UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-15829
FIRST CHARTER CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1355866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10200 DAVID TAYLOR DRIVE, CHARLOTTE, NC 28262-2373
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (704) 688-4300
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of May 1, 2002 the Registrant had outstanding 30,809,090 shares of
Common Stock, no par value.
FIRST CHARTER CORPORATION
MARCH 31, 2002 FORM 10-Q
INDEX
Page
----
PART I Item 1. Financial Statements:
FINANCIAL Consolidated Balance Sheets at March 31, 2002 2
INFORMATION and December 31, 2001
Consolidated Statements of Income for the Three 3
Months Ended March 31, 2002 and 2001
Consolidated Statements of Shareholders' 4
Equity for the Three Months Ended
March 31, 2002 and 2001
Consolidated Statements of Cash Flows for the 5
Three Months Ended March 31, 2002 and 2001
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 24
Market Risk
PART II
OTHER INFORMATION Item 1. Legal Proceedings 25
Item 2. Changes in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 6. Exhibits and Reports on Form 8-K 25
Signature 26
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31 December 31
2002 2001
----------------------------------------------------------------------------------------------------------
(Dollars in thousands, except share data) (UNAUDITED)
----------------------------------------------------------------------------------------------------------
ASSETS:
Cash and due from banks $ 89,611 $ 134,084
Federal funds sold 1,363 1,161
Interest bearing bank deposits 16,984 6,220
----------------------------------------------------------------------------------------------------------
Cash and cash equivalents 107,958 141,465
----------------------------------------------------------------------------------------------------------
Securities available for sale (cost of $1,113,484 at March 31, 2002 and
$1,066,743 at December 31, 2001; carrying amount of pledged collateral
at March 31, 2002, $147,173) 1,107,939 1,077,365
Loans 2,029,737 1,955,086
Less: Unearned income (277) (191)
Allowance for loan losses (26,576) (25,843)
----------------------------------------------------------------------------------------------------------
Loans, net 2,002,884 1,929,052
----------------------------------------------------------------------------------------------------------
Premises and equipment, net 96,917 96,976
Other assets 89,922 87,879
----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,405,620 $ 3,332,737
----------------------------------------------------------------------------------------------------------
LIABILITIES:
Deposits, domestic:
Noninterest bearing demand $ 257,864 $ 276,699
Interest bearing 1,952,444 1,886,246
----------------------------------------------------------------------------------------------------------
Total deposits 2,210,308 2,162,945
----------------------------------------------------------------------------------------------------------
Other borrowings 836,769 808,512
Other liabilities 54,798 51,939
----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 3,101,875 3,023,396
----------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY:
Preferred stock - no par value; authorized 2,000,000 shares; no shares
issued and outstanding -- --
Common stock - no par value; authorized 100,000,000 shares;
issued and outstanding 30,805,474 and 30,742,532 shares 135,751 135,167
Common stock held in Rabbi Trust for deferred compensation (410) (388)
Deferred compensation payable in common stock 410 388
Retained earnings 171,379 168,334
Accumulated other comprehensive (loss) income:
Unrealized (loss) gain on securities available for sale, net (3,385) 5,840
----------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 303,745 309,341
----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,405,620 $ 3,332,737
----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
FOR THE THREE MONTHS
ENDED MARCH 31
------------------------------
(Dollars in thousands, except share and per share data) 2002 2001
-------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 32,815 $ 43,816
Federal funds sold 3 31
Interest bearing bank deposits 29 156
Securities 16,193 10,067
-------------------------------------------------------------------------------------------
Total interest income 49,040 54,070
-------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Deposits 13,749 21,129
Federal funds purchased and securities
sold under agreements to repurchase 597 1,520
Federal Home Loan Bank and other borrowings 7,144 6,042
-------------------------------------------------------------------------------------------
Total interest expense 21,490 28,691
-------------------------------------------------------------------------------------------
NET INTEREST INCOME 27,550 25,379
PROVISION FOR LOAN LOSSES 2,105 750
-------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 25,445 24,629
NONINTEREST INCOME:
Service charges on deposit accounts 4,665 2,918
Financial management income 668 775
Gain on sale of securities 3,763 267
(Loss) income from equity method investments (2,959) 111
Mortgage loan fees 407 509
Brokerage services income 637 394
Insurance services income 2,231 1,991
Trading gains 420 --
Other 1,096 1,455
-------------------------------------------------------------------------------------------
Total noninterest income 10,928 8,420
-------------------------------------------------------------------------------------------
NONINTEREST EXPENSE:
Salaries and employee benefits 12,897 10,353
Occupancy and equipment 4,241 3,570
Data processing 622 596
Advertising 640 643
Postage and supplies 1,189 1,189
Professional services 1,662 1,164
Telephone 546 291
Other 2,759 2,237
-------------------------------------------------------------------------------------------
Total noninterest expense 24,556 20,043
-------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 11,817 13,006
INCOME TAXES 3,226 4,162
-------------------------------------------------------------------------------------------
NET INCOME $ 8,591 $ 8,844
-------------------------------------------------------------------------------------------
NET INCOME PER SHARE:
Basic $ 0.28 $ 0.28
Diluted $ 0.28 $ 0.28
WEIGHTED AVERAGE SHARES:
Basic 30,798,728 31,696,764
Diluted 30,993,981 31,833,564
See accompanying notes to consolidated financial statements.
3
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Unaudited)
------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK
HELD IN RABBI DEFERRED ACCUMULATED
COMMON STOCK TRUST FOR COMPENSATION OTHER
(Dollars in thousands, except share ----------------------- DEFERRED PAYABLE IN RETAINED COMPREHENSIVE
data) SHARES AMOUNT COMPENSATION COMMON STOCK EARNINGS INCOME (LOSS) TOTAL
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 31,601,263 $ 151,486 $ -- $ -- $ 155,762 $ 2,039 $ 309,287
Comprehensive income:
Net income -- -- -- -- 8,844 -- 8,844
Unrealized gain on securities available
for sale, net -- -- -- -- -- 5,171 5,171
----------
Total comprehensive income 14,015
Cash dividends -- -- -- -- (5,711) -- (5,711)
Stock options exercised and Dividend
Reinvestment Plan stock issued 109,055 1,388 -- -- -- -- 1,388
----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2001 31,710,318 $ 152,874 $ -- $ -- $ 158,895 $ 7,210 $ 318,979
----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 30,742,532 $ 135,167 $(388) $388 $ 168,334 $ 5,840 $ 309,341
Comprehensive income:
Net income -- -- -- -- 8,591 -- 8,591
Unrealized loss on securities available
for sale, net -- -- -- -- -- (9,225) (9,225)
----------
Total comprehensive loss (634)
Common stock purchased by Rabbi Trust
for deferred compensation -- -- (22) -- -- -- (22)
Deferred compensation payable
in common stock -- -- -- 22 -- -- 22
Cash dividends -- -- -- -- (5,546) -- (5,546)
Stock options exercised 62,942 643 -- -- -- -- 643
Purchase and retirement of common stock -- (67) -- -- -- -- (67)
Other -- 8 -- -- -- -- 8
----------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2002 30,805,474 $ 135,751 $(410) $410 $ 171,379 $(3,385) $ 303,111
------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
FIRST CHARTER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS
ENDED MARCH 31
----------------------------------------------------------------------------------------------------------------
(Dollars in thousands) 2002 2001
----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,591 $ 8,844
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 2,105 750
Depreciation 2,461 1,669
Premium amortization and discount accretion, net (187) (66)
Net gain on securities available for sale transactions (3,763) (267)
Net loss (gain) on sale of other real estate 65 (69)
Loss (income) from equity method investees 2,959 (111)
Net loss on sale of premises and equipment -- 18
Origination of mortgage loans held for sale (21,127) (41,123)
Proceeds from sale of mortgage loans held for sale 23,060 35,021
Decrease in other assets 1,142 3,098
Increase (decrease) in other liabilities 2,860 (590)
----------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,166 7,174
----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale 124,803 40,031
Proceeds from maturities of securities available for sale 105,486 40,337
Purchase of securities available for sale (273,078) (339,956)
Net (increase) decrease in loans (78,523) 8,859
Proceeds from sales of other real estate 1,384 876
Net purchases of premises and equipment (2,403) (12,332)
----------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (122,331) (262,185)
----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand, money market and savings accounts (2,111) 5,094
Net increase in certificates of deposit 49,474 8,759
Net increase in securities sold under repurchase
agreements and other borrowings 28,257 126,110
Purchase and retirement of common stock (67) --
Proceeds from issuance of common stock 651 1,388
Dividends paid (5,546) (5,711)
----------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 70,658 135,640
----------------------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (33,507) (119,371)
Cash and cash equivalents at beginning of period 141,465 194,672
----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 107,958 $ 75,301
----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ 22,127 $ 29,713
Cash paid for income taxes 191 --
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS:
Transfer of loans and premises and equipment to other real estate owned 652 25
Unrealized gain on securities available for sale
(net of tax effect of $(6,707) and $3,306 for the three months ended
March 31, 2002 and 2001, respectively) (9,225) 5,171
Loans securitized and retained in the available for sale portfolio -- 166,992
See accompanying notes to consolidated financial statements.
