Financial Officer
-24-
<PAGE> 25
EXHIBIT INDEX
Exhibit No.
(per Exhibit Table
in item 601 of Sequential
Regulation S-K) Description of Exhibits Page Number
27 Financial Data Schedule
-25-
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL STATEMENTS OF FIRST CHARTER CORPORATION FOR THE
QUARTER ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 36,867
<INT-BEARING-DEPOSITS> 4,978
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 342,037
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 1,384,714
<ALLOWANCE> 16,837
<TOTAL-ASSETS> 1,819,879
<DEPOSITS> 1,136,606
<SHORT-TERM> 148,673
<LIABILITIES-OTHER> 28,119
<LONG-TERM> 278,031
0
0
<COMMON> 99,790
<OTHER-SE> 128,660
<TOTAL-LIABILITIES-AND-EQUITY> 1,819,879
<INTEREST-LOAN> 28,594
<INTEREST-INVEST> 4,913
<INTEREST-OTHER> 44
<INTEREST-TOTAL> 33,551
<INTEREST-DEPOSIT> 10,897
<INTEREST-EXPENSE> 5,451
<INTEREST-INCOME-NET> 17,203
<LOAN-LOSSES> 375
<SECURITIES-GAINS> 225
<EXPENSE-OTHER> 11,649
<INCOME-PRETAX> 10,552
<INCOME-PRE-EXTRAORDINARY> 10,552
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,118
<EPS-BASIC> 0.40
<EPS-DILUTED> 0.40
<YIELD-ACTUAL> 4.16
<LOANS-NON> 6,375
<LOANS-PAST> 4,114
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,554
<CHARGE-OFFS> 1,485
<RECOVERIES> 537
<ALLOWANCE-CLOSE> 16,837
<ALLOWANCE-DOMESTIC> 16,837
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
