10. Stock-Based Compensation
First Charter Comprehensive Stock Option Plan. In April 1992, the Corporations shareholders
approved the First Charter Corporation Comprehensive Stock Option Plan (Comprehensive Stock Option
Plan). Under the terms of 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 Stock Option Plan generally are determined by the Compensation
Committee of the Corporations Board of Directors (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 and six months ended June 30, 2007, no shares were issued under
this plan.
First Charter Corporation Stock Option Plan for Non-Employee Directors. In April 1997, the
Corporations shareholders approved the First Charter Corporation Stock Option Plan for
Non-Employee Directors (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 and six months ended June 30, 2007, no shares were
issued under this plan.
2000 Omnibus Stock Option and Award Plan. In June 2000, the Corporations shareholders approved the
First Charter Corporation 2000 Omnibus Stock Option and Award Plan (the 2000 Omnibus Plan).
Under the 2000 Omnibus Plan, 2.0 million 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 1.5 million shares for issuance, for a total of 3.5 million 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, targeted charge-off levels, and earnings per share growth as measured against a group of
selected peer companies. During the three months ended June 30, 2007, no shares were issued under
this plan. During the six months ended June 30, 2007, 71,500 stock options, 21,000 service-based
nonvested shares, and 54,600 performance-based nonvested shares were issued under this plan.
Restricted Stock Award Program. In April 1995, the Corporations 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 generally vest based on
either three or five years of service. Under the Restricted Stock Plan, a maximum of 360,000
shares of common stock are reserved for issuance. During the three and six months ended June 30,
2007, there were 18,732 and 89,935 service-based nonvested shares issued under this plan,
respectively.
19
Stock-based compensation costs totaled $1.0 million for the three months ended June 30, 2007, which
consisted of $32,000 related to stock options, $736,000 related to service-based nonvested shares,
and $232,000 related to performance-based nonvested shares. For the six months ended June 30,
2007, stock-based compensation costs totaled $1.8 million, which consisted of $82,000 related to
stock options, $1.3 million related to service-based nonvested shares, and $446,000 related to
performance-based nonvested shares.
Stock-based compensation costs totaled $555,000 for the three months ended June 30, 2006, which
consisted of $202,000 related to stock options, $246,000 related to service-based nonvested shares,
and $107,000 related to performance-based nonvested shares. For the six months ended June 30,
2006, stock-based compensation costs totaled $1.1 million, which consisted of $481,000 related to
stock options, $373,000 related to service-based nonvested shares, and $214,000 related to
performance-based nonvested shares.
The fair value of each stock option award is estimated at the date of grant using a Black-Scholes
option-pricing model based on the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Expected volatility |
|
|
N/A |
|
|
|
N/A |
|
|
|
22.4 |
% |
|
|
25.0 |
% |
Expected dividend yield |
|
|
N/A |
|
|
|
N/A |
|
|
|
3.2 |
|
|
|
3.2 |
|
Risk-free interest rate |
|
|
N/A |
|
|
|
N/A |
|
|
|
4.8 |
|
|
|
3.9 |
|
Expected term (in years) |
|
|
N/A |
|
|
|
N/A |
|
|
|
8.0 |
|
|
|
7.0 |
|
|
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 Corporations stock.
Stock option activity under the Comprehensive Stock Option Plan, the Director Plan, and the 2000
Omnibus Plan at and for the six months ended June 30, 2007, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
Weighted- |
|
Remaining |
|
|
|
|
|
|
|
|
Average |
|
Contractual |
|
Aggregate |
|
|
|
|
|
|
Exercise |
|
Term |
|
Intrinsic |
|
|
Shares |
|
Price |
|
(in years) |
|
Value |
|
Outstanding at January 1, 2007 |
|
|
1,497,619 |
|
|
$ |
20.57 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
71,500 |
|
|
|
24.46 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(56,960 |
) |
|
|
18.98 |
|
|
|
|
|
|
$ |
297,893 |
|
Forfeited or expired |
|
|
(204,906 |
) |
|
|
25.79 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
1,307,253 |
|
|
$ |
20.03 |
|
|
|
5.5 |
|
|
$ |
3,093,754 |
|
|
Exercisable at March 31, 2007 |
|
|
1,187,673 |
|
|
$ |
19.62 |
|
|
|
5.1 |
|
|
$ |
3,093,754 |
|
|
Weighted-average Black-Scholes fair value
of options granted during the period |
|
|
|
|
|
$ |
5.63 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
1,307,253 |
|
|
$ |
20.03 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(60,338 |
) |
|
|
17.75 |
|
|
|
|
|
|
$ |
239,159 |
|
Forfeited or expired |
|
|
(22,878 |
) |
|
|
22.76 |
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2007 |
|
|
1,224,037 |
|
|
$ |
20.09 |
|
|
|
5.3 |
|
|
$ |
1,501,676 |
|
|
Exercisable at June 30, 2007 |
|
|
1,104,457 |
|
|
$ |
19.65 |
|
|
|
5.1 |
|
|
$ |
1,501,676 |
|
|
Weighted-average Black-Scholes fair value
of options granted during the period |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
20
No options were granted during the three months ended June 30, 2006. The weighted-average
Black-Scholes fair value of options granted during the six months ended June 30, 2006, was $5.85,
and the aggregate intrinsic value of options exercised was $604,000 and $1.5 million, respectively.