5
FIRST CHARTER CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
First Charter Corporation (the "Corporation") is a bank holding company
established as a North Carolina Corporation in 1983. Its principal asset is the
stock of its subsidiary, First Charter Bank ("FCB" or the "Bank"). FCB is a full
service bank, which now operates 52 financial centers, five insurance offices
and one mortgage origination office in addition to its main office, as well as
99 ATMs (automated teller machines). These facilities are located in Ashe,
Alleghany, Avery, Buncombe, Cabarrus, Cleveland, Guilford, Iredell, Jackson,
Lincoln, McDowell, Mecklenburg, Rowan, Rutherford, Swain, Transylvania and Union
counties of North Carolina. Further, FCB recently opened one mortgage
origination office in Virginia.
Through its financial center locations, the Bank provides a wide range
of banking products, including interest bearing and non-interest bearing
checking accounts; "Money Market Rate" accounts; certificates of deposit;
individual retirement accounts; overdraft protection; commercial, consumer,
agriculture, real estate, residential mortgage and home equity loans; personal
and corporate trust services; safe deposit boxes; and automated banking. In
addition, through First Charter Brokerage Services, a subsidiary of FCB, the
Registrant offers full service and discount brokerage services, annuity sales
and financial planning services pursuant to a third party arrangement with UVEST
Investment Services. The Bank also operates six other subsidiaries: First
Charter Insurance Services, Inc., First Charter of Virginia Realty Investments,
Inc., First Charter Realty Investments, Inc., FCB Real Estate, Inc., First
Charter Real Estate Holding, LLC., and First Charter Leasing, Inc. First Charter
Insurance Services, Inc. is a North Carolina corporation formed to meet the
insurance needs of businesses and individuals throughout the Charlotte
metropolitan area. First Charter of Virginia Realty Investments, Inc. is a
Virginia corporation engaged in the mortgage origination business and also acts
as a holding company for First Charter Realty Investments, Inc., a Delaware real
estate investment trust. FCB Real Estate, Inc. is a North Carolina real estate
investment trust and First Charter Real Estate Holdings, LLC is a North Carolina
limited liability company. First Charter Leasing, Inc. is a North Carolina
corporation, which leases commercial equipment. The Bank also has a majority
ownership in Lincoln Center at Mallard Creek, LLC. Lincoln Center is a
three-story office building occupied in part by a branch of FCB.
NOTE ONE - ACCOUNTING POLICIES
The consolidated financial statements include the accounts of the
Corporation and its wholly owned subsidiary, FCB. In consolidation, all
intercompany accounts and transactions have been eliminated.
The information contained in the consolidated financial statements is
unaudited. The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities and disclosure of contingent liabilities at
the date of the financial statements, as well as the amounts of income and
expenses during the reporting period. Actual results could differ from those
estimates.
The information furnished in this report reflects all adjustments which
are, in the opinion of management, necessary to present a fair statement of the
financial condition and the results of operations for interim periods. All such
adjustments were of a normal recurring nature. Certain amounts reported in prior
periods have been reclassified to conform with the current period presentation.
Such reclassifications have no effect on net income or shareholders' equity as
previously reported.
Accounting policies followed by the Corporation are presented on pages
43 to 48 of the Corporation's Annual Report on Form 10-K for the year ended
December 31, 2001.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 (SFAS No. 141), "Business Combinations", and Statement of
Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other
Intangible Assets". SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS 141 also
specifies criteria which must be met for intangible assets acquired in a
purchase method business combination to be recognized and reported apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 also requires
that identifiable intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated
6
residual values, and reviewed for impairment in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of".
The Corporation adopted the provisions of SFAS 141 as of June 30, 2001
and fully adopted SFAS 142 as of January 1, 2002. Furthermore, any goodwill and
any intangible asset determined to have an indefinite useful life that was
acquired in a purchase business combination completed after June 30, 2001 has
not been amortized, but has been evaluated for impairment in accordance with the
appropriate accounting literature issued prior to SFAS 142. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 continued to be amortized in 2001 prior to the full adoption of SFAS 142 on
January 1, 2002.
SFAS 141 requires, upon adoption of SFAS 142, that the Corporation
evaluate its existing intangible assets and goodwill that were acquired in prior
purchase business combinations, and to make any necessary reclassifications in
order to conform with the new criteria in SFAS 141 for recognition apart from
goodwill. Upon adoption of SFAS 142, the Corporation reassessed the useful lives
and residual values of all identifiable intangible assets acquired in purchase
business combinations, and as a result did not make any necessary amortization
period adjustments. In addition, any intangible assets classified as goodwill
under SFAS 142 are subjected to a transitional impairment test during the first
six months of 2002 based on the level of goodwill as of January 1, 2002. Any
impairment losses identified as a result of this transitional impairment test
will be recognized in the 2002 statement of income as the effect of a change in
accounting principle. The Corporation expects to complete the transitional
impairment test during the second quarter of 2002.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations",
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement cost. This standard requires the Corporation to record the fair value
of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and or normal
use of the assets. The Corporation also is to record a corresponding increase to
the carrying amount of the related long-lived asset and to depreciate that cost
over the life of the asset. The liability is changed at the end of each period
to reflect the passage of time and changes in the estimated future cash flows
underlying the initial fair value measurement. This statement is effective for
fiscal years beginning after June 15, 2002. At this time, the Corporation is
assessing the impact of SFAS No. 143 on its financial condition and results of
operations.
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This standard provides guidance on differentiating between long-lived assets to
be held and used, long-lived assets to be disposed of other than by sale and
long-lived assets to be disposed of by sale. SFAS No. 144 supersedes FASB
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS No. 144 also supersedes Accounting Principals Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". This statement is effective for fiscal years beginning
after December 15, 2001. Accordingly, the Corporation adopted SFAS No. 144 on
January 1, 2002, with no material impact on its consolidated financial
statements.
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.
NOTE TWO - NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted average number of shares of common stock outstanding for the year.
Diluted net income per share reflects the potential dilution that could occur if
the Corporation's potential common stock and contingently issuable shares, which
consist of dilutive stock options, restricted stock and shares issuable under
the Corporation's share repurchase agreement were issued.
7
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. The effect of potential common stock is excluded from the computation
of diluted earnings per common share in periods in which the effect would be
antidilutive. A reconciliation of the basic average common shares outstanding to
the diluted average common shares outstanding is as follows:
THREE MONTHS
ENDED MARCH 31
-------------------------------
2002 2001
-------------------------------
Basic weighted average number of common shares outstanding 30,798,728 31,696,764
Dilutive effect arising from
potential common stock 195,253 136,800
-------------------------------
Diluted weighted average number of common shares outstanding 30,993,981 31,833,564
===============================
The Corporation paid cash dividends of $0.18 per share for both the
three months ended March 31, 2002 and 2001.
NOTE THREE - GOODWILL AND OTHER INTANGIBLE ASSETS
The following is a summary of the gross carrying amount and accumulated
amortization of amortized intangible assets as of March 31, 2002 and December
31, 2001 and the carrying amount of unamortized intangible assets as of March
31, 2002:
MARCH 31 December 31
2002 2001
-------------------------------------------------------------------
GROSS CARRYING ACCUMULATED Gross Carrying Accumulated
(Dollars in thousands) AMOUNT AMORTIZATION Amount Amortization
----------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Noncompete agreements (1) $ 946 $ 626 $ 946 $ 575
Customer lists (1) 417 86 417 79
Branch acquisitions (2) 14,739 2,589 14,739 2,308
----------------------------------------------------------------------------------------------------------
TOTAL $16,102 $3,301 $16,102 $2,962
----------------------------------------------------------------------------------------------------------
Unamortized intangible assets:
Goodwill (3) $ 6,018 $6,018
==========================================================================================================
(1) Noncompete agreements and customer lists intangible assets are recorded
in the Other Operating Segments as defined in the 2001 Annual Report on Form
10-K.
(2) Branch acquisition intangible assets are recorded in the FCB segment as
defined in the 2001 Annual Report on Form 10-K.
