<PAGE> 1
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, 2000
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.
31,592,015 shares of Common Stock, no par value,
outstanding as of November 10, 2000.
<PAGE> 2
FIRST CHARTER CORPORATION
SEPTEMBER 30, 2000 FORM 10-Q
================================================================================
INDEX
Page
----
PART I Item 1. Financial Statements:
FINANCIAL Consolidated Balance Sheets at September 30, 2000 2
INFORMATION and December 31, 1999
Consolidated Statements of Income for the Three and 3
Nine Months Ended September 30, 2000 and 1999
Consolidated Statements of Shareholders' 4
Equity for the Nine Months Ended
September 30, 2000 and 1999
Consolidated Statements of Cash Flows for the 5
Nine Months Ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 7
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 16
Market Risk
--------------------------------------------------------------------------------
PART II
OTHER Item 1. Legal Proceedings 16
INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults Upon Senior Securities 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Index to Exhibits 19
<PAGE> 3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30 December 31
2000 1999
------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data) (UNAUDITED)
------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and due from banks .................................................. $ 72,311 $ 94,568
Federal funds sold ....................................................... 1,020 665
Interest bearing bank deposits ........................................... 6,026 2,435
----------------------------
Cash and cash equivalents ........................................... 79,357 97,668
Securities held to maturity (market value of $34,686 at December 31, 1999) -- 36,082
Securities available for sale (cost of $480,094 at September 30, 2000
and $500,452 at December 31, 1999) .................................. 474,077 487,435
Loans .................................................................... 2,111,428 1,968,077
Less: Unearned income ............................................... (284) (204)
Allowance for loan losses ..................................... (27,861) (25,002)
----------------------------
Loans, net .......................................................... 2,083,283 1,942,871
----------------------------
Premises and equipment, net .............................................. 72,320 56,480
Other assets ............................................................. 78,918 59,192
----------------------------
Total assets .................................................... $2,787,955 $2,679,728
============================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits, domestic:
Noninterest bearing demand ...................................... $ 279,765 $ 228,030
Interest bearing ................................................ 1,642,675 1,588,461
----------------------------
Total deposits ......................................... 1,922,440 1,816,491
Other borrowings ......................................................... 519,762 542,021
Other liabilities ........................................................ 46,703 30,948
----------------------------
Total liabilities ............................................... 2,488,905 2,389,460
----------------------------
Shareholders' equity:
Preferred stock - no par value; authorized 100,000 shares; issued and
outstanding - shares .............................................. -- --
Common stock - no par value; authorized 100,000,000 and 50,000,000 shares;
issued and outstanding 31,520,637 and 31,100,310 shares ........... 150,684 146,438
Retained earnings ....................................................... 152,039 151,215
Accumulated other comprehensive loss:
Unrealized loss on securities available for sale, net ............... (3,673) (7,385)
----------------------------
Total shareholders' equity ...................................... 299,050 290,268
----------------------------
Total liabilities and shareholders' equity ...................... $2,787,955 $2,679,728
============================
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 4
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
---------------------------- ----------------------------
(Dollars in thousands, except share and per share data) 2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans ............................................. $ 47,026 $ 40,195 $ 135,596 $ 120,395
Federal funds sold ................................ 17 35 235 430
Interest bearing bank deposits .................... 49 44 125 269
Securities ........................................ 7,647 7,978 23,764 22,954
---------------------------- ----------------------------
Total interest income ....................... 54,739 48,252 159,720 144,048
---------------------------- ----------------------------
Interest expense:
Deposits .......................................... 19,463 16,178 53,727 49,510
Federal funds purchased and securities
sold under agreements to repurchase ........... 1,707 671 5,069 3,028
Federal Home Loan Bank and other borrowings ....... 6,897 5,151 20,068 14,535
---------------------------- ----------------------------
Total interest expense .................... 28,067 22,000 78,864 67,073
---------------------------- ----------------------------
Net interest income ........... 26,672 26,252 80,856 76,975
Provision for loan losses ................................... 2,200 815 5,540 3,770
---------------------------- ----------------------------
Net interest income after provision for loan losses 24,472 25,437 75,316 73,205
Noninterest income:
Trust income ...................................... 832 654 2,210 1,875
Service charges on deposit accounts ............... 2,710 2,209 8,352 6,340
(Loss) gain on sale of securities ................. (3,425) 223 (3,013) 881
(Loss) gain on sale of loans ...................... -- -- (99) 1,757
Gain on sale of property .......................... 527 1,752 527 1,752
Insurance and other fee income .................... 2,412 2,055 7,220 6,699
Other ............................................. 4,630 1,164 7,577 3,300
---------------------------- ----------------------------
Total noninterest income .................. 7,686 8,057 22,774 22,604
---------------------------- ----------------------------
Noninterest expense:
Salaries and employee benefits .................... 9,521 10,142 30,582 28,715
Occupancy and equipment ........................... 2,898 2,950 9,151 8,656
Restructuring and merger related .................. -- -- 16,250 --
Other ............................................. 5,338 5,973 17,275 18,358
---------------------------- ----------------------------
Total noninterest expense ................. 17,757 19,065 73,258 55,729
---------------------------- ----------------------------
Income before income taxes .... 14,401 14,429 24,832 40,080
Income taxes ................................................ 4,464 4,678 9,089 12,653
---------------------------- ----------------------------
Net income .................................................. $ 9,937 $ 9,751 $ 15,743 $ 27,427
============================ ============================
Net income per share:
