First Charter Corporation
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2006
OR
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o |
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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)
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North Carolina
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56-1355866 |
(State or Other Jurisdiction of
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(I.R.S. Employer |
Incorporation or Organization)
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Identification No.) |
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10200 David Taylor Drive, Charlotte, NC
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28262-2373 |
(Address of Principal Executive Offices)
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(Zip Code) |
Registrants 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer o
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Accelerated Filer þ
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Non-Accelerated Filero |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act.) Yes o No þ
As of May 9, 2006 the Registrant had outstanding 31,083,364 shares of Common Stock, no par
value.
First Charter Corporation
Form 10-Q for the Quarterly Period Ended March 31, 2006
INDEX
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Page |
Part I Financial Information |
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Item 1. Financial Statements: |
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Consolidated Balance Sheets at March 31, 2006 and December 31, 2005 |
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3 |
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Consolidated Statements of Income for the Three Months Ended March 31, 2006 and 2005 |
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4 |
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Consolidated Statement of Shareholders Equity for the Three Months
Ended March 31, 2006 |
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5 |
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Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2006 and 2005 |
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6 |
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Notes to Consolidated Financial Statements |
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7 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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16 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk |
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34 |
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Item 4. Controls and Procedures |
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34 |
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Part II Other Information |
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Item 1. Legal Proceedings |
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35 |
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Item 1A. Risk Factors |
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35 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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35 |
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Item 3. Defaults Upon Senior Securities |
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35 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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35 |
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Item 5. Other Information |
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35 |
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Item 6. Exhibits |
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36 |
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Signature |
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37 |
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2
PART 1. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
First Charter Corporation and Subsidiaries
Consolidated Balance Sheets
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March 31, |
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December 31, |
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2006 |
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2005 |
(Dollars in thousands, except share data) |
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(Unaudited) |
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Assets: |
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Cash and due from banks |
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$ |
95,382 |
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$ |
119,080 |
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Federal funds sold |
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2,706 |
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2,474 |
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Interest bearing bank deposits |
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3,745 |
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3,998 |
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Cash and cash equivalents |
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101,833 |
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125,552 |
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Securities available for sale (cost of $920,496 and $917,710;
carrying amount of pledged collateral $588,258 and $557,132) |
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900,424 |
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899,111 |
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Loans held for sale |
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8,719 |
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6,447 |
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Loans |
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3,011,088 |
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2,945,918 |
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Less: Unearned income |
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(125 |
) |
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(173 |
) |
Allowance for loan losses |
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(29,505 |
) |
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(28,725 |
) |
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Loans, net |
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2,981,458 |
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2,917,020 |
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Premises and equipment, net |
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107,298 |
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106,773 |
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Goodwill and other intangible assets |
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21,746 |
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21,897 |
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Other assets |
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161,878 |
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155,620 |
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Total assets |
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$ |
4,283,356 |
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$ |
4,232,420 |
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Liabilities: |
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Deposits, domestic: |
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Noninterest bearing demand |
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$ |
422,184 |
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$ |
429,758 |
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Interest bearing |
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2,378,162 |
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2,369,721 |
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Total deposits |
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2,800,346 |
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2,799,479 |
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Federal funds purchased and securities sold under
agreements to repurchase |
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261,599 |
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312,283 |
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Commercial paper and other short-term borrowings |
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199,342 |
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198,432 |
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Long-term debt |
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642,843 |
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557,859 |
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Other liabilities |
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45,599 |
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40,772 |
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Total liabilities |
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3,949,729 |
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3,908,825 |
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Shareholders equity: |
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Preferred stock no par value; authorized 2,000,000 shares; no shares
issued and outstanding |
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Common stock no par value; authorized 100,000,000 shares;
issued and outstanding 30,974,393 and 30,736,936 shares |
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138,363 |
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133,408 |
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Common stock held in Rabbi Trust for deferred compensation |
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(974 |
) |
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(893 |
) |
Deferred compensation payable in common stock |
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974 |
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893 |
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Retained earnings |
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207,409 |
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201,442 |
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Accumulated other comprehensive loss: |
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Unrealized loss on securities available for sale, net |
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(12,145 |
) |
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(11,255 |
) |
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Total shareholders equity |
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333,627 |
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323,595 |
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Total liabilities and shareholders equity |
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$ |
4,283,356 |
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$ |
4,232,420 |
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See accompanying notes to consolidated financial statements.
3
First Charter Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)
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For the Three Months |
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Ended March 31 |
(Dollars in thousands, except share and per share data) |
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2006 |
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2005 |
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Interest income: |
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Loans |
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$ |
50,260 |
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$ |
36,446 |
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Securities |
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9,311 |
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14,784 |
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Federal funds sold and interest bearing bank deposits |
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75 |
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52 |
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Total interest income |
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59,646 |
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51,282 |
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Interest expense: |
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Deposits |
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16,562 |
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10,514 |
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Federal funds purchased and securities
sold under agreements to repurchase |
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2,807 |
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1,327 |
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Federal Home Loan Bank and other borrowings |
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8,187 |
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8,867 |
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Total interest expense |
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27,556 |
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20,708 |
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Net interest income |
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32,090 |
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30,574 |
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Provision for loan losses |
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1,519 |
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1,900 |
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Net interest income after provision for loan losses |
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30,571 |
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28,674 |
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Noninterest income: |
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Service charges on deposit accounts |
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6,698 |
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6,236 |
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Wealth management income |
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1,664 |
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1,580 |
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Loss on sale of securities |
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(49 |
) |
Gain (loss) from equity method investments |
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545 |
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(58 |
) |
Mortgage services income |
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808 |
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394 |
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Brokerage services income |
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711 |
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802 |
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Insurance services income |
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4,290 |
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3,512 |
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Bank owned life insurance |
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|
827 |
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827 |
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Gain on sale of properties |
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81 |
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529 |
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ATM & debit card income |
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1,898 |
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1,450 |
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Other |
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719 |
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591 |
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Total noninterest income |
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18,241 |
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15,814 |
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Noninterest expense: |
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Salaries and employee benefits |
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17,693 |
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15,569 |
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Occupancy and equipment |
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4,770 |
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4,381 |
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Data processing |
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1,453 |
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1,321 |
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Marketing |
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1,288 |
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1,080 |
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Postage and supplies |
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1,231 |
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1,208 |
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Professional services |
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1,950 |
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1,913 |
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Telephone |
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579 |
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528 |
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Amortization of intangibles |
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150 |
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131 |
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Other |
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2,398 |
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2,738 |
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Total noninterest expense |
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31,512 |
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28,869 |
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Income before income taxes |
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17,300 |
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15,619 |
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Income tax expense |
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5,856 |
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5,310 |
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Net income |
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$ |
11,444 |
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$ |
10,309 |
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Net income per share: |
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Basic |
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$ |
0.37 |
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$ |
0.34 |
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Diluted |
|
$ |
0.37 |
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$ |
0.34 |
|
Weighted average shares: |
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|
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Basic |
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|
30,859,461 |
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30,234,683 |
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Diluted |
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|
31,153,338 |
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|
30,630,601 |
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See accompanying notes to consolidated financial statements.
4
First Charter Corporation and Subsidiaries
Consolidated Statements of Shareholders Equity
(Unaudited)
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Common Stock |
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held in Rabbi |
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Deferred |
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Accumulated |
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Trust for |
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Compensation |
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Other |
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Common Stock |
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Deferred |
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Payable in |
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Retained |
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Comprehensive |
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(Dollars in thousands, except share data) |
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Shares |
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Amount |
|
Compensation |
|
Common Stock |
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Earnings |
|
Income (Loss) |
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Total |
|
Balance, December 31, 2005 |
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30,736,936 |
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|
$ |
133,408 |
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|
$ |
(893 |
) |
|
$ |
893 |
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|
$ |
201,442 |
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|
$ |
(11,255 |
) |
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$ |
323,595 |
|
Comprehensive loss: |
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|
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|
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|
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Net income |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,444 |
|
|
|
|
|
|
|
11,444 |
|
Unrealized loss on securities available
for sale, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(890 |
) |
|
|
(890 |
) |
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Total comprehensive loss |
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|
|
|
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|
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|
|
|
|
|
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|
|
|
|
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|
|
|
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|
|
10,554 |
|
Common stock purchased by Rabbi Trust
for deferred compensation |
|
|
|
|
|
|
|
|
|
|
(81 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81 |
) |
Deferred compensation payable
in common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81 |
|
|
|
|
|
|
|
|
|
|
|
81 |
|
Cash dividends declared |
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|
|
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|
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(5,477 |
) |
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|
|
|
|
|
(5,477 |
) |
Stock options exercised and Dividend
Reinvestment Plan stock issued |
|
|
148,803 |
|
|
|
2,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,307 |
|
Restricted stock issued |
|
|
88,654 |
|
|
|
2,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,118 |
|
Tax benefit from employees stock option
and restricted stock plans |
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144 |
|
Stock-based compensation |
|
|
|
|
|
|
386 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
386 |
|
|
Balance, March 31, 2006 |
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|
30,974,393 |
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|
$ |
138,363 |
|
|
$ |
(974 |
) |
|
$ |
974 |
|
|
$ |
207,409 |
|
|
$ |
(12,145 |
) |
|
$ |
333,627 |
|
|
See accompanying notes to consolidated financial statements.
5
First Charter Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
|
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|
|
|
|
|
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|
|
Three Months |
|
|
Ended March 31 |
(Dollars in thousands) |
|
2006 |
|
2005 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
11,444 |
|
|
$ |
10,309 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
1,519 |
|
|
|
1,900 |
|
Depreciation |
|
|
2,344 |
|
|
|
2,352 |
|
Amortization of intangibles |
|
|
150 |
|
|
|
131 |
|
Stock-based compensation expense |
|
|
513 |
|
|
|
42 |
|
Premium amortization and discount accretion, net |
|
|
284 |
|
|
|
591 |
|
Net loss on securities available for sale transactions |
|
|
|
|
|
|
49 |
|
Net
(gain) loss on sale of foreclosed assets |
|
|
(18 |
) |
|
|
123 |
|
Write-downs on foreclosed assets |
|
|
|
|
|
|
117 |
|
Net gain on sale of equipment |
|
|
|
|
|
|
(21 |
) |
(Gain) loss from equity method investments |
|
|
(545 |
) |
|
|
58 |
|
Net gain on sale property |
|
|
(81 |
) |
|
|
(529 |
) |
Origination of mortgage loans held for sale |
|
|
(38,833 |
) |
|
|
(27,666 |
) |
Proceeds from sale of mortgage loans held for sale |
|
|
36,561 |
|
|
|
26,987 |
|
Change in cash surrender value of bank owned life insurance |
|
|
(827 |
) |
|
|
(827 |
) |
Change in other assets |
|
|
(1,283 |
) |
|
|
4,640 |
|
Change in other liabilities |
|
|
4,771 |
|
|
|
(11,044 |
) |
|
Net cash provided by operating activities |
|
|
15,999 |
|
|
|
7,212 |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Proceeds from sales of securities available for sale |
|
|
10,037 |
|
|
|
157,897 |
|
Proceeds from maturities of securities available for sale |
|
|
21,578 |
|
|
|
42,935 |
|
Purchase of securities available for sale |
|
|
(34,684 |
) |
|
|
(7,228 |
) |
Net change in loans |
|
|
(67,432 |
) |
|
|
(270,565 |
) |
Proceeds from sales of other real estate |
|
|
546 |
|
|
|
443 |
|
Net purchases of premises and equipment |
|
|
(2,869 |
) |
|
|
(3,382 |
) |
|
Net cash used in investing activities |
|
|
(72,824 |
) |
|
|
(79,900 |
) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net change in demand, money market and savings accounts |
|
|
32,354 |
|
|
|
6,521 |
|
Net change in certificates of deposit |
|
|
(31,486 |
) |
|
|
86,342 |
|
Net change in federal funds purchased and securities sold under repurchase
agreements |
|
|
(50,684 |
) |
|
|
29,647 |
|
Net change in commerical paper and other short-term borrowings |
|
|
910 |
|
|
|
87,478 |
|
Proceeds from issuance of long-term debt |
|
|
84,984 |
|
|
|
(115,105 |
) |
Proceeds from issuance of common stock |
|
|
1,932 |
|
|
|
2,881 |
|
Tax benefit from employees stock option and restricted stock plans |
|
|
144 |
|
|
|
|
|
Dividends paid |
|
|
(5,048 |
) |
|
|
(4,884 |
) |
|
Net cash provided by financing activities |
|
|
33,106 |
|
|
|
92,880 |
|
|
Net change in cash and cash equivalents |
|
|
(23,719 |
) |
|
|
20,192 |
|
Cash and cash equivalents at beginning of period |
|
|
125,552 |
|
|
|
98,011 |
|
|
Cash and cash equivalents at end of period |
|
$ |
101,833 |
|
|
$ |
118,203 |
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
25,051 |
|
|
$ |
20,113 |
|
Income taxes |
|
|
295 |
|
|
|
10,104 |
|
Supplemental disclosure of non-cash transactions: |
|
|
|
|
|
|
|
|
Transfer of loans to other real estate |
|
|
1,475 |
|
|
|
4,487 |
|
Unrealized loss on securities available for sale
(net of tax effect of ($583) and ($7,144), respectively) |
|
|
(890 |
) |
|
|
(10,850 |
) |
See accompanying notes to consolidated financial statements.
6
First Charter Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2006 and 2005
First Charter Corporation (the Corporation) is a regional financial services company with
assets of $4.3 billion and is the holding company for First Charter Bank. As of March 31, 2006,
First Charter operated 58 financial centers, four insurance offices and 139 ATMs located throughout
North Carolina. First Charter also operates loan origination offices in Asheville, North Carolina
and Reston, Virginia. First Charter provides businesses and individuals with a broad range of
financial services, including banking, financial planning, wealth management, investments,
insurance, mortgages and a broad array of employee benefit programs. The results of operations of
the Bank constitute a substantial majority of the consolidated net income, revenues and assets of
the Corporation.