Nonvested share activity under the Omnibus Plan and the Restricted Stock Plan at and for the six
months ended June 30, 2007 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service-Based |
|
Performance-Based |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Grant Date |
|
|
|
|
|
Grant Date |
|
|
Shares |
|
Fair Value |
|
Shares |
|
Fair Value |
|
Outstanding at January 1, 2007 |
|
|
215,663 |
|
|
$ |
24.00 |
|
|
|
52,100 |
|
|
$ |
21.91 |
|
Granted |
|
|
92,203 |
|
|
|
24.34 |
|
|
|
54,600 |
|
|
|
22.70 |
|
Vested |
|
|
(5,342 |
) |
|
|
23.66 |
|
|
|
|
|
|
|
|
|
Forfeited or expired |
|
|
(13,262 |
) |
|
|
23.81 |
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2007 |
|
|
289,262 |
|
|
$ |
24.14 |
|
|
|
106,700 |
|
|
$ |
22.31 |
|
Granted |
|
|
18,732 |
|
|
|
20.64 |
|
|
|
|
|
|
|
|
|
Vested |
|
|
|
|
|
|
|
|
|
|
(5,967 |
) |
|
|
22.13 |
|
Forfeited or expired |
|
|
(4,666 |
) |
|
|
23.88 |
|
|
|
(9,333 |
) |
|
|
22.41 |
|
|
Outstanding at June 30, 2007 |
|
|
303,328 |
|
|
$ |
23.92 |
|
|
|
91,400 |
|
|
$ |
22.32 |
|
|
As of June 30, 2007, there was approximately $5.6 million of total unrecognized compensation cost
related to service-based nonvested share-based compensation arrangements granted under the Omnibus
Plan and the Restricted Stock Plan. This cost is expected to be recognized over a remaining
weighted-average period of 2.3 years. No share-based awards vested during the three months ended
June 30, 2007. The total fair value of share-based awards that vested during the six months ended
June 30, 2007, was $126,000.
As of June 30, 2007, there was $1.3 million of total unrecognized compensation cost related to
performance-based nonvested share-based compensation arrangements granted under the Omnibus Plan.
This cost is expected to be recognized over a remaining weighted-average period of 1.9 years.
The following table provides certain information about stock options outstanding at June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Options |
|
Options Exercisable |
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
Number |
|
Contractual |
|
Average |
|
Number |
|
Average |
Range of Exercise Prices |
|
Outstanding |
|
Life (in years) |
|
Exercise Price |
|
Exercisable |
|
Exercise Price |
|
$5.01-10.00 |
|
|
3,400 |
|
|
|
2.2 |
|
|
$ |
9.04 |
|
|
|
3,400 |
|
|
$ |
9.04 |
|
10.01 - 12.50 |
|
|
18,702 |
|
|
|
1.5 |
|
|
|
11.63 |
|
|
|
18,702 |
|
|
|
11.63 |
|
12.51 - 15.00 |
|
|
63,160 |
|
|
|
2.5 |
|
|
|
14.43 |
|
|
|
63,160 |
|
|
|
14.43 |
|
15.01 - 17.50 |
|
|
256,537 |
|
|
|
4.0 |
|
|
|
16.62 |
|
|
|
256,537 |
|
|
|
16.62 |
|
17.51 - 20.00 |
|
|
262,845 |
|
|
|
4.4 |
|
|
|
18.44 |
|
|
|
262,845 |
|
|
|
18.44 |
|
20.01 - 22.50 |
|
|
167,814 |
|
|
|
6.4 |
|
|
|
20.78 |
|
|
|
167,814 |
|
|
|
20.78 |
|
22.51 - 25.00 |
|
|
422,514 |
|
|
|
7.1 |
|
|
|
23.83 |
|
|
|
302,934 |
|
|
|
23.71 |
|
25.01 - 27.50 |
|
|
29,065 |
|
|
|
2.7 |
|
|
|
26.35 |
|
|
|
29,065 |
|
|
|
26.35 |
|
|
Total |
|
|
1,224,037 |
|
|
|
5.3 |
|
|
$ |
20.09 |
|
|
|
1,104,457 |
|
|
$ |
19.65 |
|
|
21
11. Other Borrowings
A summary of other borrowings follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
December 31, 2006 |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Contractual |
|
|
|
|
|
Contractual |
(In thousands) |
|
Balance |
|
Rate |
|
Balance |
|
Rate |
|
Federal funds purchased and securities sold under
agreements to repurchase |
|
$ |
216,152 |
|
|
|
4.71 |
% |
|
$ |
201,713 |
|
|
|
4.60 |
% |
Commercial paper |
|
|
77,844 |
|
|
|
2.71 |
|
|
|
38,191 |
|
|
|
2.72 |
|
Other short-term borrowings |
|
|
265,000 |
|
|
|
5.30 |
|
|
|
371,000 |
|
|
|
5.35 |
|
Long-term debt |
|
|
617,762 |
|
|
|
5.13 |
|
|
|
487,794 |
|
|
|
4.79 |
|
|
Total other borrowings |
|
$ |
1,176,758 |
|
|
|
4.93 |
% |
|
$ |
1,098,698 |
|
|
|
4.87 |
% |
|
Securities sold under agreements to repurchase represent short-term borrowings by the banking
subsidiaries with maturities less than one year collateralized by a portion of the Corporations
securities of the United States government or its agencies, which have been delivered to a
third-party custodian for safekeeping. Securities with an aggregate carrying value of $194.2
million and $214.9 million at June 30, 2007 and December 31, 2006, respectively, were pledged to
secure securities sold under agreements to repurchase.