Basic ..................................... $ 0.32 $ 0.31 $ 0.50 $ 0.87
Diluted ................................... $ 0.31 $ 0.31 $ 0.50 $ 0.86
Weighted average shares:
Basic ..................................... 31,503,251 31,159,716 31,384,049 31,649,358
Diluted ................................... 31,646,483 31,442,540 31,544,011 31,902,447
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 5
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK OTHER
-------------------------- RETAINED COMPREHENSIVE
(Dollars in thousands) SHARES AMOUNT EARNINGS INCOME (LOSS) TOTAL
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 ................ 32,007,899 $168,904 $130,828 $ 6,535 $306,267
Comprehensive income:
Net income through September 30, 1999 . -- -- 27,427 -- 27,427
Unrealized loss on securities available
for sale, net ..................... -- -- -- (8,529) (8,529)
--------
Total comprehensive income 18,898
Cash dividends ............................ -- -- (10,928) -- (10,928)
Stock options exercised and Dividend
Reinvestment Plan stock issued .... 156,517 800 -- -- 800
Shares issued in connection with
business acquisition ................ 68,551 1,273 -- -- 1,273
Purchase and retirement of common stock ... (1,174,601) (24,739) -- -- (24,739)
------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1999 ............... 31,058,366 $146,238 $147,327 $(1,994) $291,571
========================================================================
BALANCE, DECEMBER 31, 1999 ................ 31,100,310 $146,438 $151,215 $(7,385) $290,268
Comprehensive income:
Net income through September 30, 2000 . -- -- 15,743 -- 15,743
Unrealized gain on securities available
for sale, net ..................... -- -- -- 3,712 3,712
--------
Total comprehensive income 19,455
Cash dividends ............................ -- -- (14,920) -- (14,920)
Stock options exercised and Dividend
Reinvestment Plan stock issued .... 300,794 2,250 -- -- 2,250
Shares issued in connection with
business acquisition ................ 122,263 2,025 -- -- 2,025
Purchase and retirement of common stock ... (2,730) (29) -- -- (29)
------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 2000 ............... 31,520,637 $150,684 $152,038 $(3,673) $299,049
========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 6
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................................... $ 15,743 $ 27,427
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses .............................................. 5,540 3,770
Depreciation ........................................................... 4,434 4,879
Premium amortization and discount accretion, net ....................... 37 (549)
Net loss (gain) on securities available for sale transactions .......... 3,013 (881)
Net loss (gain) on sale of other real estate ........................... 93 (585)
Net loss (gain) on sale of mortgage loans .............................. 99 (1,757)
Net loss (gain) on sale of premises and equipment ...................... 13 (1,725)
Origination of mortgage loans held for sale ............................ (44,351) (20,487)
Proceeds from sale of mortgage loans held for sale ..................... 86,175 172,699
(Increase) decrease in other assets .................................... (18,312) 3,865
Increase in other liabilities .......................................... 15,757 28,907
-------------------------
Net cash provided by operating activities ...................... 68,241 215,563
-------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale ................... 124,261 28,432
Proceeds from maturities of securities available for sale .............. 44,847 100,365
Purchase of securities available for sale .............................. (116,475) (165,171)
Proceeds from issuer calls and maturities of securities held to maturity 758 9,794
Purchase of securities held to maturity ................................ -- (13,986)
Net increase in loans .................................................. (191,087) (154,922)
Proceeds from sales of other real estate ............................... 1,520 3,714
Net purchases of premises and equipment ................................ (21,366) (3,335)
-------------------------
Net cash used in investing activities .......................... (157,542) (195,109)
-------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand, money market and savings accounts ... (47,227) 53,837
Net increase (decrease) in certificates of deposit ..................... 153,175 (31,551)
Net decrease in securities sold under repurchase
agreements and other borrowings .................................. (22,259) (39,503)
Purchase and retirement of common stock ................................ (29) (24,739)
Proceeds from issuance of common stock ................................. 2,250 800
Dividends paid ......................................................... (14,920) (10,954)
-------------------------
Net cash provided by (used in) financing activities ............ 70,990 (52,110)
-------------------------
Net decrease in cash and cash equivalents ...................... (18,311) (31,656)
Cash and cash equivalents at beginning of period ............... 97,668 103,558
=========================
Cash and cash equivalents at end of period ..................... $ 79,357 $ 71,902
=========================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ............................................................. $ 76,705 $ 65,549
=========================
Income taxes ......................................................... $ 888 $ 7,517
=========================
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfer of loans and premises and equipment
to other real estate owned ........................................... $ 3,386 $ 2,751
=========================
Unrealized gain (loss) on securities available for sale (net of tax effect of
$1,429 and $2,249 for the nine months ended
September 30, 2000 and 1999, respectively) ........................... $ 3,712 $ (8,529)
=========================
Issuance of common stock for business acquisitions ........................... $ 2,025 $ 1,273
=========================
Transfer of loans in portfolio to held for sale .............................. $ 45,252 $ 147,555
=========================
Transfer of securities held to maturity to available for sale ................ $ 35,324 $ --
=========================
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 7
FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BUSINESS / CONSOLIDATION
The accompanying unaudited 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 Avery, Buncombe, Cabarrus, Catawba, Cleveland, Iredell,
Jackson, Lincoln, McDowell, Mecklenburg, Rowan, Rutherford,
Transylvania and Union 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. In
consolidation, all significant intercompany accounts and transactions
have been eliminated. Certain amounts reported in the prior period have
been reclassified to conform with the current period presentation. Such
reclassifications have no effect on net income or shareholders' equity
as previously reported.
2. FINANCIAL STATEMENT PRESENTATION
The preparation of 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
interim periods. All such adjustments were of a normal recurring
nature.
3. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding for the
year. Diluted net income per share reflects the potential dilution that
could occur if all of the currently outstanding stock options on the
Corporation's common stock are fully exercised. The numerators of the
basic net income per share computations are the same as the numerators
of the diluted net income per share computations for all periods
presented. A reconciliation of the denominator of the basic net income
per share computations to the denominator of the diluted net income per
share computations is as follows:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
-------------------------- --------------------------
2000 1999 2000 1999
----------------------------------------------------------
<S> <C> <C> <C> <C>
Basic net income per share denominator:
Weighted average number of
common shares outstanding ......... 31,503,251 31,159,716 31,384,049 31,649,358
Dilutive effect arising from
assumed exercise of stock options 143,232 282,824 159,962 256,089
Diluted net income
----------------------------------------------------------
per share denominator ............... 31,646,483 31,442,540 31,544,011 31,905,447
==========================================================
</TABLE>
The Corporation paid cash dividends of $0.18 and $0.17 per share during
the quarters ended September 30, 2000 and 1999, respectively.
4. MERGER-RELATED ACTIVITY
On April 4, 2000, the Corporation and Carolina First BancShares, Inc.
("Carolina First") announced the consummation of their merger (the
"Merger") in which Carolina First was merged into the Corporation. The
shareholders of each company approved the Merger at separate meetings
held on March 21, 2000. 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
6
<PAGE> 8
in a fiduciary capacity or as a result of debts previously contracted)
was converted into 2.267 shares of the no par value common stock of the
Corporation on April 4, 2000. The Merger was accounted for as a
pooling-of-interests and accordingly, all financial results for prior
periods have been restated. In connection with this transaction, the
Corporation recorded pre-tax restructuring and merger-related expenses
of approximately $15.7 million ($11.9 million after-tax).
On September 1, 2000, Business Insurers of Guilford County ("Business
Insurers") was merged into First Charter Insurer Services. This merger
was accounted for as a pooling-of-interests and accordingly, all
financial results for prior periods have been restated. In connection
with the Business Insurers merger, the Corporation recorded pre-tax
restructuring and merger-related expenses of approximately $575,000
($425,000 after-tax).
The following table indicates the primary components of the Carolina
First and Business Insurers merger and restructuring charges, including
the amounts incurred through September 30, 2000, and the amounts
remaining as accrued expenses in other liabilities at September 30,
2000.
Total
Merger and Incurred Remaining
Restructuring through accrual at
(Dollars in thousands) Charges September 30, 2000 September 30, 2000
--------------------------------------------------------------------------------
Professional costs ..... $ 3,907 $ 3,670 $ 237
Employee related costs.. 5,336 1,732 3,604
Equipment writedowns ... 4,125 4,125 --
Lease buyouts .......... 909 146 763
Conversion costs ....... 1,114 1,114 --
Printing and filing fees 187 187 --
Other .................. 672 672 --
----------------------------------------------
Total ............ $16,250 $11,646 $ 4,604
==============================================
The employee-related costs include accruals for payments to be made in
connection with the involuntary termination of approximately 130
employees who had been notified that their positions were redundant
within the combined organizations and therefore no longer needed. These
personnel were terminated from various areas of the combined
Corporation. Management expects most of these payments will be made
during the fourth quarter of 2000 and early 2001. Other restructuring
activities included closing and consolidating 14 branch facilities that
were redundant, consolidating back-office functions and converting all
of Carolina First's systems to First Charter systems. The Corporation
does not currently anticipate any material restructuring and
merger-related expenses, including any material changes to the
restructuring accrual, in the fourth quarter of 2000 related to the
Merger.
5. IMPAIRED LOANS
The recorded investment in impaired loans was $18.4 million (of which $
18.4 million was on nonaccrual status) and $10.3 million (of which $9.8
million was on nonaccrual status) at September 30, 2000 and December
31, 1999, respectively. The related allowance for loan losses on
impaired loans was $5.4 million and $3.6 million at September 30, 2000
and December 31, 1999, respectively. The average recorded investment in
impaired loans for the nine months ended September 30, 2000 and 1999
was $13.3 million and $7.3 million, respectively.
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 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".
7
<PAGE> 9
LIQUIDITY
The Bank derives the major source of its liquidity from its core deposit
base. Liquidity is further provided by loan repayments, brokered deposits,
maturities in the investment portfolio, the ability to secure public deposits,
the availability of federal fund lines and repurchase agreements at
correspondent banks and the ability to borrow from the Federal Reserve Bank
("FRB") discount window. In addition to these sources, the Bank is a member of
the Federal Home Loan Bank ("FHLB") System, which provides access to FHLB
lending sources. At September 30, 2000, the Bank had a line of credit with the
FHLB of $569.9 million, with $151.0 million available. Another source of
liquidity is the securities in the available for sale portfolio, which may be
sold in response to liquidity needs. The Bank's loan-to-deposit ratio at
September 30, 2000 was 1.10% compared to 1.08% at December 31, 1999. 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 second quarter of
2000, and the resulting impact on the Corporation's interest rate risk, the
Corporation classified $45.3 million in lower-yielding mortgage loans as held
for sale during the second quarter of 2000. The Bank entered into agreements for
the sale of these loans, with the sales closing in May of 2000. The loans were
sold with servicing rights retained. The Corporation recognized a loss of
approximately $99,000 on the sales transaction during the second quarter of
2000.
CAPITAL RESOURCES
At September 30, 2000, total shareholders' equity was $299.1 million,
representing a book value of $9.49 per share, compared to $290.3 million, or a
book value of $9.33 per share at December 31, 1999; see further discussion at
"RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- FINANCIAL CONDITION".