Note One Accounting Policies
The consolidated financial statements include the accounts of the Corporation and its wholly
owned subsidiary, the Bank, and variable interest entities (VIEs) where the Corporation is the
primary beneficiary. In consolidation, all intercompany accounts and transactions have been
eliminated.
The information contained in the interim consolidated financial statements, excluding
information as of the fiscal year ended December 31, 2005, is unaudited. The consolidated financial
statements are prepared in conformity with U.S. generally accepted accounting principles, which
require 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 are of a normal and recurring nature. Certain
amounts reported in prior periods have been reclassified to conform to the current period
presentation. Such reclassifications have no effect on net income or shareholders equity as
previously reported.
The significant accounting policies followed by the Corporation are presented on pages 59 to
67 of the Corporations Annual Report on Form 10-K for the year ended December 31, 2005. With the
exception of the Corporations policy regarding stock-based compensation adopted January 1, 2006,
these policies have not materially changed from the disclosure in that report.
Stock-Based Compensation
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards No. 123(R) (SFAS No. 123(R)), Share-Based Payment, which is a
revision of FASB Statement No. 123 Accounting for Stock-Based Compensation and supersedes
Accounting Principles Board Opinion No. 25 (APB Opinion No. 25), Accounting for Stock Issued to
Employees. The Corporation adopted SFAS No. 123(R) on January 1, 2006, with no material effect on
its consolidated financial statements. Under the fair value recognition provisions of SFAS No.
123(R), stock-based compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense on a straight-line basis over the requisite service period,
which is the vesting period. If the vesting terms are not met, no compensation cost is recognized
and any previously recognized compensation cost is reversed. The Corporation previously accounted
for stock-based compensation under the provisions of APB No. 25. As permitted under SFAS No.
123(R), the Corporation adopted the modified prospective method on January 1, 2006. In accordance
with the modified prospective method, compensation cost is recognized as a component of salary and
employee benefits expense in the accompanying Consolidated Financial Statements beginning on
January 1, 2006 (a) based on the requirements of SFAS No. 123(R) for all share-based payments
granted after January 1, 2006 and (b)
based on the requirements of SFAS 123 for all awards granted to employees prior to January 1, 2006
that remained unvested as of that date.
7
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 three months ended March 31, 2006 and 2005,
respectively. Diluted net income per share reflects the potential dilution that could occur if the
Corporations potential common stock and contingently issuable shares, which consist of dilutive
stock options and restricted stock, were issued.
A reconciliation of the basic average common shares outstanding to the diluted average common
shares outstanding is as follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Ended March 31 |
|
|
2006 |
|
2005 |
|
|
|
Basic weighted average number of common shares outstanding |
|
|
30,859,461 |
|
|
|
30,234,683 |
|
Dilutive effect arising from potential
common stock issuances |
|
|
293,877 |
|
|
|
395,918 |
|
|
|
|
Diluted weighted average number of common shares outstanding |
|
|
31,153,338 |
|
|
|
30,630,601 |
|
|
|
|
The effects of outstanding antidilutive stock options are excluded from the computation
of diluted net income per share. These amounts were 259,000 and 992,000 shares for the three
months ended March 31, 2006 and 2005, respectively.
Dividends declared by the Corporation were $0.19 per share for both the three months ended
March 31, 2006 and 2005.
Note Three Business Segment Information
The Corporation operates one reportable segment, the Bank, the Corporations primary banking
subsidiary. The Bank provides businesses and individuals with commercial, consumer and mortgage
loans, deposit banking services, brokerage services, insurance products, and comprehensive
financial planning solutions to individual and commercial clients. The results of the Banks
operations constitute a substantial majority of the consolidated net income, revenues and assets of
the Corporation. Intercompany transactions and the parent companys revenues, expenses, assets
(including cash, investment securities and investments in venture capital limited partnerships),
and liabilities (including commercial paper and subordinated debentures) are included in the
Other category.
The Corporation continuously assesses its assumptions, methodologies and reporting
classifications to better reflect the true economics of the Corporations business segments. Based
on these continuous assessments, during the second quarter of 2005, the Corporation changed the
composition of its reportable segments to collapse insurance, brokerage, mortgage and financial
planning services into the Bank. Accordingly, the Corporation restated its business segment
disclosure for prior periods.
8
Information regarding the reportable segments separate results of operations and segment
assets for the three months ended March 31, 2006 and 2005, is provided in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2006 |
(Dollars in thousands) |
|
The Bank |
|
Other |
|
Eliminations |
|
Totals |
|
Total interest income |
|
$ |
59,628 |
|
|
$ |
18 |
|
|
$ |
|
|
|
$ |
59,646 |
|
Total interest expense |
|
|
26,476 |
|
|
|
1,080 |
|
|
|
|
|
|
|
27,556 |
|
|
Net interest income (loss) |
|
|
33,152 |
|
|
|
(1,062 |
) |
|
|
|
|
|
|
32,090 |
|
Provision for loan losses |
|
|
1,519 |
|
|
|
|
|
|
|
|
|
|
|
1,519 |
|
Total noninterest income |
|
|
18,153 |
|
|
|
88 |
|
|
|
|
|
|
|
18,241 |
|
Total noninterest expense |
|
|
31,449 |
|
|
|
63 |
|
|
|
|
|
|
|
31,512 |
|
|
Net income (loss) before income taxes |
|
|
18,337 |
|
|
|
(1,037 |
) |
|
|
|
|
|
|
17,300 |
|
Income taxes expense (benefit) |
|
|
6,207 |
|
|
|
(351 |
) |
|
|
|
|
|
|
5,856 |
|
|
Net income (loss) |
|
$ |
12,130 |
|
|
$ |
(686 |
) |
|
$ |
|
|
|
$ |
11,444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale and loans, net |
|
$ |
2,990,177 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,990,177 |
|
Total assets |
|
|
4,264,850 |
|
|
|
421,395 |
|
|
|
(402,889 |
) |
|
|
4,283,356 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2005 |
(Dollars in thousands) |
|
The Bank |
|
Other |
|
Eliminations |
|
Totals |
|
Total interest income |
|
$ |
51,265 |
|
|
$ |
17 |
|
|
$ |
|
|
|
$ |
51,282 |
|
Total interest expense |
|
|
20,466 |
|
|
|
242 |
|
|
|
|
|
|
|
20,708 |
|
|
Net interest income (loss) |
|
|
30,799 |
|
|
|
(225 |
) |
|
|
|
|
|
|
30,574 |
|
Provision for loan losses |
|
|
1,900 |
|
|
|
|
|
|
|
|
|
|
|
1,900 |
|
Total noninterest income |
|
|
15,831 |
|
|
|
(17 |
) |
|
|
|
|
|
|
15,814 |
|
Total noninterest expense |
|
|
28,819 |
|
|
|
50 |
|
|
|
|
|
|
|
28,869 |
|
|
Net income (loss) before income taxes |
|
|
15,911 |
|
|
|
(292 |
) |
|
|
|
|
|
|
15,619 |
|
Income taxes expense (benefit) |
|
|
5,409 |
|
|
|
(99 |
) |
|
|
|
|
|
|
5,310 |
|
|
Net income (loss) |
|
$ |
10,502 |
|
|
$ |
(193 |
) |
|
$ |
|
|
|
$ |
10,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans held for sale and loans, net |
|
$ |
2,682,713 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,682,713 |
|
Total assets |
|
|
4,495,572 |
|
|
|
380,744 |
|
|
|
(363,262 |
) |
|
|
4,513,053 |
|
Note Four Goodwill and Other Intangible Assets
The following is a summary of the gross carrying amount and accumulated amortization of
amortized intangible assets and the carrying amount of unamortized intangible assets as of March
31, 2006 and December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
|
|
2006 |
|
2005 |
|
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
|
Gross Carrying |
|
Accumulated |
|
Net Carrying |
(Dollars in thousands) |
|
Amount |
|
Amortization |
|
Amount |
|
Amount |
|
Amortization |
|
Amount |
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncompete agreements |
|
$ |
1,037 |
|
|
$ |
987 |
|
|
$ |
50 |
|
|
$ |
1,037 |
|
|
$ |
979 |
|
|
$ |
58 |
|
Customer lists |
|
|
2,676 |
|
|
|
1,125 |
|
|
|
1,551 |
|
|
|
2,676 |
|
|
|
998 |
|
|
|
1,678 |
|
Other intangibles (1) |
|
|
379 |
|
|
|
144 |
|
|
|
235 |
|
|
|
379 |
|
|
|
128 |
|
|
|
251 |
|
|
Total |
|
$ |
4,092 |
|
|
$ |
2,256 |
|
|
$ |
1,836 |
|
|
$ |
4,092 |
|
|
$ |
2,105 |
|
|
$ |
1,987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
$ |
19,910 |
|
|
$ |
|
|
|
$ |
19,910 |
|
|
$ |
19,910 |
|
|
$ |
|
|
|
$ |
19,910 |
|
|
|
|
|
(1) |
|
Other intangibles include trade name and proprietary software. |
Amortization expense totaled $150 thousand and $131 thousand for the three months ended
March 31, 2006 and 2005, respectively.
9
The following table presents the estimated amortization expense for intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncompete |
|
Customer |
|
Other |
|
|
(Dollars in thousands) |
|
Agreements |
|
Lists |
|
Intangibles |
|
Total |
|
April December 2006 |
|
$ |
22 |
|
|
$ |
347 |
|
|
$ |
45 |
|
|
$ |
414 |
|
2007 |
|
|
28 |
|
|
|
386 |
|
|
|
54 |
|
|
|
468 |
|
2008 |
|
|
|
|
|
|
298 |
|
|
|
46 |
|
|
|
344 |
|
2009 |
|
|
|
|
|
|
210 |
|
|
|
36 |
|
|
|
246 |
|
2010 |
|
|
|
|
|
|
125 |
|
|
|
27 |
|
|
|
152 |
|
2011 and after |
|
|
|
|
|
|
185 |
|
|
|
27 |
|
|
|
212 |
|
|
Total |
|
$ |
50 |
|
|
$ |
1,551 |
|
|
$ |
235 |
|
|
$ |
1,836 |
|
|
Note Five Comprehensive Income
Comprehensive Income is defined as the change in equity from all transactions other than those
with stockholders, and it includes net income and other comprehensive income.
The following table presents the components of Comprehensive Income (Loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended March 31, |
|
|
2006 |
|
2005 |
|
|
Pre-Tax |
|
Tax |
|
After Tax |
|
Pre-Tax |
|
Tax |
|
After Tax |
(Dollars in thousands) |
|
Amount |
|
Effect |
|
Amount |
|
Amount |
|
Effect |
|
Amount |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
17,300 |
|
|
$ |
5,856 |
|
|
$ |
11,444 |
|
|
$ |
15,619 |
|
|
$ |
5,310 |
|
|
$ |
10,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized losses
arising during period |
|
|
(1,473 |
) |
|
|
(583 |
) |
|
|
(890 |
) |
|
|
(18,043 |
) |
|
|
(7,163 |
) |
|
|
(10,880 |
) |
Less: Reclassification for
realized (losses) gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(49 |
) |
|
|
(19 |
) |
|
|
(30 |
) |
|
Unrealized losses,
net of reclassification |
|
$ |
(1,473 |
) |
|
$ |
(583 |
) |
|
$ |
(890 |
) |
|
$ |
(17,994 |
) |
|
$ |
(7,144 |
) |
|
$ |
(10,850 |
) |
|
Total comprehensive income (loss) |
|
$ |
15,827 |
|
|
$ |
5,273 |
|
|
$ |
10,554 |
|
|
$ |
(2,375 |
) |
|
$ |
(1,834 |
) |
|
$ |
(541 |
) |
|
10
Note Six Securities Available-for-Sale
Securities available-for-sale are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(Dollars in thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
US government obligations |
|
$ |
14,931 |
|
|
$ |
|
|
|
$ |
51 |
|
|
$ |
14,880 |
|
US government agency obligations |
|
|
327,429 |
|
|
|
|
|
|
|
7,250 |
|
|
|
320,179 |
|
Mortgage-backed securities |
|
|
419,886 |
|
|
|
266 |
|
|
|
13,871 |
|
|
|
406,281 |
|
State, county, and municipal
obligations |
|
|
104,180 |
|
|
|
953 |
|
|
|
445 |
|
|
|
104,688 |
|
Equity securities |
|
|
49,070 |
|
|
|
337 |
|
|
|
|
|
|
|
49,407 |
|
Other |
|
|
5,000 |
|
|
|
|
|
|
|
11 |
|
|
|
4,989 |
|
|
Total |
|
$ |
920,496 |
|
|
$ |
1,556 |
|
|
$ |
21,628 |
|
|
$ |
900,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005 |
|
|
|
|
|
|
Gross |
|
Gross |
|
|
|
|
Amortized |
|
Unrealized |
|
Unrealized |
|
Fair |
(Dollars in thousands) |
|
Cost |
|
Gains |
|
Losses |
|
Value |
|
US government obligations |
|
$ |
14,905 |
|
|
$ |
|
|
|
$ |
27 |
|
|
$ |
14,878 |
|
US government agency obligations |
|
|
327,418 |
|
|
|
21 |
|
|
|
7,032 |
|
|
|
320,407 |
|
Mortgage-backed securities |
|
|
417,891 |
|
|
|
335 |
|
|
|
12,776 |
|
|
|
405,450 |
|
State, county, and municipal obligations |
|
|
108,298 |
|
|
|
1,125 |
|
|
|
427 |
|
|
|
108,996 |
|
Equity securities |
|
|
44,198 |
|
|
|
188 |
|
|
|
|
|
|
|
44,386 |
|
Other |
|
|
5,000 |
|
|
|
|
|
|
|
6 |
|
|
|
4,994 |
|
|
Total |
|
$ |
917,710 |
|
|
$ |
1,669 |
|
|
$ |
20,268 |
|
|
$ |
899,111 |
|
|
Equity securities include Bank-owned stock in the Federal Home Loan Bank of Atlanta
(FHLB) and Federal Reserve Bank. The cost basis (par value) in FHLB stock was $42.5 million and
$37.5 million at March 31, 2006 and December 31, 2005, respectively, and the cost basis of Federal
Reserve Bank stock was $5.6 million at both March 31, 2006 and December 31, 2005.