Federal funds purchased represent unsecured overnight borrowings from other financial
institutions by the banking subsidiaries. At June 30, 2007, the Bank had federal funds back-up
lines of credit totaling $363.0 million with $88.0 million outstanding. At December 31, 2006, the
Bank had federal funds backup lines of credit totaling $188.2 million with $41.5 million
outstanding.
The Corporation issues commercial paper as another source of short-term funding. It is
purchased primarily by the Banks commercial clients. Commercial paper outstanding at June 30, 2007
was $77.8 million, compared to $38.2 million at December 31, 2006.
Other short-term borrowings consist of the FHLB borrowings with an original maturity of one year or
less. FHLB borrowings are collateralized by securities from the Corporations investment portfolio,
and a blanket lien on certain qualifying commercial and single-family loans held in the
Corporations loan portfolio. At June 30, 2007, the Bank had $265.0 million of short-term FHLB
borrowings, compared to $371.0 million at December 31, 2006.
Long-term borrowings represent FHLB borrowings with original maturities greater than one year
and subordinated debentures related to trust preferred securities. At June 30, 2007, the Bank had
$555.9 million of long-term FHLB borrowings, compared to $425.9 million at December 31, 2006. In
addition, the Corporation had $61.9 million of outstanding subordinated debentures at June 30, 2007
and December 31, 2006.
The Corporation formed First Charter Capital Trust I and First Charter Capital Trust II, in
June 2005 and September 2005, respectively; both are wholly-owned business trusts. First Charter
Capital Trust I and First Charter Capital Trust II issued $35.0 million and $25.0 million,
respectively, of trust preferred securities that were sold to third parties. The proceeds of the
sale of the trust preferred securities were used to purchase the subordinated debentures (the
Notes) discussed above from the Corporation, which are presented as long-term borrowings in the
consolidated balance sheet and qualify for inclusion in Tier 1 capital for regulatory capital
purposes, subject to certain limitations.
22
The following table is a summary of the Corporations outstanding trust preferred securities and
Notes as of June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of |
|
Aggregate |
|
|
|
|
|
|
|
|
|
|
|
|
Trust |
|
Principal |
|
Stated |
|
Per Annum |
|
Interest |
|
|
|
|
|
|
Preferred |
|
Amount of |
|
Maturity of |
|
Interest Rate |
|
Payment |
|
Redemption |
Issuer |
|
Issuance Date |
|
Securities |
|
the Notes |
|
the Notes |
|
of the Notes |
|
Dates |
|
Period |
|
Capital Trust I
|
|
June 2005
|
|
$ |
35,000 |
|
|
$ |
36,083 |
|
|
September 2035
|
|
3 mo. LIBOR + 169
bps
|
|
3/15, 6/15, 9/15,
12/15
|
|
On or after
9/15/2010 |
Capital Trust II
|
|
September 2005
|
|
|
25,000 |
|
|
|
25,774 |
|
|
December 2035
|
|
3 mo. LIBOR + 142
bps
|
|
3/15, 6/15, 9/15,
12/15
|
|
On or after
12/15/2010 |
|
Total
|
|
|
|
$ |
60,000 |
|
|
$ |
61,857 |
|
|
|
|
|
|
|
|
|
|
12. 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. Included in loan commitments are commitments
to cover customer deposit account overdrafts should they occur. 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 June 30, 2007, of
standby letters of credit issued or modified during the three and six months ended June 30, 2007
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 maximum exposure is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
|
|
|
Timing not |
|
|
(In thousands) |
|
1 year |
|
1-3 Years |
|
4-5 Years |
|
Over 5 Years |
|
determinable |
|
Total |
|
Loan commitments |
|
$ |
703,813 |
|
|
$ |
118,172 |
|
|
$ |
42,662 |
|
|
$ |
59,637 |
|
|
$ |
|
|
|
$ |
924,284 |
|
Lines of credit |
|
|
31,390 |
|
|
|
1,639 |
|
|
|
2,921 |
|
|
|
455,613 |
|
|
|
|
|
|
|
491,563 |
|
Standby letters of credit |
|
|
22,920 |
|
|
|
3,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,468 |
|
Anticipated tax settlements |
|
|
584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,551 |
|
|
|
11,135 |
|
|
Total commitments |
|
$ |
758,707 |
|
|
$ |
123,359 |
|
|
$ |
45,583 |
|
|
$ |
515,250 |
|
|
$ |
10,551 |
|
|
$ |
1,453,450 |
|
|
Contingencies. The Corporation is under examination by the North Carolina Department of Revenue
for tax years 1999 through 2004 and is subject to examination for subsequent tax years. Additional
information regarding the examination is included in Note 2.