At September 30, 2000, the Corporation and the Bank were in compliance with
all existing capital requirements and the most recent notifications from the
Corporation's and the Bank's various regulators categorized the Corporation and
the Bank as well capitalized under the regulatory framework for prompt
corrective action. There are no events or conditions since those notifications
that management believes have changed either of the entities' categories. The
Corporation's capital requirements are summarized in the table below:
<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> <C> <C> <C>
Actual.................... $292,128 10.58% $292,128 13.78% $318,650 15.03%
Required.................. 110,399 4.00 84,818 4.00 169,637 8.00
Excess.................... 181,729 6.58 207,310 9.78 149,013 7.03
</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 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, 2000 amounted to $2.79 billion, compared to
$2.68 billion at December 31, 1999. Gross loans at September 30, 2000 amounted
to $2.11 billion, up from $1.97 billion at December 31, 1999, with most of the
increase due to commercial loan growth.
Securities available for sale totaled $474.1 million at September 30, 2000,
representing a decrease of $13.4 million, or 2.7%, from December 31, 1999. The
carrying value of securities available for sale was approximately $6.0 million
below their amortized cost at September 30, 2000, which represents gross
unrealized gains of $2.0 million and gross unrealized losses of $8.0 million. In
conjunction with the Merger, the Corporation transferred $35.3 million of
Carolina First's securities
8
<PAGE> 10
classified as held to maturity to available for sale due to the significance of
the impact on the Corporation's interest rate forecast as compared to corporate
policy.
Total deposits increased to $1.92 billion at September 30, 2000, compared
to $1.82 billion at December 31, 1999. Other borrowings decreased $22.3 million,
or 4.1%, to $519.8 million at September 30, 2000 from $542.0 million at December
31, 1999. Shareholders' equity increased to $299.1 million from $290.3 million
at December 31, 1999. The securities available for sale portfolio's unrealized
loss has decreased from an unrealized net loss of $7.4 million at December 31,
1999 (net of tax) to an unrealized net loss at September 30, 2000 of $3.7
million (net of tax).
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
(Dollars in thousands, ------------------------------- -------------------------------
except share and per share data) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL HIGHLIGHTS
Earnings before other non-core
items (Core operating earnings) ........... $ 9,711 $ 8,522 $ 28,111 $ 25,056
Other non-core items:
Provision for loan losses ................. (875) -- (875) --
Noninterest income
Gain (loss) on sale of loans ............ -- -- (99) 1,757
Fixed income portfolio restructuring loss (2,854) -- (2,854) --
Equity investment stock write down ...... (571) -- (1,370) --
Gain on sale of property ................ 527 1,752 527 1,752
Equity investment income ................ 4,106 138 4,552 138
Merger and restructuring charges .......... -- -- (16,250) --
------------------------------------------------------------------------------------------------------------------------
Total other items ......................... $ 333 $ 1,890 $ (16,369) $ 3,647
------------------------------------------------------------------------------------------------------------------------
Other non-core items, net of tax .......... $ 228 $ 1,229 $ (12,367) $ 2,371
------------------------------------------------------------------------------------------------------------------------
Net income .................................. $ 9,939 $ 9,751 $ 15,744 $ 27,427
------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA
Basic
Core operating earnings ................... $ 0.31 $ 0.27 $ 0.90 $ 0.79
Net income ................................ 0.32 0.31 0.50 0.87
Diluted earnings
Core operating earnings ................... 0.31 0.27 0.89 0.79
Net income ................................ 0.31 0.31 0.50 0.86
Cash dividends .............................. 0.18 0.17 0.52 0.51
Book value .................................. 9.49 9.39 9.49 9.39
Period-end price ............................ 14.44 17.50 14.44 17.50
Average shares
Basic ..................................... 31,503,251 31,159,716 31,384,049 31,649,358
Diluted ................................... 31,646,483 31,442,540 31,544,011 31,902,447
Actual shares ............................... 31,520,637 31,058,366 31,520,637 31,058,366
------------------------------------------------------------------------------------------------------------------------
PERFORMANCE HIGHLIGHTS
Before other non-core items
Return on average assets (1) .............. 1.39% 1.32% 1.37% 1.30%
Return on average equity (1) .............. 13.00 11.96 13.58 11.33
Efficiency ratio (2) ...................... 52.66 58.28 55.07 57.84
After other non-core items
Return on average assets (1) .............. 1.43 1.51 0.77 1.43
Return on average equity (1) .............. 13.30 13.68 7.61 12.40
------------------------------------------------------------------------------------------------------------------------
PERIOD-END BALANCE SHEET DATA
Securities held to maturity ................. $ -- $ 37,462 $ -- $ 37,462
Securities available for sale ............... 474,077 506,669 474,077 506,669
Loans, net .................................. 2,083,283 1,874,616 2,083,283 1,874,616
Earning assets .............................. 2,563,841 2,424,151 2,563,841 2,424,151
Total assets ................................ 2,787,955 2,593,136 2,787,955 2,593,136
Noninterest-bearing deposits ................ 279,765 228,030 279,765 228,030
Interest-bearing deposits ................... 1,642,675 1,588,461 1,642,675 1,588,461
Other borrowings ............................ 519,762 542,021 519,762 542,021
Shareholders' equity ........................ 299,050 290,268 299,050 290,268
------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Annualized
(2) Core operating noninterest expense less foreclosed property expense divided
by the sum of taxable equivalent net interest income plus core operating
noninterest income less gain on sales of securities.
9
<PAGE> 11
RESULTS OF OPERATIONS
Summary
Third quarter 2000 net income amounted to $9.9 million, or $0.31 diluted
net income per share. Third quarter 2000 net income includes the following
non-core earnings items: (i) $2.8 million after-tax ($4.1 million pre-tax) in
equity investment income from investments in venture capital funds due to
unrealized gains in underlying equity investments during the period; (ii) $0.4
million after-tax ($0.5 million pre-tax) gain on the sale of property related to
the sale of four branch facilities which were sold as a result of the Carolina
First merger; (iii) $1.9 million after-tax ($2.9 million pre-tax) loss
associated with the restructuring of the available-for-sale securities
portfolio; (iv) $0.4 million after-tax ($0.6 million pre-tax) loss associated
with the writedown of certain equity securities due to other-than-temporary
impairment in value; and (v) $0.6 million ($0.9 million pre-tax) incremental
provision for loan losses to reflect management's current assessment of probable
losses in the loan portfolio.