(3) Goodwill is recorded in the Other Operating Segments as defined in the
2001 Annual Report on Form 10-K.
There was no change in the carrying amount of goodwill at March 31,
2002 compared to December 31, 2001.
Amortization expense totaled $339,000 and $490,000 for the three months
ended March 31, 2002 and 2001, respectively.
The estimated amortization expense for intangible assets for the years
ended December 31, 2002, 2003, 2004, 2005, 2006 and 2007 and thereafter is as
follows:
ESTIMATED
(Dollars in thousands) AMORTIZATION EXPENSE
-----------------------------------------------------------
2002 $ 1,294
2003 1,244
2004 970
2005 943
2006 863
2007 and after $ 7,486
-----------------------------------------------------------
TOTAL 12,801
===========================================================
8
The following table presents the adjusted effect on net income and on
basic and diluted earnings per share excluding the amortization of goodwill for
the three months ended March 31, 2002 and 2001 and for the years ended December
31, 2001, 2000 and 1999:
FOR THE THREE MONTHS
ENDED MARCH 31
(Dollars in thousands, except ------------------------
earnings per share amounts) 2002 2001
-------------------------------------------------------------
Net income $ 8,591 $ 8,844
Add back: Goodwill amortization -- 97
-------------------------------------------------------------
ADJUSTED NET INCOME $ 8,591 $ 8,941
-------------------------------------------------------------
Basic earnings per share:
As reported $ 0.28 $ 0.28
Goodwill amortization -- --
-------------------------------------------------------------
ADJUSTED NET INCOME $ 0.28 $ 0.28
-------------------------------------------------------------
Diluted earnings per share:
As reported $ 0.28 $ 0.28
Goodwill amortization -- --
-------------------------------------------------------------
ADJUSTED NET INCOME $ 0.28 $ 0.28
-------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31
(Dollars in thousands, except -------------------------------------
earnings per share amounts) 2001 2000 1999
--------------------------------------------------------------------------
Net income $ 35,325 $ 24,841 $ 35,291
Add back: Goodwill amortization 441 363 203
--------------------------------------------------------------------------
ADJUSTED NET INCOME $ 35,766 $ 25,204 $ 35,494
--------------------------------------------------------------------------
Basic earnings per share:
As reported $ 1.12 $ 0.79 $ 1.12
Goodwill amortization 0.02 0.01 -
--------------------------------------------------------------------------
ADJUSTED NET INCOME $ 1.14 $ 0.80 $ 1.12
--------------------------------------------------------------------------
Diluted earnings per share:
As reported $ 1.12 $ 0.79 $ 1.11
Goodwill amortization 0.01 0.01 0.01
--------------------------------------------------------------------------
ADJUSTED NET INCOME $ 1.13 $ 0.80 $ 1.12
--------------------------------------------------------------------------
NOTE FOUR - IMPAIRED LOANS
The recorded investment in impaired loans was $22.6 million (of which
$16.1 million was on nonaccrual status) and $14.2 million (of which $11.9
million was on nonaccrual status) at March 31, 2002 and December 31, 2001,
respectively. The related allowance for loan losses on impaired loans was $2.8
million and $1.8 million at March 31, 2002 and December 31, 2001, respectively.
The average recorded investment in impaired loans for the three months ended
March 31, 2002 and 2001 was $19.1 million and $18.6 million, respectively.
NOTE FIVE - STOCK REPURCHASE PROGRAM
On January 23, 2002, the Corporation's Board of Directors authorized
the repurchase of up to 1.5 million additional shares of the Corporation's
common stock. As of March 31, 2002, no shares have been repurchased under this
authorization.
NOTE SIX - TRADING ACTIVITY
The Corporation engages in writing over-the-counter covered call
options on specific fixed income securities in the available for sale portfolio.
Under these agreements the Corporation agrees to sell, upon election by the
optionholder, a fixed income security at a fixed price. The Corporation receives
a premium from the optionholder in exchange for writing the option contract. For
the quarter ended March 31, 2002, the Corporation recognized income of $0.4
million from writing covered call options. There were no written covered call
options outstanding at March 31, 2002, and there were no such contracts written
during the quarter ended March 31, 2001.
9
NOTE SEVEN - RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Corporation engages in business
transactions with certain of its directors. Such transactions are competitively
negotiated at arms-length by the Corporation and are not considered to include
terms which are unfavorable to the Corporation.
During 2001, the Corporation decided to upgrade its service offerings
to include an automatic overdraft product, which allows customers the ability to
overdraw their account and have their transactions honored for a fee. During the
fourth quarter of 2001, the Corporation engaged Impact Financial Services
("Impact") to provide this product. Impact will receive a fee from the
Corporation equal to 13 percent of the incremental income from this new product
for a twenty four month period commencing the fourth full month after the
Corporation began to offer the product. John Godbold, a director of the
Corporation, is the president and owner of Godbold Financial Associates, Inc.
("GFA"), which acts as an independent sales representative for Impact for
Maryland, North Carolina, South Carolina and Virginia and as such GFA and Mr.
Godbold will receive commissions from Impact based on fees earned by Impact. As
described above, no fees were required to be paid to Impact until the fourth
full month following introduction of the new product, therefore, no fees were
payable to Impact and no commissions were payable to GFA and Mr. Godbold during
January or February of 2002. For the quarter ended March 31, 2002, the
Corporation received revenues of approximately $1.0 million which resulted in
fees of $40,000 to Impact and resulted in Impact paying commissions to GFA and
Mr. Godbold of $28,000.
NOTE EIGHT - BUSINESS SEGMENT INFORMATION
Refer to the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2001 for information with respect to the Corporation's
policies for defining and accounting for its segments. Financial information by
segment for the three months ended March 31, 2002 and 2001 is as follows:
2002
---------------------------------------------------------------------------------------------------
Other Operating
(Dollars in thousands) FCB Segments (1) Other (2) Totals
---------------------------------------------------------------------------------------------------
Total interest income $ 48,894 $ 79 $ 67 $ 49,040
Total interest expense 21,343 -- 147 21,490
---------------------------------------------------------------------------------------------------
Net interest income 27,551 79 (80) 27,550
Provision for loan losses 2,105 -- -- 2,105
Total noninterest income 9,086 3,949 (2,107) 10,928
Total noninterest expense 20,455 4,035 66 24,556
---------------------------------------------------------------------------------------------------
Net income (loss) before income taxes 14,077 (7) (2,253) 11,817
Income taxes expense (benefit) 3,844 (3) (615) 3,226
---------------------------------------------------------------------------------------------------
Net income (loss) $ 10,233 $ (4) $ (1,638) $ 8,591
---------------------------------------------------------------------------------------------------
Total loans, net $1,997,484 $ 5,400 $ -- $2,002,884
Total assets 3,356,137 16,934 32,549 3,405,620
2001
---------------------------------------------------------------------------------------------------
Other Operating
(Dollars in thousands) FCB Segments (1) Other (2) Totals
---------------------------------------------------------------------------------------------------
Total interest income $ 53,947 $ 81 $ 42 $ 54,070
Total interest expense 28,691 -- -- 28,691
---------------------------------------------------------------------------------------------------
Net interest income 25,256 81 42 25,379
Provision for loan losses 750 -- -- 750
Total noninterest income 4,513 3,776 131 8,420
Total noninterest expense 16,976 3,091 (24) 20,043
---------------------------------------------------------------------------------------------------
Net income before income taxes 12,043 766 197 13,006
Income taxes 3,836 263 63 4,162
---------------------------------------------------------------------------------------------------
Net income $ 8,207 $ 503 $ 134 $ 8,844
---------------------------------------------------------------------------------------------------
Total loans, net $1,947,270 $ 11,166 $ -- $1,958,436
Total assets 3,033,652 21,992 25,618 3,081,262
(1) Included in other operating segments are revenues, expenses and assets
of insurance services, brokerage, mortgage and financial management.
(2) Included in "other" are revenues, expenses and assets of the parent
company and eliminations.
10
NOTE NINE - EQUITY METHOD INVESTMENTS
The Corporation's equity method investments represent investments in
venture capital limited partnerships which invest in early stage companies.
The Corporation's recognition of earnings or losses from equity method
investments is determined by the Corporation's share of the investee's earnings
on a quarterly basis. The limited partnerships provide their quarterly financial
information on a quarter lag basis, so the Corporation's policy is to record its
share of earnings or losses on these equity method investments on a quarter lag
basis.