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.
23
13. Regulatory Restrictions and Capital Ratios
The Corporation and the Bank are subject to various regulatory capital requirements administered by
bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if undertaken, could
have a direct material effect on the Corporations financial position and operations. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and
the Bank must meet specific capital guidelines that involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the
Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of
Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and
of Tier I capital (as defined) to adjusted average assets (as defined). Management believes, as of
June 30, 2007, that the Corporation and the Bank meet all capital adequacy requirements to which
they are subject.
The Corporations and the Banks various regulators have issued regulatory capital
requirements 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 June 30, 2007, the Corporation and the Bank were classified
as well capitalized under these regulatory frameworks. In the judgment of management, there have
been no events or conditions since June 30, 2007, which would change the well capitalized status
of the Corporation or the Bank.
The Corporations and the Banks actual capital amounts and ratios follow:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
|
|
|
|
|
|
|
|
Adequacy Purposes |
|
To Be Well Capitalized |
|
|
Actual |
|
|
|
|
|
|
|
|
|
Minimum |
|
|
|
|
|
Minimum |
(Dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
At June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
430,373 |
|
|
|
8.97 |
% |
|
$ |
192,023 |
|
|
|
4.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
411,177 |
|
|
|
8.57 |
|
|
|
191,914 |
|
|
|
4.00 |
|
|
$ |
239,893 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
430,373 |
|
|
|
10.57 |
% |
|
$ |
162,932 |
|
|
|
4.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
411,177 |
|
|
|
10.10 |
|
|
|
162,782 |
|
|
|
4.00 |
|
|
$ |
244,174 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
475,358 |
|
|
|
11.67 |
% |
|
$ |
325,863 |
|
|
|
8.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
455,967 |
|
|
|
11.20 |
|
|
|
325,565 |
|
|
|
8.00 |
|
|
$ |
406,956 |
|
|
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
428,135 |
|
|
|
9.32 |
% |
|
$ |
183,678 |
|
|
|
4.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
362,970 |
|
|
|
8.36 |
|
|
|
173,591 |
|
|
|
4.00 |
|
|
$ |
216,988 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
428,135 |
|
|
|
10.53 |
% |
|
$ |
162,614 |
|
|
|
4.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
362,970 |
|
|
|
9.99 |
|
|
|
145,275 |
|
|
|
4.00 |
|
|
$ |
217,913 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
463,273 |
|
|
|
11.40 |
% |
|
$ |
325,228 |
|
|
|
8.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
393,664 |
|
|
|
10.84 |
|
|
|
290,550 |
|
|
|
8.00 |
|
|
$ |
363,188 |
|
|
|
10.00 |
% |
|
24
Tier 1 capital consists of total equity plus qualifying capital securities and minority
interests, less unrealized gains and losses accumulated in other comprehensive income, certain
intangible assets, and adjustments related to the valuation of servicing assets and certain equity
investments in nonfinancial companies (equity method investments).
The leverage ratio reflects Tier 1 capital divided by average total assets for the period. Average
assets used in the calculation exclude certain intangible and servicing assets.
Total risk-based capital is comprised of Tier 1 capital plus qualifying subordinated debt and
allowance for loan losses and a portion of unrealized gains on certain equity securities.
Both the Tier 1 and the total risk-based capital ratios are computed by dividing the respective
capital amounts by risk-weighted assets, as defined.
The Corporation from time to time is required to maintain noninterest bearing reserve balances
with the Federal Reserve Bank. The required reserve was $1.0 million at June 30, 2007.
Under current Federal Reserve regulations, a bank subsidiary is limited in the amount it may loan
to its parent company and nonbank subsidiaries. Loans to a single affiliate may not exceed 10
percent and loans to all affiliates may not exceed 20 percent of the Banks capital stock, surplus,
and undivided profits, plus the allowance for loan losses. Loans from the Bank to nonbank
affiliates, including the parent company, are also required to be collateralized.
The primary source of funds available to the Corporation is the payment of dividends from the
Bank. Dividends paid by a subsidiary bank to its parent company are also subject to certain legal
and regulatory limitations.
14. Subsequent Event
On July
31, 2007, the General Assembly of North Carolina passed House Bill
1473 which includes a provision that disallows the deduction of dividends paid by captive real estate investment trusts (REITs) for the purposes of determining North Carolina taxable income.
The Corporation, through its subsidiaries, participates in two entities
classified as captive REITs from which the Corporation has historically received dividends which resulted in certain tax benefits taken within the Corporations tax returns and consolidated financial statements.
This legislation is effective for taxable years beginning on or after January 1, 2007.
The Corporation is currently evaluating the impact that this legislation will have on the Corporations current and prior tax filings, as well as the related financial statement impact to the Corporations effective tax rate and uncertain tax positions. Assuming the legislation eliminates the deductibility of the REIT dividends for North Carolina
state income tax purposes, the Corporation expects an increase in its effective tax rate for
2007 and subsequent fiscal years.