Third quarter 1999 net income amounted to $9.8 million, or $0.31 diluted
net income per share. Third quarter 1999 net income includes the following
non-core earnings items: (i) $1.2 million after-tax ($1.8 million pre-tax)
non-core earnings gain on the sale of property and (ii) $0.1 million after-tax
earnings ($0.1 million pre-tax) from equity method income on investments in
venture capital funds due to unrealized gains in underlying equity investments
during the period.
Nine months ended September 30, 2000 net income amounted to $15.7 million,
or $0.50 diluted net income per share. Nine months ended September 30, 2000 net
income includes the following non-core earnings items: (i) $12.0 million
after-tax ($16.3 million pre-tax) merger and restructuring charge primarily
associated with the merger of Carolina First; (ii) $3.1 million after-tax
earnings ($4.6 million pre-tax) from equity method income on investments in
venture capital funds due to unrealized gains in underlying equity investments
during the period; (iii) $0.4 million after-tax ($0.5 million pre-tax) gain on
sale of property related to the sale of four branch facilities related to the
Carolina First merger; (iv) a $1.9 million after-tax ($2.9 million after-tax)
loss associated with the restructuring of the available-for-sale securities
portfolio; (v) $1.0 million after-tax ($1.4 million pre-tax) loss associated
with the writedown of certain equity securities due to other-than-temporary
impairment in value; (vi) $0.1 million after-tax ($0.1 million pre-tax) loss
associated with the sale of mortgage loans; and (vii) $0.6 million after-tax
($0.9 million pre-tax) incremental provision for loan losses to reflect
management's current assessment of probable losses in the loan portfolio.
Nine months ended September 30, 1999 net income amounted to $27.4 million
or $0.86 diluted net income per share. Nine months ended September 30, 1999 net
income includes the following non-core earnings items: (i) $1.1 million
after-tax ($1.8 million pre-tax) gain associated with the sale of mortgage
loans; (ii) $0.1 million after-tax earnings ($0.1 million pre-tax) from equity
method income on investments in venture capital funds due to unrealized gains in
underlying equity investments during the period; and (iii) $1.1 million
after-tax ($1.8 million pre-tax) gain associated with the sale of property.
Core operating earnings for the third quarter of 2000 was $9.7 million, or
$0.31 per diluted share. This compared to third quarter 1999 core operating
earnings of $8.5 million, or $0.27 per diluted share. The increase is primarily
due to a $0.4 million increase in net interest income, a $0.3 million increase
in nonintererst income and a $1.3 million decrease in noninterest expense offset
by a $0.5 million increase in the provision for loan losses.
Core operating earnings for the nine months ended September 30, 2000
amounted to $28.1 million, or $0.89 per diluted share. This is compared to core
operating earnings for the nine months ended September 30, 1999 of $25.1
million, or $0.79 per diluted share. The increase is primarily due to a $3.9
million increase in net interest income, a $3.1 million increase in noninterest
income offset by a $0.9 million increase in the provision for loan losses and a
$1.7 million increase in noninterest expense.
Net Interest Income
Net interest income on a taxable-equivalent basis increased approximately 2
percent to $27.2 million in the third quarter of 2000 and amounted to $82.3
million in the first nine months of 2000 compared to $26.7 million and $78.3
million for the same respective 1999 periods. These increases are primarily
attributable to strong loan growth, particularly in the commercial loan
portfolio. Net interest income on a nontaxable-equivalent basis was $26.7
million and $80.9 million for the three months and nine months ended September
30, 2000 compared to $26.3 million and $77.0 million for the same respective
1999 periods.
Average earning assets increased approximately $169.3 million to $2.58
billion in the third quarter of 2000 and $139.5 million to $2.56 billion in the
first nine months of 2000, compared to the same 1999 periods. These increases
are primarily attributable to a 12.4 percent and a 9.3 percent increase in
average loans for the three months and nine months ended September 30, 2000,
partially offset by a 11.4 percent and a 4.8 percent decrease in average
securities for the three months and nine months ended September 30, 2000.
10
<PAGE> 12
The net interest yield decreased 21 basis points to 4.19 percent for the
three months ended September 30, 2000 and decreased 3 basis points to 4.29
percent for the nine months ended September 30, 2000, compared to 4.40 percent
and 4.32 percent in the comparable periods of 1999, primarily due to higher
levels of borrowings and competitive forces related to loan and deposit pricing.
Management believes that further compression of the net interest yield will
continue at least into the fourth quarter of 2000.