For the Corporations securities designated as temporarily impaired on March 31, 2006 the
following table reflects the fair values and gross unrealized losses, aggregated by investment
category and length of time that individual securities have been in a continuous unrealized loss
position.
As of March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
12 months or longer |
|
Total |
|
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
Gross Unrealized |
|
|
|
|
|
Gross Unrealized |
(Dollars in thousands) |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
Fair Value |
|
Losses |
|
US government obligations |
|
$ |
14,880 |
|
|
$ |
(51 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
14,880 |
|
|
$ |
(51 |
) |
US government agency obligations |
|
|
15,999 |
|
|
|
(10 |
) |
|
|
304,180 |
|
|
|
(7,241 |
) |
|
|
320,179 |
|
|
|
(7,251 |
) |
Mortgage-backed securities |
|
|
114,626 |
|
|
|
(2,220 |
) |
|
|
269,698 |
|
|
|
(11,650 |
) |
|
|
384,324 |
|
|
|
(13,870 |
) |
State, county and muncipal obligations |
|
|
8,358 |
|
|
|
(99 |
) |
|
|
11,075 |
|
|
|
(346 |
) |
|
|
19,433 |
|
|
|
(445 |
) |
Other |
|
|
4,989 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
4,989 |
|
|
|
(11 |
) |
|
Total temporarily impaired securities |
|
$ |
158,852 |
|
|
$ |
(2,391 |
) |
|
$ |
584,953 |
|
|
$ |
(19,237 |
) |
|
$ |
743,805 |
|
|
$ |
(21,628 |
) |
|
The unrealized losses associated with these securities were not considered to be
other-than-temporary, because they were related to changes in interest rates and did not affect the
expected cash flows of the underlying collateral or the issuer. In addition, of the $280.8 million
of mortgage-backed securities and municipal investments that have been in an unrealized loss
position for longer than one year, $277.8 million have an external credit rating of AAA by Standard
& Poors and $3.0 million have a credit rating of AA. The remaining investments that have been in an
unrealized loss position for longer than one year are US government obligations issued by the U.S.
Treasury. At March 31, 2006, the Corporation had the ability and the intent to hold these
investments to recovery of fair market value.
11
Note Seven Loans and Allowance for Loan Losses
Loans are categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
December 31, 2005 |
(Dollars in thousands) |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Commercial real estate |
|
$ |
820,318 |
|
|
|
27.2 |
% |
|
$ |
780,597 |
|
|
|
26.5 |
% |
Commercial non real estate |
|
|
213,338 |
|
|
|
7.1 |
|
|
|
233,409 |
|
|
|
7.9 |
|
Construction |
|
|
583,288 |
|
|
|
19.4 |
|
|
|
517,392 |
|
|
|
17.6 |
|
Mortgage |
|
|
565,166 |
|
|
|
18.8 |
|
|
|
573,007 |
|
|
|
19.4 |
|
Consumer |
|
|
355,636 |
|
|
|
11.8 |
|
|
|
358,592 |
|
|
|
12.2 |
|
Home equity |
|
|
473,342 |
|
|
|
15.7 |
|
|
|
482,921 |
|
|
|
16.4 |
|
|
Total loans |
|
$ |
3,011,088 |
|
|
|
100.0 |
% |
|
$ |
2,945,918 |
|
|
|
100.0 |
% |
|
The following is a summary of the changes in the allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(Dollars in thousands) |
|
2006 |
|
2005 |
|
Balance, January 1 |
|
$ |
28,725 |
|
|
$ |
26,872 |
|
|
Provision for loan losses |
|
|
1,519 |
|
|
|
1,900 |
|
Charge-offs |
|
|
(1,229 |
) |
|
|
(1,918 |
) |
Recoveries |
|
|
490 |
|
|
|
629 |
|
|
Net charge-offs |
|
|
(739 |
) |
|
|
(1,289 |
) |
|
Balance, March 31 |
|
$ |
29,505 |
|
|
$ |
27,483 |
|
|
The table below summarizes the Corporations nonperforming assets and loans 90 days or more
past due and still accruing interest at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
December 31 |
(Dollars in thousands) |
|
2006 |
|
2005 |
|
Nonaccrual loans |
|
$ |
9,211 |
|
|
$ |
10,811 |
|
Other real estate owned |
|
|
6,072 |
|
|
|
5,124 |
|
|
Total nonperforming assets |
|
|
15,283 |
|
|
|
15,935 |
|
|
Loans 90 days or more past due and still accruing |
|
|
|
|
|
|
|
|
|
Total nonperforming assets and loans 90 days
or more past due and still accruing |
|
$ |
15,283 |
|
|
$ |
15,935 |
|
|
At March 31, 2006, the recorded investment in individually impaired loans was $2.1
million, all of which were on nonaccrual status. The related allowance for loan losses on these
loans was $0.5 million. At December 31, 2005, the recorded investment in individually impaired
loans was $8.2 million, of which $4.3 million were on nonaccrual status and had specific reserves
of $0.6 million and $3.9 million were accruing and had specific reserves of $0.7 million.
The average recorded investment in individually impaired loans for the three months ended
March 31, 2006 and 2005 was $2.4 million and $12.0 million, respectively.
12
Note Eight Stock-Based Compensation
First Charter Comprehensive Stock Option Plan. Under the terms of the First Charter
Corporation Comprehensive Stock Option Plan (the Comprehensive Stock Option Plan), stock options
(which can be incentive stock options or non-qualified stock options) may be periodically granted
to key employees of the Corporation or its subsidiaries. The terms and vesting schedules of options
granted under the Comprehensive Plan generally are determined by the Compensation Committee of the
Board of Directors of the Corporation (the Compensation Committee). However, no options may be
exercisable prior to six months following the grant date, and certain additional restrictions,
including the term and exercise price, apply with respect to any incentive stock options. Under the
Comprehensive Stock Option Plan, 480,000 shares of common stock are reserved for issuance. During
the three months ended March 31, 2006, no shares were issued under this plan.
First Charter Corporation Stock Option Plan for Non-Employee Directors. In April 1997, the
shareholders approved the First Charter Corporation Stock Option Plan for Non-Employee Directors
(the Director Plan). Under the Director Plan, non-statutory stock options may be granted to
non-employee Directors of the Corporation and its subsidiaries. The terms and vesting schedules of
any options granted under the Director Plan generally are determined by the Compensation Committee.
The exercise price for each option granted, however, is the fair value of the common stock as of
the date of grant. A maximum of 180,000 shares are reserved for issuance under the Director Plan.
During the three months ended March 31, 2006, no shares were issued under this plan.
2000 Omnibus Stock Option and Award Plan. In June 2000, the shareholders approved the First
Charter Corporation 2000 Omnibus Stock Option and Award Plan (the 2000 Omnibus Plan). Under the
2000 Omnibus Plan, 2,000,000 shares of common stock were originally reserved for issuance. In April
of 2005, the shareholders approved an amendment to the 2000 Omnibus Plan, authorizing an additional
1,500,000 shares for issuance, for a total of 3,500,000 shares. The 2000 Omnibus Plan permits the
granting of stock options and nonvested shares to Directors and key employees. Stock options are
granted with an exercise price equal to the market price of the Corporations common stock at the
date of grant; those stock option awards generally vest ratably over five years and have a 10-year
contractual term. Nonvested shares are generally granted at a value equal to the market price of
the Corporations common stock at the date of grant and vesting is based on either service or
performance conditions. Service-based nonvested shares generally vest over three years.
Performance-based nonvested shares are earned over three years upon meeting various performance
goals as approved by the Compensation Committee, including cash return on equity and targeted
charge-off levels and earnings per share growth as measured against a group of selected peer
companies. During the three months ended March 31, 2006, 69,250 stock options, 15,000 service-based
nonvested shares and 58,500 performance-based nonvested shares were issued under this plan.
Restricted Stock Award Program. In April 1995, the shareholders approved the First Charter
Corporation Restricted Stock Award Program (the Restricted Stock Plan). Awards of restricted
stock (nonvested shares) may be made under the Restricted Stock Plan at the discretion of the
Compensation Committee to key employees. Nonvested shares are granted at a value
equal to the market price of the Corporations common stock at the date of grant and vest based on
either three or five years of service. A maximum of 360,000 shares of common stock are reserved
for issuance under the Restricted Stock Plan. During the three months ended March 31, 2006, 74,549
service-based nonvested shares were issued under this plan.
Stock-based compensation costs totaled $513,000 for the three months ended March 31, 2006,
which consisted of $279,000 related to stock options, $107,000 related to performance-based
nonvested shares and $127,000 related to service-based nonvested shares.
13
The fair value of each stock option award is estimated at the date of grant using a
Black-Scholes option-pricing model using the following
weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
|
2006 |
|
|
2005 |
|
Dividend yield |
|
|
3.21 |
% |
|
|
3.16 |
% |
Risk free interest rate |
|
|
4.72 |
% |
|
|
3.87 |
% |
Expected lives |
|
8 years |
|
7 years |
Volatility |
|
|
25 |
% |
|
|
26 |
% |
The Black-Scholes model incorporates assumptions to value stock-based awards. The
risk-free rate of interest for periods within the contractual life of the option is based on a U.S.
government instrument over the contractual term of the equity instrument. Expected volatility is
based on historical volatility of the Companys stock.
Pro forma net income as if the fair value based method had been applied to all awards is as
follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
(Dollars in thousands, except per share data) |
|
2006 |
|
|
2005 |
|
Net income, as reported |
|
$ |
11,444 |
|
|
$ |
10,309 |
|
Total stock-based employee compensation expense
included in the determination of reported net
income |
|
|
446 |
|
|
|
26 |
|
Total stock-based employee compensation expense
determined under fair value based method for all
awards, net of tax effect of $67 and $43,
respectively |
|
|
(446 |
) |
|
|
(621 |
) |
|
|
|
|
|
|
|
Pro forma net income |
|
$ |
11,444 |
|
|
$ |
9,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share: |
|
|
|
|
|
|
|
|
Basic-as reported |
|
$ |
0.37 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
Basic-pro forma |
|
$ |
0.37 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted-as reported |
|
$ |
0.37 |
|
|
$ |
0.34 |
|
|
|
|
|
|
|
|
Diluted-pro forma |
|
$ |
0.37 |
|
|
$ |
0.32 |
|
|
|
|
|
|
|
|
The following is a summary of stock option activity under the Comprehensive Plan, the
Director Plan and the 2000 Omnibus Plan during the period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
Weighted |
|
Weighted- |
|
|
|
|
|
|
|
|
Average |
|
Average |
|
|
|
|
|
|
|
|
Exercise |
|
Remaining |
|
Aggregate |
|
|
|
|
|
|
(Option) |
|
Contractual |
|
Intrinsic |
|
|
Shares |
|
Price |
|
Term (Years) |
|
Value |
|
Outstanding at January 1 |
|
|
2,638,058 |
|
|
$ |
21.09 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
69,250 |
|
|
|
23.68 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(115,250 |
) |
|
|
16.52 |
|
|
|
|
|
|
|
883,380 |
|
Forfeited |
|
|
(23,567 |
) |
|
|
21.56 |
|
|
|
|
|
|
|
|
|
Expired |
|
|
(7,400 |
) |
|
|
24.66 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31 |
|
|
2,561,091 |
|
|
|
21.35 |
|
|
|
4.54 |
|
|
|
6,699,388 |
|
|
Options exercisable at March 31 |
|
|
1,945,326 |
|
|
|
21.11 |
|
|
|
3.34 |
|
|
|
5,724,719 |
|
|
Weighted-average Black-Scholes fair value
of options granted during the year |
|
|
|
|
|
$ |
5.85 |
|
|
|
|
|
|
|
|
|
|
The
weighted-average Black-Scholes fair value of options granted during
the three months ended March 31, 2005 was $5.53 and the
aggregate intrinsic value of options exercised was $1.4 million.
14
The following table presents the status and changes of nonvested shares in the Restricted
Stock Plan and the Omnibus Plan:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service-Based |
|
Performance-Based |
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
Weighted Average |
|
|
Shares |
|
Grant Price |
|
Shares |
|
Grant Price |
|
|
|
Outstanding at December 31, 2005 |
|
|
32,647 |
|
|
$ |
22.9724 |
|
|
|
|
|
|
$ |
|
|
|
Granted |
|
|
89,549 |
|
|
|
23.6600 |
|
|
|
58,500 |
|
|
|
23.6600 |
|
Vested |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(895 |
) |
|
|
22.3400 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2006 |
|
|
121,301 |
|
|
$ |
23.4847 |
|
|
|
58,500 |
|
|
$ |
23.6600 |
|
|
As of March 31, 2006, there were $2.4 million of total unrecognized compensation costs
related to service-based nonvested share-based compensation arrangements granted under the
Restricted Stock Plan and the Omnibus Plan and is expected to be recognized over a weighted-average
period of 2.5 years.