15. 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. The results of the Banks operations constitute a substantial
majority of the consolidated net income, revenue and assets of the Corporation. Intercompany
transactions and the Corporations revenue, 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.
25
Information regarding the separate results of operations and assets for the Bank and Other for the
three months ended June 30, 2007 and 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
(In thousands) |
|
The Bank |
|
Other |
|
Eliminations |
|
Total |
|
Interest income |
|
$ |
78,280 |
|
|
$ |
11 |
|
|
$ |
|
|
|
$ |
78,291 |
|
Interest expense |
|
|
39,520 |
|
|
|
1,227 |
|
|
|
|
|
|
|
40,747 |
|
|
Net interest income (expense) |
|
|
38,760 |
|
|
|
(1,216 |
) |
|
|
|
|
|
|
37,544 |
|
Provision for loan losses |
|
|
9,124 |
|
|
|
|
|
|
|
|
|
|
|
9,124 |
|
Noninterest income |
|
|
20,109 |
|
|
|
32 |
|
|
|
|
|
|
|
20,141 |
|
Noninterest expense |
|
|
34,951 |
|
|
|
256 |
|
|
|
|
|
|
|
35,207 |
|
|
Income (loss) from continuing operations before |
|
|
14,794 |
|
|
|
(1,440 |
) |
|
|
|
|
|
|
13,354 |
|
income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
4,886 |
|
|
|
(482 |
) |
|
|
|
|
|
|
4,404 |
|
|
Net income (loss) |
|
$ |
9,908 |
|
|
$ |
(958 |
) |
|
$ |
|
|
|
$ |
8,950 |
|
|
Average loans |
|
$ |
3,543,840 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,543,840 |
|
Average assets |
|
|
4,861,455 |
|
|
|
537,631 |
|
|
|
(524,344 |
) |
|
|
4,874,742 |
|
Total assets |
|
|
4,898,290 |
|
|
|
589,514 |
|
|
|
(571,083 |
) |
|
|
4,916,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
(In thousands) |
|
The Bank |
|
Other |
|
Eliminations |
|
Total |
|
Interest income |
|
$ |
63,653 |
|
|
$ |
89 |
|
|
$ |
|
|
|
$ |
63,742 |
|
Interest expense |
|
|
29,935 |
|
|
|
1,160 |
|
|
|
|
|
|
|
31,095 |
|
|
Net interest income (expense) |
|
|
33,718 |
|
|
|
(1,071 |
) |
|
|
|
|
|
|
32,647 |
|
Provision for loan losses |
|
|
880 |
|
|
|
|
|
|
|
|
|
|
|
880 |
|
Noninterest income (loss) |
|
|
16,301 |
|
|
|
(9 |
) |
|
|
|
|
|
|
16,292 |
|
Noninterest expense |
|
|
30,649 |
|
|
|
39 |
|
|
|
|
|
|
|
30,688 |
|
|
Income (loss) from continuing operations before |
|
|
18,490 |
|
|
|
(1,119 |
) |
|
|
|
|
|
|
17,371 |
|
income tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
|
6,329 |
|
|
|
(383 |
) |
|
|
|
|
|
|
5,946 |
|
|
Income (loss) from continuing operations, net of tax |
|
|
12,161 |
|
|
|
(736 |
) |
|
|
|
|
|
|
11,425 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
50 |
|
Income tax expense |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
20 |
|
|
Income from discontinued operations, net of tax |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
30 |
|
|
Net income (loss) |
|
$ |
12,191 |
|
|
$ |
(736 |
) |
|
$ |
|
|
|
$ |
11,455 |
|
|
Average loans |
|
$ |
3,030,815 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,030,815 |
|
Average assets of continuing operations |
|
|
4,251,761 |
|
|
|
417,805 |
|
|
|
(397,703 |
) |
|
|
4,271,863 |
|
Average assets of discontinued operations |
|
|
2,482 |
|
|
|
|
|
|
|
|
|
|
|
2,482 |
|
Total assets of continuing operations |
|
|
4,332,140 |
|
|
|
443,647 |
|
|
|
(417,139 |
) |
|
|
4,358,648 |
|
Total assets of discontinued operations |
|
|
2,583 |
|
|
|
|
|
|
|
|
|
|
|
2,583 |
|
|
26
Information regarding the separate results of operations and assets for the Bank and Other for the
six months ended June 30, 2007 and 2006 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
(In thousands) |
|
The Bank |
|
Other |
|
Eliminations |
|
Total |
|
Interest income |
|
$ |
155,412 |
|
|
$ |
93 |
|
|
$ |
|
|
|
$ |
155,505 |
|
Interest expense |
|
|
78,742 |
|
|
|
2,484 |
|
|
|
|
|
|
|
81,226 |
|
|
Net interest income (expense) |
|
|
76,670 |
|
|
|
(2,391 |
) |
|
|
|
|
|
|
74,279 |
|
Provision for loan losses |
|
|
10,490 |
|
|
|
|
|
|
|
|
|
|
|
10,490 |
|
Noninterest income |
|
|
39,567 |
|
|
|
140 |
|
|
|
|
|
|
|
39,707 |
|
Noninterest expense |
|
|
70,661 |
|
|
|
466 |
|
|
|
|
|
|
|
71,127 |
|
|
Income
(loss) from continuing operations before income tax expense |
|
|
35,086 |
|
|
|
(2,717 |
) |
|
|
|
|
|
|