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. Assuming a 300 basis point pro-rata change in
interest rates over a twelve-month period, the Corporation's sensitivity to
interest rate risk was approximately 7.12% of net interest income at September
30, 2000 and is within Management's acceptable range. 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 following tables present an analysis of the Corporation's
taxable-equivalent net interest income and average balance sheet levels for the
three months and nine months ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
--------------------------------------------------------------------------
2000 1999
------------------------------------- -------------------------------------
INTEREST AVERAGE Interest Average
AVERAGE INCOME/ YIELD/RATE Average Income/ Yield/Rate
(Dollars in thousands) BALANCE EXPENSE PAID Balance Expense Paid
---------------------------------------------- -------------- ----------- -------- ------------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) (2)................................. $ 2,099,692 $ 47,113 8.93% $1,867,338 $ 40,253 8.55%
Securities ................................... 475,630 8,036 6.72 537,011 8,375 6.19
Federal funds sold............................ 1,083 17 6.24 1,741 35 7.98
Interest bearing bank deposits................ 1,969 49 9.90 2,998 44 5.82
-------------- ----------- ------------- ----------
Total (3)..................................... $ 2,578,374 $ 55,215 8.52% $2,409,088 $ 48,707 8.02%
============== =========== ============= ==========
Interest bearing liabilities:
Demand deposits............................... 235,401 308 0.52% 258,840 935 1.43%
Money market accounts......................... 227,182 2,641 4.62 235,315 2,226 3.75
Savings deposits.............................. 138,813 834 2.39 182,347 1,417 3.08
Other time deposits........................... 1,027,832 15,678 6.07 900,306 11,600 5.11
Other borrowings.............................. 563,377 8,604 6.08 437,591 5,822 5.28
-------------- ----------- ------------- ----------
Total......................................... $ 2,192,605 $ 28,065 5.09% $2,014,399 $ 22,000 4.33%
============== =========== ============= ==========
Net interest income and spread................ $ 27,150 3.43% $ 26,707 3.69%
=========== ==========
Net yield on interest earning assets (4)...... 4.19% 4.40%
</TABLE>
(1) The preceding analysis takes into consideration the principal amount of
nonaccruing loans and only income actually collected.
(2) Average loan balances are shown net of unearned income.
(3) Interest income includes taxable-equivalent adjustments of $476 and $455 for
the three months ended September 30, 2000 and 1999, respectively.
(4) Represents net interest income as a percentage of total average interest
earning assets.
11
<PAGE> 13
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------------------------------
2000 1999
------------------------------------ ------------------------------------
INTEREST AVERAGE Interest Average
AVERAGE INCOME/ YIELD/RATE Average Income/ Yield/Rate
(Dollars in thousands) BALANCE EXPENSE PAID Balance Expense Paid
---------------------------------------------- ------------- ------------- -------- ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Interest earning assets:
Loans (1) (2)................................. $2,055,665 $ 135,868 8.83% $1,880,492 $ 120,530 8.57%
Securities ................................... 496,767 24,899 6.70 522,015 24,125 6.18
Federal funds sold............................ 5,079 235 6.18 11,858 430 4.85
Interest bearing bank deposits................ 2,523 125 6.62 6,141 269 5.86
------------- ------------- ------------- -----------
Total (3)..................................... $2,560,034 $ 161,127 8.41% $2,420,506 $ 145,354 8.03%
============= ============= ============= ===========
Interest bearing liabilities:
Demand deposits............................... 249,499 871 0.47% 255,998 3,056 1.60%
Money market accounts......................... 238,872 8,524 4.77 186,456 5,747 4.12
Savings deposits.............................. 158,891 3,037 2.55 193,867 4,628 3.19
Other time deposits........................... 960,543 41,294 5.74 935,440 36,079 5.16
Other borrowings.............................. 552,246 25,137 6.08 434,537 17,563 5.40
------------- ------------- ------------- -----------
Total......................................... $2,160,051 $ 78,863 4.88% $2,006,298 $ 67,073 4.47%
============= ============= ============= ===========
Net interest income and spread................ $ 82,264 3.53% $ 78,281 3.56%
============= ===========
Net yield on interest earning assets (4)...... 4.29% 4.32%
</TABLE>
(1) The preceding analysis takes into consideration the principal amount of
nonaccruing loans and only income actually collected.
(2) Average loan balances are shown net of unearned income.
(3) Interest income includes taxable-equivalent adjustments of $1,407 and $1,306
for the nine months ended September 30, 2000 and 1999, respectively.
(4) Represents net interest income as a percentage of total average interest
earning assets.
The following tables present the dollar amount of change in interest income
and interest expense on a taxable-equivalent basis. The table distinguishes
between the changes related to average outstanding (volume) interest-earning
assets and interest-bearing liabilities, as well as the changes related to
average interest rates (rate) on such assets and liabilities. Changes
attributable to both volume and rate have been allocated proportionately.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30
------------------------------------------------
2000 1999
INCOME/ INCOME/
(Dollars in thousands) EXPENSE RATE VOLUME EXPENSE
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans ........................ $47,113 $1,749 $5,111 $40,253
Securities ................... 8,036 658 (997) 8,375
Federal funds sold ........... 17 (6) (12) 35
Interest bearing bank deposits 49 25 (20) 44
------------------------------------------------
Total interest income ........ $55,215 $2,426 $4,082 $48,707
================================================
Interest expense:
Demand deposits .............. $ 308 $ (569) $ (58) $ 935
Money market accounts ........ 2,641 501 (86) 2,226
Savings deposits ............. 834 (283) (300) 1,417
Other time deposits .......... 15,678 2,284 1,794 11,600
Other borrowings ............. 8,604 985 1,797 5,822
------------------------------------------------
Total interest expense ....... 28,065 2,918 3,147 22,000
------------------------------------------------
Net interest income ..... $27,150 $ (492) $ 935 $26,707
================================================
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30
---------------------------------------------------
2000 1999
INCOME/ INCOME/
(Dollars in thousands) EXPENSE RATE VOLUME EXPENSE
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans ........................ $135,868 $ 3,935 $11,403 $120,530
Securities ................... 24,899 1,990 (1,216) 24,125
Federal funds sold ........... 235 85 (280) 430
Interest bearing bank deposits 125 25 (169) 269
---------------------------------------------------
Total interest income ........ $161,127 $ 6,035 $ 9,738 $145,354
===================================================
Interest expense:
Demand deposits .............. $ 871 $(2,135) $ (50) $ 3,056
Money market accounts ........ 8,524 1,034 1,743 5,747
Savings deposits ............. 3,037 (839) (752) 4,628
Other time deposits .......... 41,294 4,191 1,024 36,079
Other borrowings ............. 25,137 2,516 5,058 17,563
---------------------------------------------------
Total interest expense ....... 78,863 4,767 7,023 67,073
---------------------------------------------------
Net interest income ..... $ 82,264 $ 1,268 $ 2,715 $ 78,281
===================================================
</TABLE>
At September 30, 2000 the allowance for loan losses was $27.9 million or
1.32 percent of gross loans compared to $25.0 million or 1.27 percent at
December 31, 1999. The allowance for loan losses varied over the periods
presented as a result of changes in the portfolio's perceived risk profile, and
due to increased nonperforming assets and the effect of higher interest rates
and slower economic growth on some customers.