As of March 31, 2006, there were $1.2 million of total unrecognized compensation costs related
to performance-based nonvested share-based compensation arrangements granted under the Omnibus Plan
and is expected to be recognized over a weighted-average period of 2.8 years.
Note Nine Commitments, Contingencies and Off-Balance Sheet Risk
Commitments and Off-Balance Sheet Risk. The Corporation is party to various financial
instruments with off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and
standby letters of credit and involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the consolidated financial statements. 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.
Standby letters of credit are recorded as a liability by the Corporation at the fair value of the
obligation undertaken in issuing the guarantee. The fair value and carrying value at March 31, 2006
of standby letters of credit issued or modified during the three months ended March 31, 2006 was
immaterial. Commitments to extend credit are not recorded as an asset or liability by the
Corporation until the instrument is exercised. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for instruments reflected in the
consolidated financial statements. The creditworthiness of each customer is evaluated on a
case-by-case basis.
The Corporations exposure to credit risk was as follows:
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
December 31, |
(Dollars in thousands) |
|
2006 |
|
2005 |
|
Lines of Credit |
|
$ |
458,556 |
|
|
$ |
441,855 |
|
Standby Letters of Credit |
|
|
16,030 |
|
|
|
15,600 |
|
Loan Commitments |
|
|
679,218 |
|
|
|
668,356 |
|
|
Total Commitments |
|
$ |
1,153,804 |
|
|
$ |
1,125,811 |
|
|
Contingencies. 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.
15
The Corporation is currently under examination by the North Carolina Department of Revenue
for 1999 and 2000 and is subject to examination for subsequent tax years.
The Corporation received a proposed assessment for tax and interest
of $3.6 million that the Corporation is appealing. The
Corporations maximum exposure for tax and interest related to
this assessment in excess of the current reserve is approximately
$1.5 million, net of tax. The ultimate tax implications for 1999 and
2000 may impact tax years beyond 2000. Management believes there will be no material impact on the
consolidated results of operations as a result of this examination.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors that May Affect Future Results
The following discussion contains certain forward-looking statements about the
Corporations 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 managements 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, and which may be beyond the Corporations control, include, among
others, the following possibilities: (1) projected results in connection with managements
implementation of, or changes in, the Corporations business plan and strategic initiatives,
including the recent balance sheet initiatives, are lower than expected; (2) competitive pressure
among financial services companies increases significantly; (3) costs or difficulties related to
the integration of acquisitions, including deposit attrition, customer retention and revenue loss,
or expenses in general are greater than expected; (4) general economic conditions, in the markets
in which the Corporation does business, are less favorable than expected; (5) risks inherent in
making loans, including repayment risks and risks associated with collateral values, are greater
than expected; (6) changes in the interest rate environment, or interest rate policies of the Board
of Governors of the Federal Reserve System, may reduce interest margins and affect funding sources;
(7) changes in market rates and prices may adversely affect the value of financial products; (8)
legislation or regulatory requirements or changes thereto, including changes in accounting
standards, may adversely affect the businesses in which the Corporation is engaged; (9) regulatory
compliance cost increases are greater than expected; (10) the passage of future tax legislation, or
any negative regulatory, administrative or judicial position, may adversely impact the Corporation;
(11) the Corporations competitors may have greater financial resources and may develop products
that enable them to compete more successfully in the markets in which it operates; and (12) changes
in the securities markets, including changes in interest rates, may adversely affect the
Corporations ability to raise capital from time to time.
Overview
First Charter Corporation is a regional financial services company with assets of $4.3 billion
and is the holding company for First Charter Bank. As of March 31, 2006, First Charter operated 58
financial centers, four insurance offices and 139 ATMs located throughout North Carolina. First
Charter also operates loan origination offices in Asheville, North Carolina and Reston, Virginia.
First Charter provides businesses and individuals with a broad range of financial services,
including banking, financial planning, wealth management, investments, insurance, mortgages and a
broad array of employee benefit programs.
The Corporations principal source of earnings is derived from net interest income. Net
interest income is the interest earned on securities, loans and other interest earning assets less
the interest paid for deposits and long- and short-term debt.
Another source of earnings for the Corporation is noninterest income. Noninterest income is
derived largely from service charges on deposit accounts and other fee or commission based services
and
16
products including mortgage, financial management, brokerage and insurance. Other sources of
noninterest income include securities gains or losses, transactions involving bank-owned property
and income from Bank Owned Life Insurance (BOLI) policies.
Noninterest expense is the primary component of expense for the Corporation. Noninterest
expense is primarily composed of corporate operating expenses including salaries and benefits,
occupancy and equipment, professional fees and other operating expenses.
First Quarter 2006 Highlights
The Corporations first quarter 2006 net income was $11.4 million, an increase of 11 percent
from a year ago. Earnings per share increased to $0.37 from $0.34 per fully diluted share a year
ago. Total revenues increased 9 percent to $50.3 million, compared to $46.4 million a year ago. The
increase was driven by two factors. First, net interest income on a taxable-equivalent basis
increased $1.5 million to $32.7 million as the net interest margin improved 34 basis points. The
improvement in net interest income and the margin was largely attributable to First Charters
balance sheet repositioning initiatives executed in the fourth quarter of 2005. Second, noninterest
income increased $2.4 million or 15 percent due to higher insurance, mortgage and deposit revenues.
Loan growth was strong as average balances increased $394.0 million or 15 percent compared to a
year ago. Loan growth includes $73.3 million in average balances attributable to first quarter 2005
mortgage loan purchases. Credit quality continues to be very strong with net charge-offs only 0.10
percent of average total loans in the first quarter of 2006. The Corporation also continued with
its growth strategy by opening three additional full-service financial centers and three ATMs in
the Raleigh area.
The Community Banking Model
First Charter follows a community banking model. The community banking model is focused on
delivering our clients with a broad array of financial products and solutions, delivered with
exceptional service and convenience at a fair price. It emphasizes local market decision making and
management whenever possible. Management believes this model works well against both larger
competitors that may have less flexibility, as well as local competition that may not have the
array of products and services that First Charter can offer. First Charter competes against three
of the largest banks in the country as well as other local banks, savings and loan associations,
credit unions and finance companies. Management believes that by focusing on core values, striving
to expand our clients expectations, being an employer of choice and providing exceptional value to
shareholders, First Charter can achieve the profitability and growth goals it has set for itself.
Please refer to First Charters Annual Report on Form 10-K for the year ended December 31,
2005, for additional information with respect to the Corporations recent accomplishments and
significant challenges.
17
Table One
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
March 31, |
|
December 31, |
|
September 30, |
|
June 30, |
|
March 31, |
(Dollars in thousands, except per share amounts) |
|
2006 |
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
Income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest income |
|
$ |
59,646 |
|
|
$ |
58,639 |
|
|
$ |
59,080 |
|
|
$ |
55,604 |
|
|
$ |
51,282 |
|
Total interest expense |
|
|
27,556 |
|
|
|
26,710 |
|
|
|
27,990 |
|
|
|
24,314 |
|
|
|
20,708 |
|
|
Net interest income |
|
|
32,090 |
|
|
|
31,929 |
|
|
|
31,090 |
|
|
|
31,290 |
|
|
|
30,574 |
|
Provision for loan losses |
|
|
1,519 |
|
|
|
1,795 |
|
|
|
2,770 |
|
|
|
2,878 |
|
|
|
1,900 |
|
Total noninterest income |
|
|
18,241 |
|
|
|
39 |
|
|
|
17,043 |
|
|
|
17,317 |
|
|
|
15,814 |
|
Total noninterest expense |
|
|
31,512 |
|
|
|
44,046 |
|
|
|
28,943 |
|
|
|
29,364 |
|
|
|
28,869 |
|
|
Net income (loss) before
income taxes |
|
|
17,300 |
|
|
|
(13,873 |
) |
|
|
16,420 |
|
|
|
16,365 |
|
|
|
15,619 |
|
Income tax expense (benefit) |
|
|
5,856 |
|
|
|
(5,543 |
) |
|
|
4,368 |
|
|
|
5,085 |
|
|
|
5,310 |
|
|
Net income (loss) |
|
$ |
11,444 |
|
|
$ |
(8,330 |
) |
|
$ |
12,052 |
|
|
$ |
11,280 |
|
|
$ |
10,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) |
|
$ |
0.37 |
|
|
$ |
(0.27 |
) |
|
$ |
0.39 |
|
|
$ |
0.37 |
|
|
$ |
0.34 |
|
Diluted net income (loss) |
|
|
0.37 |
|
|
|
(0.27 |
) |
|
|
0.39 |
|
|
|
0.37 |
|
|
|
0.34 |
|
Cash dividends declared |
|
|
0.190 |
|
|
|
0.190 |
|
|
|
0.190 |
|
|
|
0.190 |
|
|
|
0.190 |
|
Period-end book value |
|
|
10.77 |
|
|
|
10.53 |
|
|
|
10.82 |
|
|
|
10.73 |
|
|
|
10.31 |
|
Average shares
outstanding basic |
|
|
30,859,461 |
|
|
|
30,678,743 |
|
|
|
30,575,440 |
|
|
|
30,409,307 |
|
|
|
30,234,683 |
|
Average shares
outstanding diluted |
|
|
31,153,338 |
|
|
|
30,678,743 |
|
|
|
30,891,887 |
|
|
|
30,679,636 |
|
|
|
30,630,601 |
|
Ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average
shareholders equity (1) |
|
|
14.12 |
% |
|
|
(10.21 |
)% |
|
|
14.57 |
% |
|
|
14.12 |
% |
|
|
13.21 |
% |
Return on average assets (1) |
|
|
1.10 |
|
|
|
(0.77 |
) |
|
|
1.02 |
|
|
|
1.00 |
|
|
|
0.94 |
|
Net interest margin (1) |
|
|
3.40 |
|
|
|
3.27 |
|
|
|
2.92 |
|
|
|
3.03 |
|
|
|
3.06 |
|
Average loans to
average deposits |
|
|
105.75 |
|
|
|
103.30 |
|
|
|
103.30 |
|
|
|
103.68 |
|
|
|
97.04 |
|
Average equity to
average assets |
|
|
7.82 |
|
|
|
7.52 |
|
|
|
7.03 |
|
|
|
7.05 |
|
|
|
7.13 |
|
Efficiency ratio (2) |
|
|
61.89 |
|
|
|
59.90 |
|
|
|
59.44 |
|
|
|
59.70 |
|
|
|
61.41 |
|
Selected period end
balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale |
|
$ |
900,424 |
|
|
$ |
899,111 |
|
|
$ |
1,374,163 |
|
|
$ |
1,412,885 |
|
|
$ |
1,440,494 |
|
Loans held for sale |
|
|
8,719 |
|
|
|
6,447 |
|
|
|
7,309 |
|
|
|
8,159 |
|
|
|
6,006 |
|
Loans, net |
|
|
2,981,458 |
|
|
|
2,917,020 |
|
|
|
2,900,357 |
|
|
|
2,829,127 |
|
|
|
2,676,707 |
|
Allowance for loan losses |
|
|
29,505 |
|
|
|
28,725 |
|
|
|
29,788 |
|
|
|
29,032 |
|
|
|
27,483 |
|
Total assets |
|
|
4,283,356 |
|
|
|
4,232,420 |
|
|
|
4,699,722 |
|
|
|
4,633,236 |
|
|
|
4,513,053 |
|
Total deposits |
|
|
2,800,346 |
|
|
|
2,799,479 |
|
|
|
2,872,993 |
|
|
|
2,751,385 |
|
|
|
2,702,708 |
|
Borrowings |
|
|
1,103,784 |
|
|
|
1,068,573 |
|
|
|
1,438,388 |
|
|
|
1,503,322 |
|
|
|
1,451,756 |
|
Total liabilities |
|
|
3,949,729 |
|
|
|
3,908,824 |
|
|
|
4,368,677 |
|
|
|
4,305,538 |
|
|
|
4,200,799 |
|
Total shareholders equity |
|
|
333,627 |
|
|
|
323,596 |
|
|
|
331,045 |
|
|
|
327,698 |
|
|
|
312,254 |
|
Selected average
balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale |
|
|
2,945,908 |
|
|
|
2,932,195 |
|
|
|
2,904,954 |
|
|
|
2,788,438 |
|
|
|
2,551,876 |
|
Earning Assets (3) |
|
|
3,868,519 |
|
|
|
3,969,620 |
|
|
|
4,331,780 |
|
|
|
4,236,232 |
|
|
|
4,122,175 |
|
Total assets |
|
|
4,203,273 |
|
|
|
4,303,821 |
|
|
|
4,665,301 |
|
|
|
4,543,846 |
|
|
|
4,439,768 |
|
Total deposits |
|
|
2,785,632 |
|
|
|
2,838,566 |
|
|
|
2,812,165 |
|
|
|
2,689,390 |
|
|
|
2,629,795 |
|
Borrowings |
|
|
1,049,529 |
|
|
|
1,099,350 |
|
|
|
1,471,482 |
|
|
|
1,491,636 |
|
|
|
1,443,909 |
|
Total shareholders equity |
|
|
328,763 |
|
|
|
323,753 |
|
|
|
328,115 |
|
|
|
320,412 |
|
|
|
316,476 |
|
|
|
|
(1) |
|
Annualized |
|
(2) |
|
Noninterest expense less debt extinguishment expense and derivative termination
costs divided by the sum of taxable equivalent net interest income plus noninterest income less (loss) gain on
sale of securities. |
|
(3) |
|
The amounts in 2005 have been adjusted to correct the average balances presented
in Table Six of the
Corporations Annual Report on Form 10-K for the year ended December 31, 2005. |
18
Critical Accounting Estimates and Policies
The Corporations significant accounting policies are described in Note One of the
Corporations Annual Report on Form 10-K for the year ended December 31, 2005, on pages 57 to 69,
as supplemented in this report with respect to the Corporations recently adopted stock-based
compensation policy. These policies are essential in understanding managements discussion and
analysis of financial condition and results of operations. Some of the Corporations accounting
policies require significant judgment to estimate values of either assets or liabilities. In
addition, certain accounting principles require significant judgment with respect to their
application to complicated transactions to determine the most appropriate treatment.