32,369 |
|
Income tax expense (benefit) |
|
|
11,992 |
|
|
|
(929 |
) |
|
|
|
|
|
|
11,063 |
|
|
Net income (loss) |
|
$ |
23,094 |
|
|
$ |
(1,788 |
) |
|
$ |
|
|
|
$ |
21,306 |
|
|
Average loans |
|
$ |
3,532,915 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3,532,915 |
|
Average assets |
|
|
4,858,766 |
|
|
|
539,157 |
|
|
|
(525,001 |
) |
|
|
4,872,922 |
|
Total assets |
|
|
4,898,290 |
|
|
|
589,514 |
|
|
|
(571,083 |
) |
|
|
4,916,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
(In thousands) |
|
The Bank |
|
Other |
|
Eliminations |
|
Total |
|
Interest income |
|
$ |
123,281 |
|
|
$ |
107 |
|
|
$ |
|
|
|
$ |
123,388 |
|
Interest expense |
|
|
56,411 |
|
|
|
2,240 |
|
|
|
|
|
|
|
58,651 |
|
|
Net interest income (expense) |
|
|
66,870 |
|
|
|
(2,133 |
) |
|
|
|
|
|
|
64,737 |
|
Provision for loan losses |
|
|
2,399 |
|
|
|
|
|
|
|
|
|
|
|
2,399 |
|
Noninterest income |
|
|
33,204 |
|
|
|
79 |
|
|
|
|
|
|
|
33,283 |
|
Noninterest expense |
|
|
61,327 |
|
|
|
102 |
|
|
|
|
|
|
|
61,429 |
|
|
Income
(loss) from continuing operations before income tax expense |
|
|
36,348 |
|
|
|
(2,156 |
) |
|
|
|
|
|
|
34,192 |
|
Income tax expense (benefit) |
|
|
12,348 |
|
|
|
(734 |
) |
|
|
|
|
|
|
11,614 |
|
|
Income (loss) from continuing operations, net of tax |
|
|
24,000 |
|
|
|
(1,422 |
) |
|
|
|
|
|
|
22,578 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
|
|
198 |
|
|
|
|
|
|
|
|
|
|
|
198 |
|
Income tax expense |
|
|
78 |
|
|
|
|
|
|
|
|
|
|
|
78 |
|
|
Income from discontinued operations, net of tax |
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
120 |
|
|
Net income (loss) |
|
$ |
24,120 |
|
|
$ |
(1,422 |
) |
|
$ |
|
|
|
$ |
22,698 |
|
|
Average loans |
|
$ |
2,988,596 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,988,596 |
|
Average assets of continuing operations |
|
|
4,217,951 |
|
|
|
417,950 |
|
|
|
(400,284 |
) |
|
|
4,235,617 |
|
Average assets of discontinued operations |
|
|
2,511 |
|
|
|
|
|
|
|
|
|
|
|
2,511 |
|
Total assets of continuing operations |
|
|
4,332,140 |
|
|
|
443,647 |
|
|
|
(417,139 |
) |
|
|
4,358,648 |
|
Total assets of discontinued operations |
|
|
2,583 |
|
|
|
|
|
|
|
|
|
|
|
2,583 |
|
|
27
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: (i) projected results in connection with managements implementation of,
or changes in, the Corporations business plan and strategic initiatives, including the
Corporations various balance sheet initiatives; (ii) competitive pressure among financial services
companies increases significantly; (iii) 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; (iv) general economic conditions, in the markets in which the
Corporation does business, are less favorable than expected; (v) risks inherent in making loans,
including repayment risks and risks associated with collateral values, are greater than expected,
including the Penland loans described herein; (vi) 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; (vii) changes in market rates and prices may adversely affect
the value of financial products; (viii) legislation or regulatory requirements or changes thereto,
including changes in accounting standards, may adversely affect the businesses in which the
Corporation is engaged; (ix) regulatory compliance cost increases are greater than expected; (x)
the passage of future tax legislation, or any negative regulatory, administrative or judicial
position, may adversely impact the Corporation; (xi) the Corporations competitors may have greater
financial resources and may develop products that enable them to compete more successfully in the
markets in which the Corporation operates; (xii) changes in the securities markets, including
changes in interest rates, may adversely affect the Corporations ability to raise capital from
time to time; (xiii) the material weaknesses in the Corporations internal control over financial
reporting result in subsequent adjustments to managements projected results; and (xiv)
implementation of managements plans to remediate the material weaknesses takes longer than
expected and causes the Corporation to incur costs that are greater than expected.