The provision for loan losses charged to earnings was an amount believed
sufficient to position the allowance for loan losses at the appropriate level as
described above. The provision for loan losses for the three months and nine
months ended September 30, 2000 amounted to $2.2 million and $5.5 million,
respectively. This is compared to provision for loan losses of $0.8 million and
$3.8 million for the same periods in 1999. The provision for loan losses varied
over the periods presented as a result of changes in the portfolio's perceived
risk profile. The increase in the provision over prior year levels was due to:
(i) loan growth primarily in the commercial portfolio; (ii) increases in net
charge-offs; and (iii) increases in nonperforming assets due to the impact of
higher interest rates and slower economic growth on some customers.
13
<PAGE> 15
As discussed in the Annual Report on Form 10-K, the Company performs a
periodic analysis to evaluate the adequacy of the allowance for loan losses.
During the third quarter of 2000, the Company's analysis indicated an increased
level of risk in the portfolio, largely due to the effects of changes in the
economy and increases in nonperforming assets and annualized net charge-offs.
The Company generally records provisions for loan losses that cover loan growth
and current period net charge-offs. Due to the aforementioned increased risk
noted in the portfolio, the Company recorded an incremental $0.9 million
provision for loan losses over and above what would have been its expected
provision for loan losses. While the Company considers this incremental
provision to be a one-time charge, there can be no assurance that the Company's
future analyses and market conditions will not yield similar results, thereby
requiring similar additional provisions in such periods.
The following table presents changes in the allowance for loan losses for
the nine months ended September 30, 2000 and 1999, respectively.
SEPTEMBER 30 September 30
(Dollars in thousands) 2000 1999
-----------------------------------------------------------------------------
Beginning balance................... $25,002 $22,278
Provision charged to operations..... 5,540 3,770
Allowance related to loans sold..... (113) (369)
Charge-offs......................... (3,420) (2,161)
Recoveries.......................... 852 656
------- -------
Net loan charge-offs.............. (2,568) (1,505)
------- -------
Ending balance.................. $27,861 $24,174
======= =======
Management considers the allowance for loan losses adequate to cover
inherent losses in the Bank's loan portfolio as of the date of the financial
statements. Management believes it has established the allowance in accordance
with generally accepted accounting principles and in consideration of the
current economic environment. While Management uses the best information
available to make evaluations, future additions to the allowance may be
necessary based on changes in economic and other conditions. Additionally,
various regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowances for loan losses. Such agencies may
require the recognition of adjustments to the allowances based on their
judgments of information available to them at the time of their examinations.
The total of nonperforming assets at September 30, 2000 increased to $29.3
million compared to $12.7 million and $11.3 million at December 31, 1999 and
September 30, 1999, respectively. As a percentage of total assets, nonperforming
assets have increased to 1.08% at September 30, 2000 compared to 0.61% and 0.60%
at December 31, 1999 and September 30, 1999, respectively. Net loan charge-offs
as a percentage of average gross loans increased to 0.17% (annualized) for the
nine months ended September 30, 2000 as compared to 0.10% for the year ended
December 31, 1999, and 0.11% (annualized) for the nine months ended September
30, 1999. This increase was primarily due to the effect of higher interest rates
and slower economic growth on some customers.
Total nonperforming assets and loans 90 days or more past due and still
accruing at September 30, 2000 were $30.0 million or 1.42% of total loans and
other real estate, compared to $16.3 million or 0.83% of total loans and other
real estate at December 31, 1999. Total nonperforming assets and loans 90 days
or more past due and still accruing have increased during the period due to an
increase in other real estate of $0.7 million and an increase in nonaccrual
loans of $15.9 million mitigated by a $2.9 million decrease in loans 90 days or
more past due and still accruing. The increase in nonaccrual loans was not
concentrated in any one industry and was primarily due to the effect of higher
interest rates and slower economic growth on some customers. The components of
nonperforming assets and loans 90 days or more past due and still accruing are
presented in the table below:
SEPTEMBER 30 December 31
(Dollars in thousands) 2000 1999
-----------------------------------------------------------------------------
Nonaccrual loans.................. $26,281 $10,353
Restructured loans................ -- 37
Other real estate................. 3,005 2,262
------- -------
Total nonperforming assets...... 29,286 12,652
Loans 90 days or more
past due and still accruing..... 716 3,638
------- -------
Total......................... $30,002 $16,290
======= =======
Noninterest Income
Core operating noninterest income for the third quarter of 2000 totaled
$6.5 million compared to $6.2 million for the same period in 1999. Core
operating noninterest income for the nine months ended September 30, 2000
totaled $22.0 million, an increase of 16.1% compared to the same period in 1999.
These increases were primarily due to increased deposit account service charges
of $0.5 million and $2.0 million for the three months and nine months ended
September
14
<PAGE> 16
30, 2000, respectively, over the comparable 1999 periods, as well as continued
growth from First Charter Insurance Services. Including the non-core items noted
in the financial highlights table on page 9, noninterest income decreased $0.4
million and increased $0.2 million for the three months and nine months ended
September 30, 2000, respectively, over the comparable 1999 periods.