These limited partnerships record their investments in investee
companies on a fair value basis, with changes in the underlying fair values
being reflected as an adjustment to their earnings in the period such changes
are determined. The earnings of these limited partnerships, and therefore the
amount recorded on an equity-method basis by the Corporation, are impacted
significantly by changes in the underlying value of the companies in which these
limited partnerships invest. All of the companies in which these limited
partnerships invest are privately held, and their market values are not readily
available. Estimations of these values are made quarterly by the management of
the limited partnerships, and are subject to review by the Corporation for
reasonableness. The assumptions in the valuation of these investments by the
limited partnerships include the viability of the business model, the ability of
the company to obtain alternative financing, their ability to generate revenues
in future periods and other subjective factors. Given the inherent risks
associated with this type of investment in the current economic environment,
there can be no guarantee that there will not be widely varying gains or losses
on these equity method investments in future periods.
At March 31, 2002 and December 31, 2001 the total investment in equity
method investments was $5.8 million and $8.7 million, respectively, and is
included in other assets on the consolidated balance sheet. At March 31, 2002,
the Corporation's remaining commitment to fund the equity method investments was
$1.3 million, all of which is callable in 2002 and is unrelated to the
investment discussed in the following paragraph.
During the first quarter of 2002, the Corporation received the final
fourth quarter 2001 valuation for one of its limited partnerships, indicating a
decline in the value of one of its investments. As a result, the Corporation
recorded a loss on this equity method investment in the first quarter of 2002 of
$3.3 million. This loss represents the elimination of a portion of previously
recorded unrealized gains on this investee company, and does not represent a
loss of the original principal invested in this company. Partially offsetting
this $3.3 million loss were gains on other equity method investments of
approximately $300,000. Given the inherent risks associated with this type of
investment in the current economic environment, there can be no guarantee that
there will not be additional losses on these equity method investments in future
periods.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDTION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Corporation and the notes
thereto.
The following discussion contains certain forward-looking statements
about the Corporation's financial condition and results of operations, which are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgment only as of the date hereof. The
Corporation undertakes no obligation to publicly revise these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
Factors that may cause actual results to differ materially from those
contemplated by such forward looking statements include, among others, the
following possibilities: (1) projected business increases in connection with the
implementation of our business plan are lower than expected; (2) competitive
pressure among financial services companies increases significantly; (3) costs
or difficulties related to the integration of acquisitions or expenses in
general are greater than expected; (4) general economic conditions, in the
markets in which the company does business, are less favorable than expected;
(5) changes in the interest rate environment reduce interest margins and affect
funding sources; (6) changes in market rates and prices may adversely affect the
value of financial products; (7) any inability to generate liquidity necessary
to meet loan demand or other cash needs; (8) any inability to accurately predict
the adequacy of the loan loss allowance needs; (9) legislation or regulatory
requirements or changes adversely affect the businesses in which the company is
engaged; and (10) decisions to change the business mix of the company.
OVERVIEW
The Corporation is a regional financial services company with assets of
$3.41 billion and is the holding company for First Charter Bank ("FCB" or the
"Bank"). FCB is a full-service bank and trust company with 52 financial centers,
five insurance offices and one mortgage origination office located in 17
counties throughout North Carolina. Further, FCB recently opened one mortgage
origination office in Virginia. FCB provides businesses and individuals with a
broad range of financial services, including banking, comprehensive financial
planning, funds management, investments, insurance, mortgages and a full array
of employee benefit programs.
CRITICAL ACCOUNTING POLICIES
The Corporation's significant accounting policies are set forth on
pages 43 to 48 of the Corporation's Annual Report on Form 10-K for the year
ended December 31, 2001. Of these policies, the Corporation considers its policy
regarding the allowance for loan losses to be one of its most critical
accounting policies, because it requires management's most subjective and
complex judgments. The Corporation has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses,
recognizing that this process requires a number of assumptions and estimates
with respect to its loan portfolio. The Corporation's assessments may be
impacted in future periods by changes in economic conditions, the impact of
regulatory examinations and the discovery of information with respect to
borrowers which is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning the
Corporation's allowance for loan losses and related matters, see ALLOWANCE FOR
LOAN LOSSES.
In addition, the Corporation also considers its policy regarding equity
method investments to be a critical accounting policy due to the assumptions in
the valuation of these investments and other subjective factors. The
Corporation's equity method investments represent investments in venture capital
limited partnerships which invest in early stage companies.
The Corporation's recognition of earnings or losses from equity method
investments is determined by the Corporation's share of the investment's
earnings on a quarterly basis. The limited partnerships provide their quarterly
financial information on a quarter lag basis, so the Corporation's policy is to
record its share of earnings or losses on these equity method investments on a
quarter lag basis.
12
These limited partnerships record their investments in investee
companies on a fair value basis, with changes in the underlying fair values
being reflected as an adjustment to their earnings in the period such changes
are determined. The earnings of these limited partnerships, and therefore the
amount recorded on an equity-method basis by the Corporation, are impacted
significantly by changes in the underlying value of the companies in which these
limited partnerships invest. All of the companies in which these limited
partnerships invest are privately held, and their market values are not readily
available. Estimations of these values are made quarterly by the management of
the limited partnerships, and are subject to review by the Corporation for
reasonableness. The assumptions in the valuation of these investments by the
limited partnerships include the viability of the business model, the ability of
the company to obtain alternative financing, their ability to generate revenues
in future periods and other subjective factors. Given the inherent risks
associated with this type of investment in the current economic environment,
there can be no guarantee that there will not be widely varying gains or losses
on these equity method investments in future periods.
RESULTS OF OPERATIONS
Refer to TABLE ONE for quarterly selected financial data.
EARNINGS SUMMARY
Net income amounted to $8.6 million, or $0.28 per diluted common share,
for the three months ended March 31, 2002, compared to $8.8 million, or $0.28
per diluted common share, for the three months ended March 31, 2001. The
decrease in net income was primarily due to a $1.4 million increase in the
provision for loan losses and a $4.5 million increase in noninterest expense
partially offset by a $2.2 million increase in net interest income, a $2.5
million increase in noninterest income and a $0.9 million decrease in income tax
expense. Net income for the three months ended March 31, 2002 and 2001 was also
impacted by certain other items, which are set forth in TABLE ONE. These other
items are considered nonrecurring in nature by management and therefore should
be considered in year over year analysis of results of operations.
13
TABLE ONE
SELECTED FINANCIAL DATA
---------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31
---------------------------------
(Dollars in thousands, except per share amounts) 2002 2001
--------------------------------------------------------------------------------------
INCOME STATEMENT
Interest income $ 49,040 $ 54,070
Interest expense 21,490 28,691
--------------------------------------------------------------------------------------
Net interest income 27,550 25,379
Provision for loan losses 2,105 750
Noninterest income 10,928 8,420
Noninterest expense 24,556 20,043
--------------------------------------------------------------------------------------
Income before income taxes 11,817 13,006
Income taxes 3,226 4,162
--------------------------------------------------------------------------------------
Net income $ 8,591 $ 8,844
--------------------------------------------------------------------------------------
PER COMMON SHARE
Basic net income $ 0.28 $ 0.28
Diluted net income 0.28 0.28
Cash dividends declared 0.18 0.18
Period-end book value 9.86 10.06
Average shares outstanding - basic 30,798,728 31,696,764
Average shares outstanding - diluted 30,993,981 31,833,564
RATIOS
Return on average shareholders' equity (1) 10.82% 11.46%
Return on average assets (1) 1.03 1.24
Net interest margin (1) 3.64 3.90
Average loans to average deposits 90.82 103.56
Average equity to average assets 9.53 10.85
Efficiency ratio (2) 69.82 58.90
Dividend payout 64.94 64.79
SELECTED PERIOD END BALANCES
Securities available for sale $ 1,107,939 $ 875,946
Loans, net 2,002,884 1,958,436
Allowance for loan losses 26,576 28,049
Total assets 3,405,620 3,081,263
Total deposits 2,210,308 2,012,087
Borrowings 836,769 696,134
Total liabilities 3,101,875 2,762,284
Total shareholders' equity 303,745 318,979
SELECTED AVERAGE BALANCES
Loans, net 1,983,455 2,043,217
Earning assets 3,093,516 2,676,436
Total assets 3,377,791 2,884,703
Total deposits 2,183,990 1,973,002
Borrowings 826,381 550,797
Total shareholders' equity 321,966 313,081
--------------------------------------------------------------------------------------
SCHEDULE OF OTHER ITEMS INCLUDED IN EARNINGS
Noninterest income
Equity portfolio restructuring gains 834 --
Bond portfolio restructuring gains 2,070 --
Equity investment write down (20) (144)
Equity method (loss) income (2,959) 111
--------------------------------------------------------------------------------------
Total other items $ (75) $ (33)
--------------------------------------------------------------------------------------
Other items, net of tax $ (55) $ (22)
--------------------------------------------------------------------------------------
(1) Annualized
(2) Noninterest expense divided by the sum of taxable equivalent net
interest income plus noninterest income less gain on sale of securities
less gain on sale of securities
14
NET INTEREST INCOME
An analysis of the Corporation's net interest income on a
taxable-equivalent basis and average balance sheets for the three months ended
March 31, 2002 and 2001 is presented in TABLE TWO. The changes in net interest
income for the three months ended March 31, 2002 and 2001 are analyzed in TABLE
THREE.