First Charter Corporation (NASDAQ: FCTR) (hereinafter referred to as First Charter, the
Corporation, or the Registrant), headquartered in Charlotte, North Carolina, is a regional
financial services company with assets of $4.9 billion and is the holding company for First Charter
Bank (the Bank). As of June 30, 2007, First Charter operated 58 financial centers, four
insurance offices, and 138 ATMs throughout North Carolina and Georgia, and 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, and mortgages. The results of operations of
the Bank constitute the substantial majority of the consolidated net income, revenue, and assets of
the Corporation.
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 short- and long-term debt.
28
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 products, including mortgage, wealth management, brokerage, and insurance. Other sources of
noninterest income include securities gains or losses, gains from Small Business Administration
loan sales, 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 expense. The provision for loan losses and
income taxes are also considered material expenses.
The Community-Banking Model
The Bank follows a community-banking model. The community-banking model is focused on
delivering a broad array of financial products and solutions to our clients 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 larger competitors that may
have less flexibility, as well as local competition that may not have the array of products and
services that the Bank offers. The Bank competes against four 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 exceed our clients expectations,
being an employer of choice and providing exceptional value to shareholders, the Corporation can
achieve the profitability and growth goals it has set for itself.
Market Expansion
First Charter expanded into the Raleigh, North Carolina market with the opening of a de novo
financial center in October 2005 and three additional de novo financial centers in mid-February,
2006. A fifth de novo financial center opened in Raleigh in late-January 2007.
On November 1, 2006, the Corporation entered the greater Atlanta, Georgia metropolitan market with
the acquisition of GBC Bancorp, Inc. (GBC) and its banking subsidiary, Gwinnett Banking Company
(Gwinnett Bank), with financial centers located in Lawrenceville and Alpharetta, Georgia. By
expanding into the greater Atlanta metropolitan market through this acquisition, the Corporation
has been able to spread its credit risk over multiple market areas and states, as well as gain
access to another large market area as a source of core deposits. Effective March 1, 2007,
Gwinnett Bank was merged with and into the Bank.
Recent Challenges
During the fourth quarter of 2006, the Corporation closed two significant transactions, the
acquisition of GBC and the sale of Southeastern Employee Benefits Services (SEBS), its employee
benefits administration business. In addition, the Corporation was faced with several new
accounting standards. The numerous challenges that these events posed for the Corporation were
compounded by a key vacancy in the leadership of its accounting area and turnover within other key
finance positions, and exposed certain material weaknesses in the Corporations internal control
over financial reporting. Management has begun to implement its remediation plan to address these
material weaknesses (the Remediation Plan). See Item 4. Controls and Procedures.
For additional information with respect to the material weaknesses in the Corporations internal
controls, and the Remediation Plan, refer to First Charters Annual Report on Form 10-K for the
year ended December 31, 2006.
29
During the second quarter of 2007, the North Carolina Attorney General obtained a court order to
appoint a receiver to take control of a real estate venture in Western North Carolina. The
Attorney Generals complaint alleges that various defendants, including real estate development
companies, individuals, and an appraiser engaged in deceptive practices to induce consumers to
obtain loans to purchase lots in The Village of Penland and related development projects
(Penland) in the Spruce Pine, North Carolina area. These lots were allegedly priced based upon inflated appraisals. Several financial institutions,
including First Charter, made loans in connection with these residential developments.
As of June 30, 2007, the Corporation had 70 loans with an aggregate outstanding balance of $14.1
million to individual lot purchasers related to Penland. As previously disclosed, based on
managements assessment of probable incurred losses associated with the Penland loan portfolio, the
Corporation recorded an additional $7.8 million provision for loan losses during the second quarter
of 2007. As of June 30, 2007, no loans in the Penland loan portfolio had reached a 90-day past-due
status. However, based on managements assessment of the individual borrowers, $5.4 million of
these loans were placed on nonaccrual status as of June 30, 2007
and all of the previously recognized
interest income related to these nonaccrual loans was reversed.
Financial Summary
The Corporations second quarter 2007 net income was $9.0 million, a 21.9 percent decrease,
compared to $11.5 million for the second quarter of 2006. On a per share basis, net income was
$0.26 per diluted share, compared to $0.37 per diluted share for the second quarter of 2006.
Total revenue on a tax-equivalent basis increased 17.8 percent to $58.3 million, compared to $49.5
million in the second quarter of 2006. Return on average tangible equity was 9.97 percent and
return on average assets was 0.74 percent, compared to 14.97 percent and 1.07 percent,
respectively, a year ago.
The financial results for 2007 include the financial performance and the effect of additional
outstanding shares from the recent acquisition of GBC Bancorp, Inc., compared with two months of
results in the 2006 fourth quarter and no impact for the six months ended June 30, 2006.
For the six months ended June 30, 2007 net income was $21.3 million, a 6.1 percent decrease,
compared to $22.7 million from the same period a year ago. On a per share basis, net income was
$0.61 per diluted share for the six months ended June 30, 2007, compared to $0.73 per diluted share
for the six months ended June 30, 2006.