Noninterest Expense
Noninterest expense for the third quarter of 2000 totaled $17.8 million
compared to $19.1 million for the same period in 1999. This decrease for the
quarter was primarily the result of synergies realized as a result of the
Carolina First BancShares merger. Core operating noninterest expense for the
nine months ended September 30, 2000 totaled $57.0 million compared to $55.7
million for the same period in 1999. Including the non-core items noted in the
financial highlights table on page 9, noninterest expense decreased $1.3 million
and increased $17.5 million for the three months and nine months ended September
30, 2000, respectively, over the comparable 1999 periods.
Income Tax Expense
Total income tax expense amounted to $4.5 million for the three months
ended September 30, 2000 and $4.7 million for the same comparable 1999 period.
Income tax expense for the nine months ended September 30, 2000 was $9.1 million
compared to $12.7 million for the same comparable 1999 period. The decrease in
the income tax expense for the nine months ended September 30, 2000 is due to
restructuring and merger-related expenses incurred during second quarter of
2000. The effective tax rates for the three months and nine months ended
September 30, 2000 was 31.0% and 36.6%, respectively compared to 32.4% and 31.6%
for the same comparable 1999 periods. The increase in the effective tax rates
for the nine month periods was due to certain nondeductible restructuring and
merger-related expenses.
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 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 was delayed by Statement of Financial
Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB Statement No. 133" to the
first fiscal quarters of fiscal years beginning after June 15, 2000.
Accordingly, the Corporation will adopt SFAS No. 133 on January 1, 2001. The
Corporation is in the process of assessing the impact of this standard.
In September, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 140 (SFAS No. 140), "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities- a replacement of FASB Statement 125", which revises the criteria
for accounting for securitizations and other transfers of financial assets and
collateral, and introduces new disclosures. The enhanced disclosure requirements
are effective for year-end 2000. The other provisions of SFAS No. 140 apply
prospectively to transfers of financial assets and extinguishments of
liabilities occurring after March 31, 2001. Earlier or retroactive application
is not permitted. The effect of SFAS No. 140 on the Corporation is not expected
to be 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 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, and the
ability to manage unforeseen domestic and global rapid changes in interest
rates.
15
<PAGE> 17
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following table presents the scheduled maturity of market risk
sensitive instruments at September 30, 2000:
<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 ....... $ 64,523 $ 48,135 $ 70,155 $ 57,438 $ 26,376 $172,350 $ 438,976
Loans ................. 878,106 93,278 149,942 203,990 197,921 560,047 2,083,283
------------------------------------------------------------------------------------------------
Total ................ $ 942,629 $141,413 $220,097 $261,427 $224,296 $732,397 $2,522,259
================================================================================================
LIABILITIES:
Savings, NOW and IMMA's $ 572,612 $ 1,969 $ 5,716 $ 261 $ -- $ 690 $ 581,248
CD's .................. 883,793 62,067 85,537 23,069 3,077 3,885 1,061,427
Short-term borrowings . 336,383 -- -- -- -- -- 336,383
Long-term borrowings .. -- 50,040 40 40 40 133,219 183,379
------------------------------------------------------------------------------------------------
Total ............... $1,792,787 $114,076 $ 91,292 $ 23,370 $ 3,117 $137,795 $2,162,437
================================================================================================
</TABLE>
The following table presents the average interest rate and estimated fair
value of market risk sensitive instruments at September 30, 2000:
Carrying Average Estimated
(Dollars in thousands) Value Interest Rate Fair Value
--------------------------------------------------------------------------------
ASSETS:
Debt securities................ $ 438,976 6.86 $ 438,976
Loans.......................... 2,083,283 8.72 2,058,419
---------- ----------
Total........................ $2,522,259 8.40 $2,497,395
========== ----------
LIABILITIES:
Savings, NOW and IMMA's........ $ 581,248 2.41 $ 581,418
CDs............................ 1,061,427 6.18 1,059,767
Short-term borrowings.......... 336,383 6.09 333,901
Long-term borrowings........... 183,379 5.73 182,026
---------- ----------
Total........................ $2,162,437 5.11 $2,157,112
========== ----------
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
From late 1996 through mid 2000, Home Federal, a former subsidiary of the
Corporation that was merged into the Bank in March 1999, was involved in a
series of lawsuits in state and federal courts with a former borrower, companies
controlled by the borrower and with members of the former borrower's family.
That litigation was described in prior quarterly and annual reports and has now
been concluded without liability on the part of the Corporation or the Bank.
The Corporation and the Bank are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these 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 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
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<PAGE> 18
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).
27.1 Financial Data Schedules (for SEC use only)
27.2 Restated Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the
Corporation during the quarter ended September 30,
2000:
Current Report on Form 8-K dated July 13, 2000 and filed July 20, 2000,
Items 5 and 7.
Current Report on Form 8-K dated July 19, 2000 and filed July 21, 2000,
Items 5 and 7.
Current Report on Form 8-K dated September 20, 2000 and filed September
21, 2000, Items 5 and 7.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FIRST CHARTER CORPORATION
(Registrant)
Date: November 14, 2000 By: /s/ Robert O. Bratton
-----------------------------
Robert O. Bratton
Executive Vice President &
Chief Operating Officer and
Chief Financial Officer
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EXHIBIT INDEX
Exhibit No.
(per Exhibit Table
in item 601 of Sequential
Regulation S-K) Description of Exhibits Page Number
27.1 Financial Data Schedule 20
(for SEC use only)
27.2 Restated Financial Data Schedule 21
(for SEC use only)
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