Net interest income, the difference between total interest income and
total interest expense, is the Corporation's principal source of earnings. Net
interest income amounted to $27.6 million for the three months ended March 31,
2002, an increase of $2.2 million from net interest income of $25.4 million for
the same period in 2001. The increase in net interest income was driven by
decreased interest expense, increased loan growth and increased securities
interest income. The reduced interest expense for 2002 was due to the lower cost
of funding in a declining interest rate environment. The increased securities
interest income was due to the increase in the Corporation's average securities
available for sale portfolio since the first quarter of 2001. The Corporation
began to increase its securities available for sale portfolio late in the first
quarter of 2001, to offset the effects of the dampened loan growth.
Average interest earning assets increased approximately $417.1 million
to $3.09 billion for the three months ended March 31, 2002 compared to $2.68
billion for the same 2001 period. This increase is primarily due to a $590.6
million increase in the Corporation's average securities available for sale
portfolio for the three months ended March 31, 2002, excluding the impact of the
securitization of $167.0 million of mortgage loans during the first quarter of
2001. The increase in average securities available for sale was primarily due to
net purchases of additional securities beginning late in the first quarter of
2001 and continuing through the end of 2001. The increase in average interest
earning assets was partially offset by a decrease of $169.2 million in the
Corporation's average loan portfolio, excluding the impact of the securitization
of $167.0 million of mortgage loans during the first quarter of 2001. The
decrease in average yield on interest earning assets to 6.46 percent for the
three months ended March 31, 2002, compared to 8.25 percent for the three months
ended March 31, 2001, resulted principally from the decrease in the average
prime rate during the three months ended March 31, 2002 to 4.50 percent, from
8.68 percent for the three months ended March 31, 2001. The decrease in the
average prime rate is attributable to the Federal Reserve's 475 basis point
decrease in the Fed Funds rate during 2001. The average yield earned on loans
was 6.73 percent for the three months ended March 31, 2002, compared to 8.72
percent for the same 2001 period.
In addition to the increase in average interest earning assets, the
Corporation experienced an increase in average interest-bearing liabilities of
$470.0 million to $2.76 billion for the three months ended March 31, 2002 due to
the use of Federal Home Loan Bank ("FHLB") advances to fund securities purchases
and increases in deposits. The average rate paid on interest bearing liabilities
decreased to 3.16 percent for the three months ended March 31, 2002, compared to
5.09 percent in the same 2001 period, primarily due to a decline in the average
rate of borrowings. The average rate paid on interest-bearing deposits was 2.89
percent for the three months ended March 31, 2002, down from 4.94 percent in the
same 2001 period. Similarly, the rate paid on other borrowed funds decreased to
3.80 percent for the three months ended March 31, 2002, compared to 5.57 percent
in the same 2001 period.
The net interest margin (tax adjusted net interest income divided by
average interest-earning assets) decreased 26 basis points to 3.64 percent for
the three months ended March 31, 2002, compared to 3.90 percent in the same 2001
period. The decrease reflects the impact of the declining interest rate
environment in 2001, which had a negative impact on the net interest margin as
assets repriced faster than liabilities. The addition of lower yielding
securities, higher levels of borrowings and competitive forces related to loan
and deposit pricing also had a negative impact on the net interest margin.
The following table includes for the three months ended March 31, 2002
and 2001 interest income on interest earning assets and related average yields,
as well as interest expense on interest bearing liabilities and related average
rates paid. In addition, the table includes the net interest margin. Average
balances were calculated based on daily averages.
15
TABLE TWO
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
-----------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER 2002 First Quarter 2001
------------------------------------------------------------------------------------
INTEREST AVERAGE Interest Average
AVERAGE INCOME/ YIELD/RATE Average Income/ Yield/Rate
(Dollars in thousands) BALANCE EXPENSE PAID (5) Balance Expense Paid (5)
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Loans (1) (2) (3) $ 1,983,455 $ 32,920 6.73% $ 2,043,217 $ 43,931 8.72%
Securities - taxable 1,016,391 15,190 5.98 528,309 8,976 6.80
Securities - nontaxable 85,292 1,353 6.34 92,213 1,473 6.39
Federal funds sold 792 4 1.95 1,881 31 6.74
Interest bearing bank deposits 7,586 28 1.47 10,816 156 5.86
-----------------------------------------------------------------------------------------------------------------------------------
Total earning assets (4) 3,093,516 49,495 6.46 2,676,436 54,567 8.25
-----------------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 98,834 67,668
Other assets 185,442 140,559
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 3,377,791 $ 2,884,703
-----------------------------------------------------------------------------------------------------------------------------------
INTEREST BEARING LIABILITIES:
Demand deposits 559,566 1,431 1.04 488,981 3,122 2.59
Savings deposits 116,200 354 1.23 118,862 590 2.01
Other time deposits 1,254,038 11,964 3.87 1,127,523 17,417 6.26
Other borrowings 826,381 7,741 3.80 550,797 7,562 5.57
-----------------------------------------------------------------------------------------------------------------------------------
Total interest bearing liabilities 2,756,185 21,490 3.16 2,286,163 28,691 5.09
-----------------------------------------------------------------------------------------------------------------------------------
Noninterest bearing sources:
Noninterest bearing deposits 254,186 237,636
Other liabilities 45,454 47,823
Shareholders' equity 321,966 313,081
-----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 3,377,791 $ 2,884,703
-----------------------------------------------------------------------------------------------------------------------------------
Net interest spread 3.30 3.16
Impact of noninterest bearing sources 0.34 0.74
-----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/
YIELD ON EARNINGS ASSETS $ 28,005 3.64% $ 25,876 3.90%
-----------------------------------------------------------------------------------------------------------------------------------
(1) The preceding analysis takes into consideration the principal amount of
nonaccruing loans and only income actually collected and recognized on
such loans.
(2) Average loan balances are shown net of unearned income.
(3) Includes amortization of deferred loan fees of approximately $633 and
$679 for the first quarter of 2002 and 2001, respectively.
(4) Yields on nontaxable securities and loans are stated on a
taxable-equivalent basis, assuming a Federal tax rate of 35 percent,
applicable state taxes and TEFRA disallowances for the first quarter of
2002 and 2001. The adjustments made to convert to a taxable-equivalent
basis were $455 and $497 for the first quarter of 2002 and 2001,
respectively.
(5) Annualized
16
The following tables presents the changes in net interest income from
the three months ended March 31, 2001 to March 31, 2002:
TABLE THREE
VOLUME AND RATE VARIANCE ANALYSIS
------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31
---------------------------------------------------------
INCREASE (DECREASE) IN NET INTEREST INCOME
DUE TO CHANGE IN (1)
---------------------------------------------------------
2001 2002
INCOME/ INCOME/
(DOLLARS IN THOUSANDS) EXPENSE RATE VOLUME EXPENSE
------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $43,931 $ (9,873) $(1,138) $32,920
Securities - taxable 8,976 (1,580) 7,794 15,190
Securities - nontaxable 1,473 (10) (110) 1,353
Federal funds sold 31 (16) (11) 4
Interest bearing bank deposits 156 (100) (28) 28
------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $54,567 $(11,579) $ 6,507 $49,495
------------------------------------------------------------------------------------------------
INTEREST EXPENSE:
Demand deposits $ 3,122 $ (2,006) $ 315 $ 1,431
Savings deposits 590 (225) (11) 354
Other time deposits 17,417 (7,034) 1,581 11,964
Other borrowings 7,562 (3,003) 3,182 7,741
------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 28,691 (12,268) 5,067 21,490
------------------------------------------------------------------------------------------------
NET INTEREST INCOME $25,876 $ 689 $ 1,440 $28,005
------------------------------------------------------------------------------------------------
(1) The changes for each category of income and expense are divided between the
portion of change attributable to the variance in rate or volume for that
category. The amount of change that cannot be separated is allocated to each
variance proportionately.