The Corporation has identified three accounting policies as being critical in terms of
judgments and the extent to which estimates are used: allowance for loan losses, tax contingencies
and derivative instruments. In many cases, there are numerous alternative judgments that could be
used in the process of estimating values of assets or liabilities. Where alternatives exist, the
Corporation has used the factors that it believes represent the most reasonable value in developing
the inputs for the valuation. Actual performance that differs from the Corporations estimates of
the key variables could impact net income. For more information on the Corporations critical
accounting policies, refer to pages 26 to 29 of the Corporations Annual Report on Form 10-K for
the year ended December 31, 2005.
Earnings Performance
Net Interest Income and Margin
Net interest income, the difference between total interest income and total interest expense,
is the Corporations principal source of earnings. An analysis of the Corporations net interest
income on a taxable-equivalent basis and average balance sheets for the three months ended March
31, 2006 and 2005 is presented in Table Two. Net interest income on a taxable-equivalent basis
(FTE) is a non-GAAP (Generally Accepted Accounting Principles) performance measure used by
management in operating the business which management believes provides investors with a more
accurate picture of the interest margin for comparative purposes. The changes in net interest
income (on a taxable-equivalent basis) for the three months ended March 31, 2006 and 2005 are
analyzed in Table Three.
For the three months ended March 31, 2006, net interest income on a FTE basis amounted to
$32.7 million, an increase of approximately 5 percent from $31.1 million for the three months ended
March 31, 2005. The increase was primarily due to a $394.0 million increase in average loan
balances, an increase in the percentage of earning assets funded by low-cost core deposits (money
market, demand and savings accounts) and the balance sheet repositioning which occurred in late
October 2005.
The net interest margin (tax-adjusted net interest income divided by average interest-earning
assets) increased 34 basis points to 3.40 percent for the three months ended March 31, 2006,
compared to 3.06 percent in the same 2005 period. The improvements were primarily the result of the
previously disclosed October 2005 balance sheet repositioning and improved pricing discipline.
The increase in earning asset yields of 121 basis points was driven by two factors. First,
loan yields increased 111 basis points to 6.91 percent and securities yields increased 39 basis
points to 4.31 percent. Second, the percentage of higher yielding assets improved as a result of
the balance sheet repositioning. The percentage of investment securities to total earning assets
was reduced from 35 percent to 23 percent. Interest earning asset average balances decreased $253.7
million to $3.87 billion at March 31, 2006 compared to $4.12 billion for the same 2005 period. The
decrease was primarily due to the balance sheet repositioning which resulted in a $646.1 million
decline in average securities balances. This was partially offset by $394.0 million growth in the
Corporations loan average balances compared to March 31, 2005. Loan balances increased, in part,
due to the purchase of whole loan ARMs during the first quarter of 2005, which contributed $73.3
million to the increase in average balances.
19
The cost of interest bearing liabilities increased 102 basis points compared to the first
quarter of 2005. This was comprised of a 94 basis point increase in interest bearing deposit costs
to 2.83 percent while other borrowing costs increased 143 basis points to 4.25 percent.
Interest-bearing liability average balances decreased $278.4 million compared to March 31, 2005.
The decrease was primarily due to the balance sheet repositioning which resulted in a $394.4
million decline in other borrowings average balances. This decline in interest bearing liabilities
average balances was partially offset by a $155.8 million increase in interest-bearing deposit
average balances compared to March 31, 2005, driven by a $103.6 million increase in money market
average balances.
The following table compares interest income and yields for interest earning asset average
balances and interest expense and rates paid on interest bearing liability average balances for the
three months ended March 31, 2006 and 2005. In addition, the table includes the net interest
margin.
Table Two
Average Balances and Net Interest Income Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter 2006 |
|
First Quarter 2005 |
|
|
|
|
|
|
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 and loans held for sale (1) (2) (3) |
|
$ |
2,945,908 |
|
|
$ |
50,306 |
|
|
|
6.91 |
% |
|
$ |
2,551,876 |
|
|
$ |
36,499 |
|
|
|
5.80 |
% |
Securities taxable |
|
|
808,399 |
|
|
|
8,308 |
|
|
|
4.11 |
|
|
|
1,448,157 |
|
|
|
13,813 |
|
|
|
3.82 |
|
Securities nontaxable |
|
|
106,361 |
|
|
|
1,544 |
|
|
|
5.81 |
|
|
|
112,717 |
|
|
|
1,493 |
|
|
|
5.30 |
|
Federal funds sold |
|
|
3,223 |
|
|
|
36 |
|
|
|
4.53 |
|
|
|
1,528 |
|
|
|
9 |
|
|
|
2.43 |
|
Interest bearing bank deposits |
|
|
4,628 |
|
|
|
39 |
|
|
|
3.42 |
|
|
|
7,897 |
|
|
|
43 |
|
|
|
2.20 |
|
|
Total earning assets (4) |
|
|
3,868,519 |
|
|
|
60,233 |
|
|
|
6.29 |
|
|
|
4,122,175 |
|
|
|
51,857 |
|
|
|
5.08 |
|
|
Cash and due from banks |
|
|
97,893 |
|
|
|
|
|
|
|
|
|
|
|
93,505 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
236,861 |
|
|
|
|
|
|
|
|
|
|
|
224,088 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,203,273 |
|
|
|
|
|
|
|
|
|
|
$ |
4,439,768 |
|
|
|
|
|
|
|
|
|
|
Interest bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
|
931,780 |
|
|
|
4,298 |
|
|
|
1.87 |
|
|
|
807,835 |
|
|
|
1,536 |
|
|
|
0.77 |
|
Savings deposits |
|
|
120,096 |
|
|
|
64 |
|
|
|
0.22 |
|
|
|
123,221 |
|
|
|
70 |
|
|
|
0.23 |
|
Other time deposits |
|
|
1,321,036 |
|
|
|
12,200 |
|
|
|
3.75 |
|
|
|
1,325,878 |
|
|
|
8,908 |
|
|
|
2.72 |
|
Other borrowings |
|
|
1,049,529 |
|
|
|
10,994 |
|
|
|
4.25 |
|
|
|
1,443,909 |
|
|
|
10,194 |
|
|
|
2.82 |
|
|
Total interest bearing liabilities |
|
|
3,422,441 |
|
|
|
27,556 |
|
|
|
3.27 |
|
|
|
3,700,843 |
|
|
|
20,708 |
|
|
|
2.25 |
|
|
Noninterest bearing sources: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing deposits |
|
|
412,720 |
|
|
|
|
|
|
|
|
|
|
|
372,861 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
39,349 |
|
|
|
|
|
|
|
|
|
|
|
49,588 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
328,763 |
|
|
|
|
|
|
|
|
|
|
|
316,476 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity |
|
$ |
4,203,273 |
|
|
|
|
|
|
|
|
|
|
$ |
4,439,768 |
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
3.02 |
|
|
|
|
|
|
|
|
|
|
|
2.83 |
|
Impact of noninterest bearing sources |
|
|
|
|
|
|
|
|
|
|
0.38 |
|
|
|
|
|
|
|
|
|
|
|
0.23 |
|
|
Net interest income/
yield on earning assets |
|
|
|
|
|
$ |
32,677 |
|
|
|
3.40 |
% |
|
|
|
|
|
$ |
31,149 |
|
|
|
3.06 |
% |
|
|
|
|
(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 loan fees and amortization of deferred loan fees of approximately $745 and $467 for the first quarter of 2006 and 2005, 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 for the first quarter of 2006 and 2005. The adjustments made to convert to a taxable-equivalent basis were $587 and $575
for the first quarter of 2006 and 2005, respectively. |
|
(5) |
|
Annualized |
20
Changes in net interest income for the three months ended March 31, 2006 and March 31,
2005 are as follows:
Table Three
Volume and Rate Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2006 versus March 31, 2005 |
|
|
Increase (Decrease) in Net Interest Income |
|
|
Due to Change in Rate and Volume (1) |
|
|
2006 |
|
|
|
|
|
|
|
|
|
2005 |
|
|
Income/ |
|
|
|
|
|
|
|
|
|
Income/ |
(Dollars in thousands) |
|
Expense |
|
Rate |
|
Volume |
|
Expense |
|
Interest income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale (2) |
|
$ |
50,306 |
|
|
$ |
7,624 |
|
|
$ |
6,183 |
|
|
$ |
36,499 |
|
Securities taxable |
|
|
8,308 |
|
|
|
834 |
|
|
|
(6,339 |
) |
|
|
13,813 |
|
Securities nontaxable (2) |
|
|
1,544 |
|
|
|
139 |
|
|
|
(88 |
) |
|
|
1,493 |
|
Federal funds sold |
|
|
36 |
|
|
|
11 |
|
|
|
16 |
|
|
|
9 |
|
Interest bearing bank deposits |
|
|
39 |
|
|
|
19 |
|
|
|
(23 |
) |
|
|
43 |
|
|
Total interest income |
|
$ |
60,233 |
|
|
$ |
8,627 |
|
|
$ |
(251 |
) |
|
$ |
51,857 |
|
|
Interest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
4,298 |
|
|
$ |
2,359 |
|
|
$ |
403 |
|
|
$ |
1,536 |
|
Savings deposits |
|
|
64 |
|
|
|
(4 |
) |
|
|
(2 |
) |
|
|
70 |
|
Other time deposits |
|
|
12,200 |
|
|
|
3,331 |
|
|
|
(39 |
) |
|
|
8,908 |
|
Other borrowings |
|
|
10,994 |
|
|
|
4,257 |
|
|
|
(3,457 |
) |
|
|
10,194 |
|
|
Total interest expense |
|
|
27,556 |
|
|
|
9,943 |
|
|
|
(3,095 |
) |
|
|
20,708 |
|
|
Net interest income |
|
$ |
32,677 |
|
|
$ |
(1,316 |
) |
|
$ |
2,844 |
|
|
$ |
31,149 |
|
|
|
|
|
(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. |
|
(2) |
|
Income on nontaxable securities and loans are stated on a taxable-equivalent basis. Refer to
Table Two for further details. |
Noninterest Income
The major components of noninterest income are derived from service charges on deposit
accounts, mortgage, brokerage, insurance and wealth management. In addition, the Corporation
realizes securities gains and losses, gains and losses from transactions involving bank owned
property and income from its BOLI policies.
Noninterest income increased $2.4 million, or 15 percent, to $18.2 million for the three
months ended March 31, 2006 compared to the same period in 2005. This improvement was primarily due
to a $0.8 million increase in insurance revenues resulting from the early receipt of revenue
traditionally received in the second quarter, a $0.5 million increase in service charges resulting
from increased NSF volume and a $0.5 million increase in ATM, debit card and merchant income as a
result of increased transaction volume. Mortgage loan fees increased $0.4 million as the
Corporation sold a majority of its current mortgage loan production, in contrast to the 2005 first
quarter. In addition, the Corporation realized gains
of $0.5 million in its SBIC/Venture Capital portfolio, compared to a loss of $0.1 million in the
first quarter of 2005. Property sale gains of $0.1 million were recognized in the first quarter of
2006 compared to $0.6 million in the first quarter of 2005.
21
The following table compares noninterest income for the periods indicated.
Table Four
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended March 31 |
|
Increase/(Decrease) |
(Dollars in thousands) |
|
2006 |
|
2005 |
|
Amount |
|
Percent |
|
Service charges on deposit accounts |
|
$ |
6,698 |
|
|
$ |
6,236 |
|
|
$ |
462 |
|
|
|
7.4 |
% |
Wealth management income |
|
|
1,664 |
|
|
|
1,580 |
|
|
|
84 |
|
|
|
5.3 |
|
Loss on sale of securities |
|
|
|
|
|
|
(49 |
) |
|
|
49 |
|
|
|
N/A |
|
Gain (loss) from equity method investments |
|
|
545 |
|
|
|
(58 |
) |
|
|
603 |
|
|
|
1,039.7 |
|
Mortgage services income |
|
|
808 |
|
|
|
394 |
|
|
|
414 |
|
|
|
105.1 |
|
Brokerage services income |
|
|
711 |
|
|
|
802 |
|
|
|
(91 |
) |
|
|
(11.3 |
) |
Insurance services income |
|
|
4,290 |
|
|
|
3,512 |
|
|
|
778 |
|
|
|
22.2 |
|
Bank owned life insurance |
|
|
827 |
|
|
|
827 |
|
|
|
|
|
|
|
|
|
Gain on sale of property |
|
|
81 |
|
|
|
529 |
|
|
|
(448 |
) |
|
|
(84.7 |
) |
ATM & debit card income |
|
|
1,898 |
|
|
|
1,450 |
|
|
|
448 |
|
|
|
30.9 |
|
Other |
|
|
719 |
|
|
|
591 |
|
|
|
128 |
|
|
|
21.7 |
|
|
Total noninterest income |
|
$ |
18,241 |
|
|
$ |
15,814 |
|
|
$ |
2,427 |
|
|
|
15.3 |
% |
|
Noninterest Expense
Noninterest expense is primarily comprised of operating expenses for the Corporation. The
major components are salaries and employee benefits, occupancy and equipment, professional fees and
other operating expenses.
Noninterest expense increased $2.6 million to $31.5 million compared to the first quarter of
2005. Of this, $1.3 million is attributable to expenses related to the Corporations Raleigh
investments and a recent de novo financial center in Charlotte.
Salaries and employee benefits increased $2.1 million compared to the first quarter of 2005,
of which $0.8 million is due to additional personnel related to the Raleigh market expansion and
the Charlotte de novo branch. Expenses associated with equity-based compensation (SFAS No. 123(R))
totaled $0.5 million, while increased commission-based compensation and higher medical costs
contributed $0.4 million and $0.1 million, respectively, toward the increase. In addition,
occupancy and equipment increased $0.4 million due to additional financial center lease and
depreciation expenses, of which $0.3 million was related to additional financial centers in Raleigh
and Charlotte.
Marketing costs increased $0.2 million over the first quarter of 2005 primarily due to the
Raleigh market entry and other initiatives.
The following table compares noninterest expense for the periods indicated.
Table Five
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
|
|
Ended March 31 |
|
Increase/(Decrease) |
(Dollars in thousands) |
|
2006 |
|
2005 |
|
Amount |
|
Percent |
|
Salaries and employee benefits |
|
$ |
17,693 |
|
|
$ |
15,569 |
|
|
$ |
2,124 |
|
|
|
13.6 |
% |
Occupancy and equipment |
|
|
4,770 |
|
|
|
4,381 |
|
|
|
389 |
|
|
|
8.9 |
|
Data processing |
|
|
1,453 |
|
|
|
1,321 |
|
|
|
132 |
|
|
|
10.0 |
|
Marketing |
|
|
1,288 |
|
|
|
1,080 |
|
|
|
208 |
|
|
|
19.3 |
|
Postage and supplies |
|
|
1,231 |
|
|
|
1,208 |
|
|
|
23 |
|
|
|
1.9 |
|
Professional services |
|
|
1,950 |
|
|
|
1,913 |
|
|
|
37 |
|
|
|
1.9 |
|
Amortization of intangibles |
|
|
150 |
|
|
|
131 |
|
|
|
19 |
|
|
|
14.5 |
|
Telephone |
|
|
579 |
|
|
|
528 |
|
|
|
51 |
|
|
|
9.7 |
|
Other |
|
|
2,398 |
|
|
|
2,738 |
|
|
|
(340 |
) |
|
|
(12.4 |
) |
|
Total noninterest expense |
|
$ |
31,512 |
|
|
$ |
28,869 |
|
|
$ |
2,643 |
|
|
|
9.2 |
% |
|
22
Income Tax Expense
Income tax expense for the three months ended March 31, 2006 was $5.9 million for an
effective tax rate of 33.9 percent, compared to $5.3 million representing an effective tax rate of
34.0 percent for the same period of 2005.
Balance Sheet Analysis
Securities Available-for-Sale
The securities portfolio, all of which is classified as available-for-sale, is a component of
the Corporations Asset Liability Management (ALM) strategy. The decision to purchase or sell
securities is based upon liquidity needs, changes in interest rates, changes in the Banks risk
tolerance, the composition of the rest of the balance sheet, and other factors. Securities
available-for-sale are accounted for at fair value, with unrealized gains and losses recorded net
of tax as a component of other comprehensive income in shareholders equity unless the unrealized
losses are considered other-than-temporary.
The fair value of the securities portfolio is determined by various third party sources.
Valuations are determined as of a date within close proximity to the end of the reporting period
based on available quoted market prices or quoted market prices for similar securities if a quoted
market price is not available.
At March 31, 2006, securities available-for-sale were $900.4 million or 22.9 percent of total
earning assets, compared to $899.1 million or 23.3 percent of total earning assets at December 31,
2005. Pre-tax unrealized net losses on securities available-for-sale were $20.1 million at March
31, 2006, compared to pre-tax unrealized net losses of $18.6 million at December 31, 2005. To
mitigate the risk of unrealized losses increasing due to rising interest rates, the Corporations
current investment strategy focuses on holding shorter duration securities with more predictable
cash flows in a variety of interest rate scenarios. This will allow the Corporation to reinvest the
cash flows of the portfolio into higher rate securities or fund loan growth in a rising interest
rate environment. The weighted average duration of the portfolio was 2.3 years at March 31, 2006
compared to 2.5 years at December 31, 2005.
Loan Portfolio
The Corporations loan portfolio consists of six major categories: Commercial Non Real Estate,
Commercial Real Estate, Construction, Mortgage, Consumer, and Home Equity. Pricing is driven by
quality, loan size, loan tenor, prepayment risk, the Corporations relationship with the customer,
competition and other factors. The Corporation is primarily a secured lender in all of these loan
categories. The terms of the Corporations loans are generally five years or less with the
exception of home equity lines and residential mortgages, for which the tenor can range out to 30
years. In addition, the Corporation has a program in which it buys and sells portions of commercial
real estate, commercial non real estate and construction loans (primarily originated in the
Southeastern region of the United States), both participations and syndications, from key strategic
partner financial institutions with which the Corporation has established relationships. This
program enables the Corporation to diversify both its geographic and its total exposure risk.
Gross loans increased $65.2 million, or 9 percent annualized, to $3.01 billion at March 31,
2006 compared to $2.95 billion at December 31, 2005. The growth was driven by construction and
commercial real estate loans which increased $65.9 million and $39.7 million, respectively.
Mortgage loans declined $7.8 million due, in part, to normal loan amortization and the
Corporations strategy of selling most of its new mortgage production in the secondary market. Home
equity loans declined $9.6 million partly as a result of customers refinancing adjustable rate home
equity loans into fixed rate first mortgage loans. Commercial non real estate loans declined $20.1
million and consumer loans declined $3.0 million. In late 2005 and early 2006, the Corporation
expanded into the Raleigh, North Carolina market with four de novo financial centers. On March 31,
2006 First Charter had $42.1 million in loans balances from the Raleigh market.
23
The table below summarizes loans in the classifications indicated.
Table Six
Loan Portfolio Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
% |
|
December 31, |
|
% |
(Dollars in thousands) |
|
2006 |
|
of Total Loans |
|
2005 |
|
of Total Loans |
|
Commercial real estate |
|
$ |
820,318 |
|
|
|
27.2 |
% |
|
$ |
780,597 |
|
|
|
26.5 |
% |
Commercial non real estate |
|
|
213,338 |
|
|
|
7.1 |
|
|
|
233,409 |
|
|
|
7.9 |
|
Construction |
|
|
583,288 |
|
|
|
19.4 |
|
|
|
517,392 |
|
|
|
17.6 |
|
Mortgage |
|
|
565,166 |
|
|
|
18.8 |
|
|
|
573,007 |
|
|
|
19.4 |
|
Consumer |
|
|
355,636 |
|
|
|
11.8 |
|
|
|
358,592 |
|
|
|
12.2 |
|
Home equity |
|
|
473,342 |
|
|
|
15.7 |
|
|
|
482,921 |
|
|
|
16.4 |
|
|
Total loans |
|
|
3,011,088 |
|
|
|
100.0 |
|
|
|
2,945,918 |
|
|
|
100.0 |
|
|
Less allowance for loan
losses |
|
|
(29,505 |
) |
|
|
(1.0 |
) |
|
|
(28,725 |
) |
|
|
(1.0 |
) |
Unearned income |
|
|
(125 |
) |
|
|
(0.0 |
) |
|
|
(173 |
) |
|
|
(0.0 |
) |
|
Loans, net |
|
$ |
2,981,458 |
|
|
|
99.0 |
% |
|
$ |
2,917,020 |
|
|
|
99.0 |
% |
|
Deposits
Deposits totaled $2.80 billion at March 31, 2006, a slight increase from December 31, 2005.
The growth in deposits was primarily focused in lower-cost core deposits. Period-end core deposits
increased $32.4 million to $1.5 billion at March 31, 2006. Retail certificates of deposit (CDs)
declined $38.8 million from December 31, 2005 to $877.8 million due in large part to maturing
municipal CDs which the Corporation elected not to bid on at unprofitable levels. The Corporation
utilizes brokered CDs, which increased $7.3 million to $412.5 million, as an alternative source of
cost-effective funding.
Other Borrowings
Other borrowings consist of Federal Funds purchased, securities sold under agreements to
repurchase, commercial paper and other short-term borrowings, and long-term borrowings. At March
31, 2006, the Bank had available federal funds lines totaling $100.0 million with $12.5 million
outstanding compared to $25.0 million outstanding at December 31, 2005. Securities sold under
agreements to repurchase totaled $249.1 million at March 31, 2006 compared to $287.3 million at
December 31, 2005.
The Corporation issues commercial paper as another source of short-term funding. Commercial
paper outstanding at March 31, 2006 was $24.3 million compared to $58.4 million at December 31,
2005.
Other short-term borrowings include FHLB borrowings with an original maturity of one year or
less. During the first quarter of 2006, short-term FHLB borrowings increased $35 million to $175.0
million, as rates were lower than other wholesale funding sources.
Long-term borrowings represent FHLB borrowings with original maturities greater than one year
and subordinated debentures related to trust preferred securities. At March 31, 2006, the Bank had
$581.0 million of long-term FHLB borrowings compared to $496.0 million at December 31, 2005. In
addition, the Corporation had $61.9 million of subordinated debentures at both March 31, 2006 and
December 31, 2005.
24
Credit Risk Management
The Corporations credit risk policy and procedures are centralized for every loan type.
In addition, all mortgage, consumer and home equity loans are centrally decisioned. All loans flow
through an independent closing unit to ensure proper documentation. Finally, all known collection
or problem loans are centrally managed by experienced workout personnel. To monitor the
effectiveness of policies and procedures, Management maintains a set of asset quality standards for
past due, nonaccrual and watch list loans and monitors the trends of these standards over time.
These standards are approved by the Board of Directors and reviewed quarterly with the Board of
Directors for compliance.
Loan Administration and Underwriting
The Banks Chief Risk Officer is responsible for the continuous assessment of the Banks risk
profile as well as making any necessary adjustments to policies and procedures. Commercial loan
relationships less than $750,000 may be approved by experienced commercial loan officers, within
their loan authority. Commercial and commercial real estate loans are approved by signature
authority requiring at least two experienced officers for relationships greater than $750,000. The
exceptions to this include City Executives (senior loan officers) who are authorized to approve
relationships up to $1.0 million. An independent Risk Manager is involved in the approval of
commercial and commercial real estate relationships that exceed $1.0 million. All relationships
greater than $2.0 million receive a comprehensive annual review by either the senior credit
analysts or lending officers of the Bank, which is then reviewed by the independent Risk Managers
and/or the final approval officer with the appropriate signature authority. Commitments over $5.0
million are further reviewed by senior lending officers of the Bank, the Chief Risk Officer and the
Credit Risk Management Committee comprised of executive and senior management. In addition,
commitments over $10.0 million are reviewed by the Board of Directors Loan Committee. These
oversight committees provide policy, process, product and specific relationship direction to the
lending personnel. As of March 31, 2006, the Corporation had a legal lending limit of $58.8 million
and a general target lending limit of $10.0 million per relationship.
The Corporations loan portfolio consists of loans made for a variety of commercial and
consumer purposes. Because commercial loans are made based to a great extent on the Corporations
assessment of a borrowers income, cash flow, character and ability to repay, such loans are viewed
as involving a higher degree of credit risk than is the case with residential mortgage loans or
consumer loans. To manage this risk, the Corporations commercial loan portfolio is managed under a
defined process which includes underwriting standards and risk assessment, procedures for loan
approvals, loan grading, ongoing identification and management of credit deterioration and
portfolio reviews to assess loss exposure and to ascertain compliance with the Corporations credit
policies and procedures.
In general, consumer loans (including mortgage and home equity) have a lower risk profile than
commercial loans. Commercial loans (including commercial real estate, commercial non real estate
and construction loans) are generally larger in size and more complex than consumer loans.
Commercial real estate loans are deemed less risky than commercial non real estate and construction
loans, because the collateral value of real estate generally maintains its value better than non
real estate or construction collateral. Consumer loans, which are smaller in size and more
geographically diverse across the Corporations entire primary market area, provide risk diversity
across the portfolio. Because mortgage loans are secured by first liens on the consumers
residential real estate, they are the Corporations lowest risk profile loan type. Home equity
loans are deemed less risky than unsecured consumer loans as home equity loans and lines are
secured by first or second deeds of trust on the borrowers residential real estate. A centralized
decisioning process is in place to control the risk of the consumer, home equity and mortgage loan
portfolio. The consumer real estate appraisal process is also centralized relative to appraisal
engagement, appraisal review, and appraiser quality assessment. These processes are detailed in the
underwriting guidelines, which cover each retail loan product type from underwriting, servicing,
compliance issues and closing procedures.
At March 31, 2006, the substantial majority of the total loan portfolio, as well as a
substantial portion of the commercial and real estate portfolio, represents loans to borrowers
within the Charlotte and Raleigh
25
Metro regions. The diversity of the Charlotte and Raleigh Metro regions economic base tends to
provide a stable lending environment; however, an economic downturn in the Corporations primary
market area could adversely affect its business. No significant concentration of credit risk has
been identified due to the diverse industrial base in the region.
Additionally, the Corporations loan portfolio consists of certain non-traditional loan
products. Some of these products include interest only loans, loans with initial interest rates
that are below the market interest rate for the initial period of the loan-term and may increase
when that period ends and loans with a high loan-to-value ratio. Based on the Corporations
assessment, these products do not give rise to a concentration of credit risk.
Derivatives
The Corporation enters into interest rate swap agreements or other derivative transactions as
business conditions warrant. As previously discussed, the Corporation repositioned its balance
sheet in the fourth quarter of 2005. As a result, the Corporation extinguished $222 million in debt
and terminated the related interest rate swaps. As of March 31, 2006 and December 31, 2005, the
Corporation had no interest rate swap agreements or other derivative transactions outstanding.