PROVISION FOR LOAN LOSSES
The provision for loan losses for the three months ended March 31, 2002
amounted to $2.1 million, compared to the provision for loan losses of $0.8
million for the same period in 2001. The increase in the provision for loan
losses was due to $74.7 million in net loan growth and higher net charge-offs
during the first quarter of 2002.
Net charge-offs for the three months ended March 31, 2002 were $1.4
million or 0.28 percent of average loans compared to $0.7 million or 0.15
percent of average loans for the same period in 2001. The increase in net
charge-offs was primarily due to the effects of slower economic growth on some
customers within the portfolio. First Charter continues to monitor the asset
quality of the loan portfolio and charge-offs are recorded based upon the
financial condition of the borrower and the likelihood of repayment.
NONINTEREST INCOME
Noninterest income increased 30 percent to $10.9 million for the three
months ended March 31, 2002 compared to $8.4 million for the comparable 2001
period. The increase in noninterest income was driven by increased service
charge income on deposit accounts, trading gains, brokerage revenues, the
continued growth of First Charter Insurance Services and securities gains.
Premiums earned on written covered call options on fixed income securities
comprised the majority of our trading gains. The effects of these items were
offset to a certain degree by net losses on equity method investments of $3.0
million during the first quarter of 2002. As discussed in NOTE NINE of the
consolidated financial statements, the components of the $3.0 million net loss
were a loss of $3.3 million on one equity investment that was partially offset
by a gain on other equity method investments of approximately $300,000. These
net losses are included in the Other segment as presented in NOTE EIGHT of the
consolidated financial statements.
During the first quarter of 2002, we restructured a portion of our
securities available for sale investment portfolio. We sold approximately $87.3
million of longer maturities and replaced them with securities having shorter
maturities. In addition, our equity securities portfolio was reduced in order to
focus our efforts on other activities that we believe could result in greater
returns. These restructurings resulted in gains aggregating approximately $2.9
million. In addition, gains on sales of callable securities amounted to $0.9
million for the first quarter of 2002. As part of the active management of our
securities available for sale investment portfolio, callable securities which
appear to be on the verge of being called are sold in order to recognize their
gain in value.
17
During the first quarter of 2002, net losses from equity method
investments of $3.0 million offset a portion of the increases experienced in
noninterest income. First Charter's equity method investments represent
investments in venture capital limited partnerships. First Charter recognizes
gains or losses from equity method investments based upon changes in our share
of the fair market value of the limited partnerships' investments as reported by
such limited partnerships.
NONINTEREST EXPENSE
Noninterest expense increased $4.5 million to $24.6 million for the
three months ended March 31, 2002 from $20.0 million in the comparable 2001
period. The major contributors to that expense increase for the first quarter
were the increase in occupancy and equipment associated with the move into the
First Charter Center, expenses related to the implementation of a new computer
operating system and the costs associated with the human resources added during
2001. Additionally, as revenues increased in certain noninterest income
categories, incentive compensation based on that revenue increased as well. The
efficiency ratio for the first quarter of 2002 increased to 69.8 percent
compared to 58.9 percent for the first quarter of 2001. Although this ratio has
increased as infrastructure was added during 2001, the majority of the increase
relates to the losses from equity method investments recognized during the first
quarter of 2002. The efficiency ratio for the first quarter of 2002 would have
been 64.4 percent excluding the $3.0 million of losses from equity method
investments.
INCOME TAXES
Total income tax expense for the three months ended March 31, 2002 was
$3.2 million for an effective tax rate of 27.3 percent compared to $4.2 million
for an effective tax rate of 32.0 percent for the same period in 2001. The
decrease in the tax expense for the three months ended March 31, 2002, was
attributable to a decrease in taxable income and the effective tax rate. The
decrease in the effective tax rate was due to tax-planning initiatives
undertaken for 2002.
FINANCIAL CONDITION
SUMMARY
Total assets at March 31, 2002 amounted to $3.41 billion, compared to
$3.33 billion at December 31, 2001 and $3.08 billion at March 31, 2001. Gross
loans at March 31, 2002 amounted to $2.03 billion, compared to $1.96 billion at
December 31, 2001 and $1.99 billion at March 31, 2001. This increase from prior
periods was due to increased loan demand experienced during the first quarter of
2002. As the economy begins to signal improvement, we remain cautious in our
underwriting and approval process in consideration of the current economic
environment.
The securities available for sale portfolio increased to $1.11 billion
at March 31, 2002, compared to $1.08 billion at December 31, 2001, and $875.9
million at March 31, 2001. The increase in securities available for sale was due
to the purchases beginning in early 2001, and continuing throughout 2001, to
increase earning assets in order to offset the lack of loan growth that was
forecasted for the remainder of 2001.
The carrying value of securities available for sale was approximately
$5.5 million below their amortized cost at March 31, 2002, which represents
gross unrealized gains of $10.5 million and gross unrealized losses of $16.0
million.
Total deposits at March 31, 2002 amounted to $2.21 billion, compared to
$2.16 billion at December 31, 2001 and $2.01 billion at March 31, 2001. Other
borrowings increased to $836.8 million at March 31, 2002 compared to $808.5
million at December 31, 2001, and $696.1 million at March 31, 2001. The increase
was primarily due to increases in Federal Home Loan Bank advances, the proceeds
of which were principally used to fund loan growth and security purchases.
Shareholders' equity at March 31, 2002 was $303.7 million, which
represented a book value per share of $9.86 and an equity-to-assets percentage
of 9.53 percent. The securities available for sale portfolio's had an unrealized
net loss of $3.4 million (net of tax) at March 31, 2002, compared to an
unrealized net gain of $5.8 million (net of tax) at December 31, 2001.
18
NONPERFORMING ASSETS
The total of nonperforming assets increased to $34.8 million at March
31, 2002 compared to $31.9 million and $30.6 million at December 31, 2001 and
March 31, 2001, respectively. As a percentage of total assets, nonperforming
assets have increased to 1.02 percent at March 31, 2002 compared to 0.96 percent
and 0.99 at December 31, 2001 and March 31, 2001, respectively. The increase in
nonperforming assets during the first quarter of 2002 was primarily due to the
addition of two commercial relationships, which are secured by real estate, to
nonaccrual status during the quarter ended March 31, 2002.
Total nonperforming assets and loans 90 days or more past due and still
accruing interest at March 31, 2002 were $34.8 million or 1.71 percent of total
loans and other real estate, compared to $32.0 million or 1.62 percent of total
loans and other real estate at December 31, 2001. Nonaccrual loans at March 31,
2002 increased to $27.6 million, compared to $23.8 at December 31, 2001.
Nonaccrual loans at March 31, 2002 were not concentrated in any one industry and
primarily consisted of several large credits secured by real estate. The
components of nonperforming assets and loans 90 days or more past due and still
accruing are presented in the table below:
TABLE FOUR
NONPERFORMING AND PROBLEM ASSETS
----------------------------------------------------------------------------------------
MARCH 31 December 31
(Dollars in thousands) 2002 2001
----------------------------------------------------------------------------------------
Nonaccrual loans $ 27,558 $ 23,824
Other real estate 7,208 8,049
----------------------------------------------------------------------------------------
Total nonperforming assets 34,766 31,873
----------------------------------------------------------------------------------------
Loans 90 days or more past due
and still accruing interest 38 152
----------------------------------------------------------------------------------------
Total nonperforming assets and loans 90 days or
more past due and still accruing interest $ 34,804 $ 32,025
----------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
All estimates of the loan portfolio risk, including the adequacy of the
allowance for loan losses, are subject to general and local economic conditions,
among other factors, which are unpredictable and beyond the Corporation's
control. Since a significant portion of the loan portfolio is comprised of real
estate loans and loans to area businesses, the Corporation is subject to
continued risk that the real estate market and economic conditions could
continue to change and could result in future losses and require increases in
the provision for loan losses.
Management currently uses several measures to assess and control the
loan portfolio risk. For example, all loans over a certain dollar amount must
receive an in-depth review by an analyst in the Bank's Credit Department. Any
issues regarding risk assessments of those credits are addressed by the Bank's
Senior Risk Managers and factored into management's decision to originate or
renew the loan. Furthermore, large commitments are reviewed by both a Board of
Directors Loan Committee and an Executive Loan Committee comprised of executive
management, the Chief Credit Officer and senior lending officers of the Bank.
The Corporation also continues to employ an independent third party risk
assessment group to review the underwriting, documentation and risk grading
analysis. This third party group reviews loans on a sampling basis at regular
intervals throughout the year. The third party's evaluation and report is shared
with Executive Management and the Loan and Audit Committees of the Bank.