Nonperforming Assets
Nonperforming assets are comprised of nonaccrual loans and other real estate owned (OREO).
The nonaccrual status is determined after a loan is 90 days past due or when deemed not collectible
in full as to principal or interest, unless in managements opinion collection of both principal
and interest is assured by way of collateralization, guarantees or other security and the loan is
in the process of collection. OREO represents real estate acquired through foreclosure or deed in
lieu thereof and is generally carried at the lower of cost or fair value, less estimated costs to
sell.
Managements policy for any accruing loan greater than 90 days past due is to perform an
analysis of the loan, including a consideration of the financial position of the borrower and any
guarantor, as well as the value of the collateral, and use this information to make an assessment
as to whether collectibility of the principal and interest appears probable. If such collectibility
is not probable, the loans are placed on nonaccrual status. Loans are returned to accrual status
when management determines, based on an evaluation of the underlying collateral together with the
borrowers payment record and financial condition, that the borrower has the ability and intent to
meet the contractual obligations of the loan agreement. As of March 31, 2006, no loans were 90 days
or more past due and still accruing interest.
The table below summarizes the Corporations nonperforming assets and loans 90 days or more
past due and still accruing interest as of the dates indicated.
Table Seven
Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31 |
|
December 31 |
|
September 30 |
|
June 30 |
|
March 31 |
(Dollars in thousands) |
|
2006 |
|
2005 |
|
2005 |
|
2005 |
|
2005 |
|
Nonaccrual loans |
|
$ |
9,211 |
|
|
$ |
10,811 |
|
|
$ |
7,071 |
|
|
$ |
9,858 |
|
|
$ |
9,282 |
|
Other real estate owned |
|
|
6,072 |
|
|
|
5,124 |
|
|
|
6,079 |
|
|
|
6,390 |
|
|
|
7,648 |
|
|
Total nonperforming assets |
|
|
15,283 |
|
|
|
15,935 |
|
|
|
13,150 |
|
|
|
16,248 |
|
|
|
16,930 |
|
|
Loans 90 days or more past due
and still accruing interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets and loans 90 days or
more past due and still accruing interest |
|
$ |
15,283 |
|
|
$ |
15,935 |
|
|
$ |
13,150 |
|
|
$ |
16,248 |
|
|
$ |
16,930 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets as a percentage of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
0.36 |
% |
|
|
0.38 |
% |
|
|
0.28 |
% |
|
|
0.35 |
% |
|
|
0.38 |
% |
Total loans and other real estate owned |
|
|
0.51 |
|
|
|
0.54 |
|
|
|
0.45 |
|
|
|
0.57 |
|
|
|
0.62 |
|
Nonaccrual loans as a percentage of loans |
|
|
0.31 |
|
|
|
0.37 |
|
|
|
0.24 |
|
|
|
0.34 |
|
|
|
0.34 |
|
Ratio of allowance for loan losses to
nonperforming loans |
|
|
3.20 |
x |
|
|
2.66 |
x |
|
|
4.21 |
x |
|
|
2.95 |
x |
|
|
2.96 |
x |
26
Nonaccrual loans totaled $9.2 million at March 31, 2006, representing a $1.6 million decrease
from $10.8 million at December 31, 2005. The decrease was primarily due to a previously disclosed
$1.6 million paydown of one commercial loan which moved to nonaccrual status in the fourth quarter
of 2005 and the transfer of several consumer loans to OREO. Correspondingly, OREO increased $1.0
million from December 31, 2005. Nonperforming assets as a percentage of total loans and other real
estate owned decreased to 0.51 percent at March 31, 2006 compared to 0.54 percent at December 31,
2005 and 0.62 percent at March 31, 2005.
Nonaccrual loans at March 31, 2006 and December 31, 2005 were not concentrated in any one
industry and primarily consisted of loans secured by real estate. Nonaccrual loans as a percentage
of loans may increase as economic conditions change. Management has taken current economic
conditions into consideration when estimating the allowance for loan losses. See Allowance for Loan
Losses for a more detailed discussion.
Allowance for Loan Losses
The Corporations allowance for loan losses consists of three components: (i) valuation
allowances computed on impaired loans in accordance with SFAS No. 114; (ii) valuation allowances
determined by applying historical loss rates to those loans not specifically identified as
impaired; and (iii) valuation allowances for factors which management believes are not reflected in
the historical loss rates or that otherwise need to be considered when estimating the allowance for
loan losses. These three components are estimated quarterly by Credit Risk Management and, along
with a narrative analysis, comprise the Corporations allowance for loan losses model. The
resulting components are used by management to determine the adequacy of the allowance for loan
losses.
All estimates of 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 Corporations 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 risk in
the real estate market and changes in the economic conditions in its primary market area. Changes
in these areas can increase or decrease the provision for loan losses.
During the three months ended March 31, 2006, the Corporation made no changes to its estimated
loss percentages for economic factors. As a part of its quarterly assessment of the allowance for
loan losses, the Corporation reviews key local, regional and national economic information and
assesses its impact on the allowance for loan losses. Based on its review for the three months
ended March 31, 2006, the Corporation noted that economic conditions are mixed; however, management
concluded that the impact on borrowers and local industries in the Corporations primary market
area did not change significantly during the period. Accordingly, the Corporation did not modify
its loss estimate percentage attributable to economic factors in its allowance for loan losses
model.
The Corporation continuously reviews its portfolio for any concentrations of loans to any one
borrower or industry. To analyze its concentrations, the Corporation prepares various reports
showing total loans to borrowers by industry, as well as reports showing total loans to one
borrower. At the present time, the Corporation does not believe it is overly concentrated in any
industry or specific borrower and therefore has made no allocations of allowances for loan losses
for this factor for any of the periods presented.
The Corporation also monitors the amount of operational risk that exists in the portfolio.
This would include the front-end underwriting, documentation and closing processes associated with
the lending decision. The percent of additional allocation for the operational reserve has not
changed in recent periods.
27
Table Eight
Allowance For Loan Losses
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, |
(Dollars in thousands) |
|
2006 |
|
2005 |
|
Balance, January 1 |
|
$ |
28,725 |
|
|
$ |
26,872 |
|
|
Loan charge-offs: |
|
|
|
|
|
|
|
|
Commercial non real estate |
|
|
251 |
|
|
|
511 |
|
Commercial real estate |
|
|
75 |
|
|
|
553 |
|
Mortgage |
|
|
11 |
|
|
|
49 |
|
Consumer |
|
|
501 |
|
|
|
601 |
|
Home equity |
|
|
391 |
|
|
|
204 |
|
|
Total loans charged-off |
|
|
1,229 |
|
|
|
1,918 |
|
|
Recoveries of loans previously charged-off: |
|
|
|
|
|
|
|
|
Commercial non real estate |
|
|
328 |
|
|
|
439 |
|
Consumer |
|
|
162 |
|
|
|
190 |
|
|
Total recoveries of loans previously
charged-off |
|
|
490 |
|
|
|
629 |
|
|
Net charge-offs |
|
|
739 |
|
|
|
1,289 |
|
|
Provision for loan losses |
|
|
1,519 |
|
|
|
1,900 |
|
|
Balance, March 31 |
|
$ |
29,505 |
|
|
$ |
27,483 |
|
|
|
|
|
|
|
|
|
|
|
Average loans |
|
$ |
2,939,233 |
|
|
$ |
2,547,226 |
|
Net charge-offs to average loans (annualized) |
|
|
0.10 |
% |
|
|
0.21 |
% |
Allowance for loan losses to
gross loans |
|
|
0.98 |
|
|
|
1.02 |
|
|
The allowance for loan losses was $29.5 million or 0.98 percent of gross loans at March
31, 2006 compared to $28.7 million or 0.98 percent of gross loans at December 31, 2005 and $27.5
million or 1.02 percent of gross loans at March 31, 2005. The lower allowance for loan loss ratio
compared to a year ago is related to the Corporations improved credit quality trends.
Management considers the allowance for loan losses adequate to cover inherent losses in the
Corporations loan portfolio as of the date of the financial statements. Management believes it has
established the allowance in consideration of the current and expected future economic environment.
While management uses the best information available to make evaluations, future adjustments 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
Corporations allowances for loan losses. Such agencies may require the recognition of adjustments
to the allowance based on their judgment of information available to them at the time of their
examinations.
Provision for Loan Losses
The provision for loan losses is the amount charged to earnings which is necessary to maintain
an adequate and appropriate allowance for loan losses. Accordingly, the factors which influence
changes in the allowance for loan losses have a direct effect on the provision for loan losses. The
allowance for loan losses changes from period to period as a result of a number of factors, the
most significant of which for the Corporation include the following: (i) changes in the mix of
types of loans; (ii) current charge-offs and recoveries of loans; (iii) changes in impaired loan
valuation allowances; (iv) changes in credit grades
within the portfolio, which arise from a deterioration or an improvement in the performance of
the borrower; (v) changes in loss percentages; and (vi) changes in the amounts of loans
outstanding, which are used to estimate current probable loan losses. In addition, the Corporation
considers other, more subjective factors which impact the credit quality of the portfolio as a
whole and estimates allocations of allowance for loan losses for these factors, as well. These
factors include loan concentrations, economic conditions and operational risks. Changes in these
components of the allowance can arise from fluctuations in the underlying percentages used as
related loss estimates for these factors, as well as variations in the portfolio balances to which
they are applied. The net change in all of these components of
28
the allowance for loan losses results in the provision for loan losses. For a more detailed
discussion of the Corporations process for estimating the allowance for loan losses, see Allowance
for Loan Losses.
The provision for loan losses for the three months ended March 31, 2006 amounted to $1.5
million compared to $1.9 million a year ago. The decrease in the provision for loan losses was
primarily attributable to a $0.6 million decrease in net charge-offs. Net charge-offs for the three
months ended March 31, 2006 amounted to $0.7 million, or 0.10 percent of average loans, compared to
$1.3 million, or 0.21 percent of average loans for the same 2005 period.
Asset-Liability Management and Interest Rate Risk
The Corporations primary interest rate risk management objective is to maximize net interest
income across a broad range of interest rate scenarios, subject to risk tolerance approval by
Management and the Board of Directors. Management primarily analyzes interest rate risk in two
fundamentally different ways: earnings simulation and market value of equity. The first method uses
an earnings simulation model to assess the amount of near-term earnings at risk (net interest
income at risk over a 12 month horizon) due to changes in interest rates. In analyzing interest
rate sensitivity for policy measurement, net interest income is simulated in plus and minus 200
basis point rate shock scenarios relative to the implied forward interest rate scenario for the
next 12 months. Under the Corporations policy, the limit for near-term earnings at risk is 10
percent of net interest income. At March 31, 2006, First Charter estimated that its net interest
income at risk to a plus and minus 200 basis point rate shock relative to the implied forwards was
a positive 5 percent and negative 5 percent, respectively.
The second method management uses to analyze interest rate risk is to calculate the market
value of equity for the Corporation. This calculation discounts the anticipated cash flows of a
static balance sheet using current rates. Management then recalculates the Corporations market
value of equity in plus and minus 200 basis point rate shock scenarios. The Corporations has
established a 15 percent limit for the market value of equity at risk for a 200 basis point rate
shock. At March 31, 2006, the Corporations market value at risk for a 200 basis point increase and
decrease relative to the implied forward rate forecast was a negative 8 percent and positive 5
percent, respectively.
Management also analyzes interest rate risk in parallel current and forward interest rate
scenarios beyond the 200 basis point rate shocks mentioned above. In addition, Management analyzes
interest rate risk under various interest rate scenarios that involve changes in the relationship
between various market rate indices.
Management uses a variety of tools to manage the Corporations interest rate risk including,
but not limited to, loan and deposit pricing, its choice of tenor and repricing characteristics on
its wholesale borrowings, its choice of the tenor and repricing characteristics of its investment
portfolio, and from time to time, various derivative products.
Table Nine summarizes the expected maturities and weighted average effective yields and rates
associated with certain of the Corporations significant non-trading financial instruments. Cash
and cash equivalents, federal funds sold and interest-bearing bank deposits are excluded from Table
Nine as their respective carrying values approximate fair values. These financial instruments
generally expose the Corporation to insignificant market risk as they have either no stated
maturities or an average maturity of less than 30 days and interest rates that approximate market
rates. However, these financial instruments could expose the Corporation to interest rate risk by
requiring more or less reliance on alternative funding sources, such as long-term debt. The
mortgage-backed securities are shown at their weighted average expected life, obtained from an
outside evaluation of the average remaining life of each security based on expected prepayment
speeds of the underlying mortgages at March 31, 2006. These expected maturities, weighted average
effective yields and fair values will change if interest rates change. Demand deposits, money
market accounts and certain savings deposits are presented in the earliest maturity window
29
because they have no stated maturity. For interest rate risk analytical purposes, these
non-maturity deposits are believed to have average lives longer than shown here.