Management uses the information developed from the procedures described
above in evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio and to
assist management in determining the appropriate levels of the allowance for
loan losses.
As part of the continual grading process, individual commercial loans
are assigned a credit risk grade based on their credit quality, which is subject
to change as conditions warrant. Any changes in those risk assessments as
determined by the outside risk assessment group, regulatory examiners or the
Corporation's Risk Management Division are also considered in the allowance for
loan losses analysis. Management considers certain commercial loans on
nonaccrual status to be individually impaired and measures such impairment and
the related allowance for loan loss based primarily upon collateral values. An
estimate of an allowance is made for all other graded loans in
19
the portfolio based on their assigned credit risk grade, type of loan,
historical loss experience and other matters related to credit risk. In the
allowance for loan loss analysis process, the Bank also aggregates non-graded
loans into pools of similar credits and reviews the historical loss experience
associated with these pools as additional criteria to allocate the allowance to
each category. The Bank also considers the impact of the area, local, regional
and national economies in making estimates of the allowance for loan losses.
At March 31, 2002 the allowance for loan losses was $26.6 million or
1.31 percent of gross loans compared to $25.8 million or 1.32 percent at
December 31, 2001 and $28.0 million, or 1.41 percent at March 31, 2001. The
decrease in the allowance for loan losses ratio from December 31, 2001 was
primarily the result of loan growth experienced during the first quarter of
2002. The decrease in the ratio of the allowance for loan losses to gross loans
from March 31, 2001 to March 31, 2002 was primarily due to higher net loan
charge-offs associated with two large commercial relationships which were
written down during the fourth quarter of 2001. These commercial loans had been
identified as impaired during 2000 and had specific allocated reserves.
Management considers the allowance for loan losses adequate to cover
inherent losses in the Bank's loan portfolio as of the date of the financial
statements. Management believes it has established the allowance in
consideration of the current economic environment. While management uses the
best information available to make evaluations, future additions to the
allowance may be necessary based on changes in economic and other conditions.
Additionally, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for loan losses.
Such agencies may require the recognition of adjustments to the allowances based
on their judgments of information available to them at the time of their
examinations.
TABLE FIVE
ALLOWANCE FOR LOAN LOSSES
----------------------------------------------------------------------------------
THREE MONTHS
ENDED MARCH 31
----------------------------
(Dollars in thousands) 2002 2001
----------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $ 25,843 $ 28,447
----------------------------------------------------------------------------------
LOAN CHARGE-OFFS:
Commercial, financial and agricultural 600 454
Real estate - construction -- --
Real estate - mortgage 32 --
Installment 925 496
----------------------------------------------------------------------------------
Total loans charged-off 1,557 950
----------------------------------------------------------------------------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial, financial and agricultural 22 80
Real estate - construction -- --
Real estate - mortgage 19 54
Installment 109 85
Other 35 --
----------------------------------------------------------------------------------
Total recoveries of loans previously charged-off 185 219
----------------------------------------------------------------------------------
Net charge-offs 1,372 731
----------------------------------------------------------------------------------
Provision for loan losses 2,105 750
Adjustment for loans sold and securitized -- (417)
----------------------------------------------------------------------------------
BALANCE, MARCH 31 $ 26,576 $ 28,049
----------------------------------------------------------------------------------
Average loans, net of unearned income $1,983,455 $ 2,043,217
Net charge-offs to average loans (annualized) 0.28% 0.15%
Allowance for loan losses to
gross loans at March 31 1.31 1.41
----------------------------------------------------------------------------------
20
LIQUIDITY
Liquidity is the ability to maintain cash flows adequate to fund
operations and meet obligations and other commitments on a timely and
cost-effective basis. Liquidity is provided by the ability to attract deposits,
flexible repricing schedules in a sizable portion of the loan portfolio, current
earnings, a strong capital base and the ability to use alternative funding
sources that complement normal sources. Management's asset-liability policy is
to maximize net interest income while continuing to provide adequate liquidity
to meet continuing loan demand and deposit withdrawal requirements and to
service normal operating expenses.
The Corporation's primary source of funding is from customer deposits,
loan repayments, and securities available for sale. If additional funding
sources are needed, the Bank has access to federal fund lines at correspondent
banks and borrowings from the Federal Reserve discount window. In addition to
these sources, as described above, the Bank is a member of the FHLB, which
provides access to FHLB lending sources. At March 31, 2002, the Bank had an
available line of credit with the FHLB totaling $788.9 million with $119.2
million available. At March 31, 2002, FCB also had federal funds back-up lines
of credit totaling $50.0 million, of which there were no amounts outstanding. At
March 31, 2002, the Corporation had lines of credit with SunTrust Bank totaling
$25.0 million with $15.0 million outstanding and commercial paper outstandings
of $8.1 million.
Another source of liquidity is the securities available for sale
portfolio. See "FINANCIAL CONDITION - Summary" for further discussion.
Management believes the Bank's sources of liquidity are adequate to meet loan
demand, operating needs and deposit withdrawal requirements.
The Corporation has obligations under existing contractual obligations
that will require payments in future periods. The following table presents
aggregated information about such payments to be made in future periods. The
Corporation anticipates refinancing during 2002 any contractual obligations that
are due in less than one year.
TABLE SIX
CONTRACTUAL OBLIGATIONS
As of March 31, 2002
------------------------------------------------------------------------------------------------------------
PAYMENTS DUE BY PERIOD
LESS THAN
(DOLLARS IN THOUSANDS) 1 YEAR 1-3 YEARS 4-5 YEARS OVER 5 YEARS TOTAL
------------------------------------------------------------------------------------------------------------
Other borrowings $ 368,449 $ 40,080 $ 65,080 $363,160 $ 836,769
Lease obligations 1,731 2,830 1,971 1,400 7,932
Equity method investees funding 1,250 -- -- -- 1,250
Deposits (1) 1,954,975 199,455 55,468 410 2,210,308
------------------------------------------------------------------------------------------------------------
TOTAL CONTRACTUAL CASH OBLIGATIONS $2,326,405 $242,365 $122,519 $364,970 $3,056,259
------------------------------------------------------------------------------------------------------------
(1) Deposits with no stated maturity (demand, money market, and savings
deposits) are presented in the less than one year category.
ASSET-LIABILITY MANAGEMENT AND INTEREST RATE SENSITIVITY
The primary objective of the Corporation's asset-liability management
strategy is to reduce the risk of a significant decrease in net interest income
caused by interest rate changes without unduly penalizing current earnings. One
method used to manage interest rate sensitivity is to measure, over various time
periods, the interest rate sensitivity positions, or gaps; however, this method
addresses only the magnitude of timing differences and does not address earnings
or market value. Management uses an earnings simulation model to assess the
amount of earnings at risk due to changes in interest rates. This model is
updated monthly and is based on a range of interest rate scenarios. Under the
Corporation's policy, the limit for interest rate risk is 10 percent of net
interest income when considering an increase or decrease in interest rates of
300 basis points over a twelve-month period. Management believes this method
more accurately measures interest rate risk. Assuming a 300 basis point pro-rata
increase in interest rates over a twelve-month period, the Corporation's
sensitivity to interest rate risk would positively impact net interest income by
approximately 1.57 percent of net interest income at December 31, 2001. Assuming
a 150 basis point pro-rata decrease in interest rates over a twelve-month
period, the Corporation's sensitivity to interest rate risk would negatively
impact net interest income by approximately 0.61 percent of net interest income
at December 31, 2001. Both scenarios are within Management's acceptable range.
21
From time to time, the Corporation may use derivative financial
instruments including futures, forwards, interest rate swaps, option contracts,
and other financial instruments with similar characteristics. At March 31, 2002,
the Corporation had no such derivative financial instruments. Refer to NOTE SIX
to consolidated financial statements and RESULTS OF OPERATIONS for a discussion
of the Corporation's use of written over-the-counter covered call options during
2002 and 2001. The Corporation does not have any special purpose entities or
off-balance sheet financing arrangements.
The Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to
extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the
amount recognized in the consolidated financial statements. Commitments to
extend credit are agreements to lend to a customer so long as there is no
violation of any condition established in the contract. Commitments generally
have fixed expiration dates and may require collateral from the borrower if
deemed necessary by the Corporation. Standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance of a customer
to a third party up to a stipulated amount and with specified terms and
conditions. Commitments to extend credit and standby letters of credit are not
recorded as an asset or liability by the Corporation until the instrument is
exercised. See "FINANCIAL CONDITION - Loans Portfolio".
The following table presents aggregated information about commitments
of the Corporation which could impact future periods.