Table Nine
Market Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity |
(Dollars in thousands) |
|
Total |
|
1 Year |
|
2 Years |
|
3 Years |
|
4 Years |
|
5 Years |
|
Thereafter |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
Book value |
|
$ |
768,912 |
|
|
$ |
198,004 |
|
|
$ |
272,597 |
|
|
$ |
185,871 |
|
|
$ |
38,731 |
|
|
$ |
33,707 |
|
|
$ |
40,002 |
|
Weighted average effective yield |
|
|
4.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
752,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value |
|
$ |
102,513 |
|
|
|
37,657 |
|
|
|
38,005 |
|
|
|
21,851 |
|
|
|
|
|
|
|
|
|
|
|
5,000 |
|
Weighted average effective yield |
|
|
4.37 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
98,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale |
Fixed rate |
Book value |
|
$ |
774,589 |
|
|
|
155,002 |
|
|
|
144,011 |
|
|
|
155,908 |
|
|
|
83,645 |
|
|
|
106,933 |
|
|
|
129,090 |
|
Weighted average effective yield |
|
|
6.40 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
762,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate |
Book value |
|
$ |
2,245,093 |
|
|
|
850,520 |
|
|
|
343,983 |
|
|
|
249,173 |
|
|
|
103,396 |
|
|
|
100,128 |
|
|
|
597,893 |
|
Weighted average effective yield |
|
|
7.31 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
2,249,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
Fixed rate |
Book value |
|
$ |
1,290,254 |
|
|
|
1,064,822 |
|
|
|
178,800 |
|
|
|
34,434 |
|
|
|
7,904 |
|
|
|
3,966 |
|
|
|
328 |
|
Weighted average effective yield |
|
|
3.75 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
1,288,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate |
Book value |
|
$ |
1,087,908 |
|
|
|
277,718 |
|
|
|
277,206 |
|
|
|
276,403 |
|
|
|
121,705 |
|
|
|
63,582 |
|
|
|
71,294 |
|
Weighted average effective yield |
|
|
1.87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
1,025,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings |
Fixed rate |
Book value |
|
$ |
260,986 |
|
|
|
110,052 |
|
|
|
50,054 |
|
|
|
50,057 |
|
|
|
60 |
|
|
|
50,074 |
|
|
|
689 |
|
Weighted average effective yield |
|
|
4.09 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
257,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate |
Book value |
|
$ |
381,857 |
|
|
|
200,000 |
|
|
|
|
|
|
|
120,000 |
|
|
|
|
|
|
|
|
|
|
|
61,857 |
|
Weighted average effective yield |
|
|
5.66 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
382,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Off-Balance Sheet Risk
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. Standby letters of credit are recorded as a liability by
the Corporation at the fair value of the obligation undertaken in issuing the guarantee.
Commitments to extend credit are not recorded as an asset or liability by the Corporation until the
instrument is exercised. Refer to Note Nine of the consolidated financial statements for further
discussion of commitments. The Corporation does not have any off-balance sheet financing
arrangements, other than the Trust Securities.
The following table presents aggregated information about commitments of the Corporation,
which could impact future periods.
Table Ten
Commitments
As of March 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
$ |
32,345 |
|
|
$ |
2,741 |
|
|
$ |
1,841 |
|
|
$ |
421,629 |
|
|
$ |
458,556 |
|
Standby Letters of Credit |
|
|
13,496 |
|
|
|
2,534 |
|
|
|
|
|
|
|
|
|
|
|
16,030 |
|
Loan Commitments |
|
|
500,401 |
|
|
|
131,338 |
|
|
|
32,482 |
|
|
|
14,997 |
|
|
|
679,218 |
|
|
Total Commitments |
|
$ |
546,242 |
|
|
$ |
136,613 |
|
|
$ |
34,323 |
|
|
$ |
436,626 |
|
|
$ |
1,153,804 |
|
|
Liquidity Risk
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 retail deposits, by current earnings, and by a strong capital base that
enables the Corporation to use alternative funding sources that complement normal sources.
Managements asset-liability policy includes optimizing net interest income while continuing to
provide adequate liquidity to meet continuing loan demand and deposit withdrawal requirements and
to service normal operating expenses.
Liquidity is managed at two levels. The first is the liquidity of the Corporation. The second
is the liquidity of the Bank. The management of liquidity at both levels is essential, because each
of the Corporation and the Bank have different funding needs and sources, and each are subject to
certain regulatory guidelines and requirements.
The primary source of funding for the Corporation includes dividends received from the Bank
and proceeds from the issuance of equity securities. In addition, the Corporation had a $25.0
million bank line of credit with no outstandings and commercial paper outstandings of $24.3 million
at March 31, 2006. Primary uses of funds for the Corporation include repayment of commercial paper,
share repurchases and dividends paid to shareholders. During the second and third quarter of 2005,
the Corporation issued Trust Securities through specially formed trusts. The Trust Securities are
presented as long-term borrowings in the Consolidated Balance Sheet and are includable in Tier 1
capital for regulatory capital purposes, subject to certain limitations.
Primary sources of funding for the Bank include customer deposits, wholesale deposits, other
borrowings, loan repayments and securities available-for-sale. The Bank has access to federal funds
lines from various banks and borrowings from the Federal Reserve discount window. In addition to
these sources, the Bank is a member of the FHLB, which provides access to FHLB lending sources. At
March 31, 2006, the Bank had an available line of credit with the FHLB totaling $1.27 billion with
$756.0 million outstanding. At March
31
31, 2006, the Bank also had $100.0 million of federal funds lines with $12.5 million
outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan
portfolio.
Management believes the Corporations and the Banks sources of liquidity are adequate to meet
loan demand, operating needs and deposit withdrawal requirements.
The Corporation views capital as its most valuable and most expensive funding source. The
objective of effective capital management is to generate above-market returns on equity to the
Corporations shareholders while maintaining adequate regulatory capital ratios. Some of the
Corporations primary uses of capital include funding growth, asset acquisition, dividend payments
and common stock repurchases.
Shareholders equity at March 31, 2006 increased to $333.6 million, representing 7.8 percent
of period-end assets compared to $323.6 million or 7.6 percent of period-end assets at December 31,
2005. The increase was due mainly to net income of $11.4 million partially offset by cash dividends
of $0.19 per share, which resulted in cash dividend payments of $5.5 million for the three months
ended March 31, 2006. In addition, the after-tax unrealized loss on securities-available-for-sale
increased $0.9 million to $12.1 million at March 31, 2006 compared to $11.3 million at December 31,
2005. This increase was due to a rise in interest rates across the yield curve.
On January 23, 2002, the Corporations Board of Directors authorized the repurchase of up to
1.5 million shares of the Corporations common stock. As of March 31, 2006, the Corporation had
repurchased a total of 1.4 million shares of its common stock at an average per-share price of
$17.52 under this authorization, which has reduced shareholders equity by $24.5 million. No shares
were repurchased under this authorization during the three months ended March 31, 2006.
On October 24, 2003, the Corporations Board of Directors authorized the repurchase of up to
1.5 million additional shares of the Corporations common stock. At March 31, 2006 no shares had
been repurchased under this authorization.
The Corporation anticipates repurchasing shares under one or both of these plans in 2006 under
certain conditions.
During the second quarter and third quarter of 2005, the Corporation issued Trust Securities
through specially formed trusts. The Trust Securities are presented as long-term borrowings in the
Consolidated Balance Sheet and are includable in Tier 1 capital for regulatory capital purposes,
subject to certain limitations.
The Corporations and the Banks various regulators have issued regulatory capital guidelines
for U.S. banking organizations. Failure to meet the capital requirements can initiate certain
mandatory and discretionary actions by regulators that could have a material effect on the
Corporations financial statements. At March 31, 2006, the Corporation and the Bank were classified
as well capitalized under these regulatory frameworks.
32
The Corporations and the Banks actual capital amounts and ratios are presented in the table
below:
Table Eleven
Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
|
|
|
|
|
|
|
|
Adequacy Purposes |
|
To Be Well Capitalized |
|
|
Actual |
|
|
|
|
|
Minimum |
|
|
|
|
|
Minimum |
(Dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
At March 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
413,690 |
|
|
|
12.08 |
% |
|
$ |
273,939 |
|
|
|
8.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
392,171 |
|
|
|
11.49 |
|
|
|
273,022 |
|
|
|
8.00 |
|
|
$ |
341,277 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to Risk Weighted Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
384,035 |
|
|
|
11.22 |
% |
|
$ |
136,970 |
|
|
|
4.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
362,665 |
|
|
|
10.63 |
|
|
|
136,511 |
|
|
|
4.00 |
|
|
$ |
204,766 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital (to Adjusted Average Assets) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
384,035 |
|
|
|
9.14 |
% |
|
$ |
167,993 |
|
|
|
4.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
362,665 |
|
|
|
8.67 |
|
|
|
167,414 |
|
|
|
4.00 |
|
|
$ |
209,267 |
|
|
|
5.00 |
% |
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
effect on the Corporations liquidity, capital resources, or operations.
In July 2005, the FASB issued an exposure draft, Accounting for Uncertain Tax
Positions, a proposed interpretation of SFAS No. 109, Accounting for Income Taxes (the proposed
Interpretation). The proposed Interpretation would clarify the accounting for uncertain tax
positions and require the Corporation to recognize managements best estimate of the impact of a
tax position. The initial proposed effective date of the Interpretation was fiscal years ending
after December 31, 2005; however, the provisions of the Interpretation have not been finalized.
Management is currently evaluating the effect of the initial proposed Interpretation and its impact
on the consolidated financial statements.
In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments. SFAS No. 155 is an amendment of SFAS No. 133 and SFAS No. 140. SFAS No. 155 permits
companies to elect, on a deal by deal basis, to apply a fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise would require bifurcation.
SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of
an entitys first fiscal year that begins after September 15, 2006. The Corporation does not expect
SFAS No. 155 to have a material impact on the consolidated financial statements of the Corporation.
In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets.
SFAS No. 156 amends SFAS No. 140. SFAS No. 156 requires that all separately recognized servicing
assets and servicing liabilities be initially measured at fair value. For subsequent measurements,
SFAS No. 156
permits companies to choose between using an amortization method or a fair value measurement method
for reporting purposes. SFAS No. 156 is effective as of the beginning of a companys first fiscal
year that begins after September 15, 2006. The Corporation does not expect SFAS No. 156 to have a
material impact on the consolidated financial statements of the Corporation.
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.
33
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See
Managements Discussion and Analysis of Financial Condition
and Results of Operations Market Risk Management Asset-Liability Management and Interest Rate Risk on page 29 for
Quantitative and Qualitative Disclosures about Market Risk.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. As of the end of the period
covered by this report, an evaluation of the effectiveness of the Registrants disclosure controls
and procedures (as defined in Rule 13(a)-15(e) and 15d-15(e) promulgated under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) was performed under the supervision and with
the participation of the Registrants management, including the Chief Executive Officer and Chief
Financial Officer. Based on that evaluation, the Registrants Chief Executive Officer and Chief
Financial Officer have concluded that the Registrants disclosure controls and procedures were
effective to ensure that information required to be disclosed by the Registrant in its reports that
it files or submits under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities Exchange Commission rules and forms.
(b) Changes in internal control over financial reporting. During the Registrants
first fiscal quarter, there has been no change in the Registrants internal controls over financial
reporting (as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Registrants internal
controls over financial reporting.
34
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 1A. Risk Factors
There have been no material changes from those risk factors previously disclosed in Item 1A
Risk Factors of Part I of the Corporations Annual Report on Form 10-K for the year ended December
31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities
The following table summarizes the Corporations repurchases of its common stock during the
quarter ended March 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
of Shares that May |
|
|
|
|
|
|
|
|
|
|
Part of Publicly |
|
Yet Be Purchased |
|
|
Total Number of |
|
Average Price Paid |
|
Announced Plans or |
|
Under the Plans or |
Period |
|
Shares Purchased |
|
per Share |
|
Programs (1) |
|
Programs |
|
January 1,
2006-January 31,
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 1,
2006-February 28,
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625,400 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 1,
2006-March 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625,400 |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625,400 |
|
|
(1) On January 24, 2002, the Corporation announced that its Board of Directors had authorized
a stock repurchase plan to acquire up to 1.5 million shares of the Corporations common stock from
time to time. As of September 30, 2005, the Corporation had repurchased 1,374,600 shares under
this authorization. No shares were repurchased under this authorization during the quarter ended
March 31, 2006. On November 3, 2003, the Corporation announced that its Board of Directors had
authorized a stock repurchase plan to acquire up to an additional 1.5 million shares of the
Corporations common stock from time to time. As of March 31, 2006, no shares have been
repurchased under this authorization. These stock repurchase plans have no set expiration or
termination date.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
35
Item 6. Exhibits
|
|
|
Exhibit No. |
|
|
(per Exhibit Table |
|
|
in item 601 of |
|
|
Regulation S-K) |
|
Description of Exhibits |
10.1 |
|
Description of 2006 Compensation
for Non-Employee Directors, incorporated herein by reference to Item
1.01 of the Corporations Current Report on Form 8-K dated January 25, 2006. |
|
|
|
10.2 |
|
Form of Performance Shares Award
Agreement under the First Charter Corporation 2000 Omnibus Stock
Option and Award Plan, incorporated herein by reference to Exhibit
10.1 of the Corporations Current Report on Form 8-K dated February 27, 2006. |
|
|
|
10.3 |
|
Form of Restricted Stock Award
Agreement under the First Charter Corporation 2000 Omnibus Stock
Option and Award Plan, incorporated herein by reference to Exhibit
10.2 of the Corporations Current Report on Form 8-K dated February 27, 2006. |
|
|
|
10.4 |
|
Form of First Charter Corporation
Restricted Stock Award Agreement for use with the First Charter
Corporation Restricted Stock Award Program, incorporated herein by
reference to Exhibit 10.5 of the Corporations Current Report on Form 8-K dated February 27, 2006. |
|
|
|
31.1 |
|
Certification of Chief Executive
Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
|
Certification of Chief Financial
Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1 |
|
Certification of Chief Executive
Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.2 |
|
Certification of Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
36
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 10, 2006
|
|
By:
|
|
/s/ Charles A. Caswell |
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles A. Caswell |
|
|
|
|
|
|
Executive Vice President, |
|
|
|
|
|
|
Chief Financial Officer and Treasurer |
|
|
|
|
|
|
(Principal Financial Officer duly
authorized to
sign on behalf of the
registrant)
|
|
|
37