TABLE SEVEN
COMMITMENTS
As of March 31, 2002
------------------------------------------------------------------------------------------------
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
LESS THAN TOTAL AMOUNTS
(DOLLARS IN THOUSANDS) 1 YEAR 1-3 YEARS 4-5 YEARS OVER 5 YEARS COMMITTED
------------------------------------------------------------------------------------------------
Lines of Credit $ 83,224 $ 2,030 $ 5,071 $201,461 $291,786
Standby Letters of Credit 6,779 265 -- -- 7,044
Loan Commitments 156,081 51,499 15,817 8,657 232,054
------------------------------------------------------------------------------------------------
TOTAL COMMITMENTS $246,084 $53,794 $20,888 $210,118 $530,884
------------------------------------------------------------------------------------------------
CAPITAL RESOURCES
At March 31, 2002, total shareholders' equity was $303.7 million,
representing a book value of $9.86 per share, compared to $309.3 million or a
book value of $10.06 per share at December 31, 2001. The decrease was primarily
due to the recognition of $9.2 million in after-tax unrealized losses on
available for sale securities combined with net earnings (net income less
dividends) of $3.0 million and the receipt of $0.6 million from the sale of
approximately 62,942 shares of common stock issued for stock options.
At March 31, 2002, the Corporation and the Bank were in compliance with
all existing capital requirements. The most recent notifications from the
Corporation's and the Bank's various regulators categorized the Corporation and
the Bank as "well capitalized" under the regulatory framework for prompt
corrective action. There are no events or conditions since those notifications
that management believes have changed either of the entities' categories. The
Corporation's capital requirements are summarized in the table below:
RISK-BASED CAPITAL
------------------------------------------------------------------
LEVERAGE CAPITAL TIER 1 CAPITAL TOTAL CAPITAL
-----------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE (1) AMOUNT PERCENTAGE (2) AMOUNT PERCENTAGE (2)
-----------------------------------------------------------------------------------------------------------------------------------
Actual $ 288,156 8.58% $ 288,156 12.60% $315,385 13.80%
Required 134,348 4.00 91,448 4.00 182,895 8.00
Excess 153,808 4.58 196,708 8.60 132,490 5.80
(1) Percentage of total adjusted average assets. The FRB minimum leverage
ratio requirement is 3 percent to 5 percent, depending on the
institution's composite rating as determined by its regulators. The FRB
has not advised the Corporation of any specific requirements applicable
to it.
(2) Percentage of risk-weighted assets.
22
REGULATORY RECOMMENDATIONS
Management is not presently aware of any current recommendations to the
Corporation or to the Bank by regulatory authorities which, if they were to be
implemented, would have a material adverse effect on the Corporation's or the
Bank's liquidity, capital resources, or operations.
ACCOUNTING AND REGULATORY MATTERS
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 141 (SFAS No. 141), "Business Combinations", and Statement of
Financial Accounting Standards No. 142 (SFAS No. 142), "Goodwill and Other
Intangible Assets". SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. SFAS 141 also
specifies criteria which must be met for intangible assets acquired in a
purchase method business combination to be recognized and reported apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 also requires
that identifiable intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The Corporation adopted the provisions of SFAS 141 as of June 30, 2001
and fully adopted SFAS 142 as of January 1, 2002. Furthermore, any goodwill and
any intangible asset determined to have an indefinite useful life that was
acquired in a purchase business combination completed after June 30, 2001 has
not been amortized, but has been evaluated for impairment in accordance with the
appropriate accounting literature issued prior to SFAS 142. Goodwill and
intangible assets acquired in business combinations completed before July 1,
2001 continued to be amortized in 2001 prior to the full adoption of SFAS 142 on
January 1, 2002.
SFAS 141 requires, upon adoption of SFAS 142, that the Corporation
evaluate its existing intangible assets and goodwill that were acquired in prior
purchase business combinations, and to make any necessary reclassifications in
order to conform with the new criteria in SFAS 141 for recognition apart from
goodwill. Upon adoption of SFAS 142, the Corporation reassessed the useful lives
and residual values of all identifiable intangible assets acquired in purchase
business combinations, and as a result did not make any necessary amortization
period adjustments. In addition, any intangible assets classified as goodwill
under SFAS 142 are subjected to a transitional impairment test during the first
six months of 2002 based on the level of goodwill as of January 1, 2002. Any
impairment losses identified as a result of this transitional impairment test
will be recognized in the 2002 statement of income as the effect of a change in
accounting principle. The Corporation expects to complete the transitional
impairment test during the second quarter of 2002.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 (SFAS No. 143), "Accounting for Asset Retirement Obligations",
which addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and the associated asset
retirement cost. This standard requires the Corporation to record the fair value
of an asset retirement obligation as a liability in the period in which it
incurs a legal obligation associated with the retirement of tangible long-lived
assets that result from the acquisition, construction, development and or normal
use of the assets. The Corporation also is to record a corresponding increase to
the carrying amount of the related long-lived asset and to depreciate that cost
over the life of the asset. The liability is changed at the end of each period
to reflect the passage of time and changes in the estimated future cash flows
underlying the initial fair value measurement. This statement is effective for
fiscal years beginning after June 15, 2002. At this time, the Corporation is
assessing the impact of SFAS No. 143 on its financial condition and results of
operations.
In October 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144 (SFAS No. 144), "Accounting
for the Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This standard provides guidance on differentiating between long-lived assets to
be held and used, long-lived assets to be disposed of other than by sale and
long-lived assets to be disposed of by sale. SFAS No. 144 supersedes FASB
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
SFAS No. 144 also supersedes Accounting Principals Board Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary,
23
Unusual and Infrequently Occurring Events and Transactions". This statement is
effective for fiscal years beginning after December 15, 2001. Accordingly, the
Corporation adopted SFAS No. 144 on January 1, 2002, with no material impact on
its consolidated financial statements.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following table presents information concerning market risk
sensitive instruments as of March 31, 2002:
MARKET RISK
-----------------------------------------------------------------------------------------------------------------------------------
March 31, 2002
EXPECTED MATURITY
------------------------------------------------------------------------------
(Dollars in thousands) TOTAL 1 YEAR 2 YEARS 3 YEARS 4 YEARS 5 YEARS THEREAFTER
-----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Debt securities
Fixed rate
Book value $1,069,978 $ 187,957 $140,970 $164,044 $148,742 $241,492 $186,773
Weighted average effective yield 5.88%
Fair value $1,062,974
Loans
Fixed rate
Book value $ 913,339 178,842 146,511 148,987 130,444 74,970 233,585
Weighted average effective yield 7.67%
Fair value $ 940,072
Variable rate
Book value $1,089,545 331,860 130,941 118,907 100,564 126,631 280,642
Weighted average effective yield 5.33%
Fair value $1,083,664
LIABILITIES
Deposits
Fixed rate
Book value $1,270,725 1,019,129 148,339 47,379 8,249 47,219 410
Weighted average effective yield 3.58%
Fair value $1,270,864
Variable rate
Book value $ 681,719 677,982 3,519 218 -- -- --
Weighted average effective yield 1.19%
Fair value $ 681,896
Other borrowings
Fixed rate
Book value $ 537,280 83,960 25,040 40 40 65,040 363,160
Weighted average effective yield 5.05%
Fair value $ 536,026
Variable rate
Book value $ 299,489 284,489 -- 15,000 -- -- --
Weighted average effective yield 2.20%
Fair value $ 299,531
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Corporation and the Bank are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated operations, liquidity or financial position of the Corporation or
the Bank.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No.
(per Exhibit Table
in item 601 of
Regulation S-K) Description of Exhibits
3.1 Amended and Restated Articles of
Incorporation of the Corporation,
incorporated herein by reference to
Exhibit 3.1 of the Corporation's Annual
Report on Form 10-K for the fiscal year
ended December 31, 2000 (Commission File
No. 0-15829).
3.2 By-laws of the Corporation, as amended,
incorporated herein by reference to
Exhibit 3.2 of the Corporation's Annual
Report on Form 10-K for the fiscal year
ended December 31, 1995 (Commission File
No. 0-15829).
(b) Reports on Form 8-K
The following reports on Form 8-K were filed by the
Corporation during the quarter ended March 31, 2002:
Current Report on Form 8-K dated January 15, 2002 and filed
January 15, 2002, Items 5 and 7.
Current Report on Form 8-K dated January 16, 2002 and filed
January 16, 2002, Items 7 and 9.
25
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: May 2, 2002 By: /s/ Robert O. Bratton
----------------------------
Robert O. Bratton
Executive Vice President &
Chief Financial Officer
26