30
Table One
Selected Financial Data by Quarter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30 |
|
March 31 |
|
December 31 |
|
September 30 |
|
June 30 |
(Dollars in thousands, except share and per share amounts) |
|
2007 |
|
2007 |
|
2006 |
|
2006 |
|
2006 |
|
Income statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
$ |
78,291 |
|
|
$ |
77,214 |
|
|
$ |
74,456 |
|
|
$ |
67,085 |
|
|
$ |
63,742 |
|
Interest expense |
|
|
40,747 |
|
|
|
40,479 |
|
|
|
38,441 |
|
|
|
34,127 |
|
|
|
31,095 |
|
|
Net interest income |
|
|
37,544 |
|
|
|
36,735 |
|
|
|
36,015 |
|
|
|
32,958 |
|
|
|
32,647 |
|
Provision for loan losses |
|
|
9,124 |
|
|
|
1,366 |
|
|
|
1,486 |
|
|
|
1,405 |
|
|
|
880 |
|
Noninterest income |
|
|
20,141 |
|
|
|
19,566 |
|
|
|
17,388 |
|
|
|
17,007 |
|
|
|
16,292 |
|
Noninterest expense |
|
|
35,207 |
|
|
|
35,920 |
|
|
|
33,853 |
|
|
|
29,655 |
|
|
|
30,688 |
|
|
Income from continuing operations before
income tax expense |
|
|
13,354 |
|
|
|
19,015 |
|
|
|
18,064 |
|
|
|
18,905 |
|
|
|
17,371 |
|
Income tax expense |
|
|
4,404 |
|
|
|
6,659 |
|
|
|
5,962 |
|
|
|
6,223 |
|
|
|
5,946 |
|
|
Income from continuing operations, net of tax |
|
|
8,950 |
|
|
|
12,356 |
|
|
|
12,102 |
|
|
|
12,682 |
|
|
|
11,425 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
|
|
|
|
|
|
|
|
|
(162 |
) |
|
|
|
|
|
|
50 |
|
Gain on sale |
|
|
|
|
|
|
|
|
|
|
962 |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
|
|
|
|
|
|
|
|
|
887 |
|
|
|
|
|
|
|
20 |
|
|
Income (loss) from discontinued operations, net of tax |
|
|
|
|
|
|
|
|
|
|
(87 |
) |
|
|
|
|
|
|
30 |
|
|
Net income |
|
$ |
8,950 |
|
|
$ |
12,356 |
|
|
$ |
12,015 |
|
|
$ |
12,682 |
|
|
$ |
11,455 |
|
|
Per common share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
$ |
0.26 |
|
|
$ |
0.36 |
|
|
$ |
0.36 |
|
|
$ |
0.41 |
|
|
$ |
0.37 |
|
Net income |
|
|
0.26 |
|
|
|
0.36 |
|
|
|
0.36 |
|
|
|
0.41 |
|
|
|
0.37 |
|
Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax |
|
|
0.26 |
|
|
|
0.35 |
|
|
|
0.36 |
|
|
|
0.40 |
|
|
|
0.37 |
|
Net income |
|
|
0.26 |
|
|
|
0.35 |
|
|
|
0.36 |
|
|
|
0.40 |
|
|
|
0.37 |
|
Average shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
34,697,944 |
|
|
|
34,770,106 |
|
|
|
33,268,542 |
|
|
|
31,056,059 |
|
|
|
31,058,858 |
|
Diluted |
|
|
34,986,662 |
|
|
|
35,084,640 |
|
|
|
33,583,617 |
|
|
|
31,426,563 |
|
|
|
31,339,325 |
|
Dividends declared |
|
|
0.195 |
|
|
|
0.195 |
|
|
|
0.195 |
|
|
|
0.195 |
|
|
|
0.195 |
|
Period-end book value |
|
|
12.85 |
|
|
|
12.97 |
|
|
|
12.81 |
|
|
|
11.20 |
|
|
|
10.73 |
|
|
Performance ratios |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average equity (1) |
|
|
7.86 |
% |
|
|
11.09 |
% |
|
|
11.69 |
% |
|
|
14.76 |
% |
|
|
13.80 |
|
Return on average assets (1) |
|
|
0.74 |
|
|
|
1.03 |
|
|
|
1.02 |
|
|
|
1.16 |
|
|
|
1.07 |
|
Net yield on earning assets (1) |
|
|
3.42 |
|
|
|
3.38 |
|
|
|
3.40 |
|
|
|
3.33 |
|
|
|
3.36 |
|
Average portfolio loans to average deposits |
|
|
109.50 |
|
|
|
107.98 |
|
|
|
105.88 |
|
|
|
103.37 |
|
|
|
108.27 |
|
Average equity to average assets |
|
|
9.37 |
|
|
|
9.28 |
|
|
|
8.75 |
|
|
|
7.86 |
|
|
|
7.79 |
|
Efficiency ratio (2) |
|
|
60.4 |
|
|
|
63.1 |
|
|
|
62.6 |
|
|
|
52.6 |
|
|
|
62.0 |
|
|
Selected period-end balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans, net |
|
$ |
3,509,047 |
|
|
$ |
3,494,015 |
|
|
$ |
3,450,087 |
|
|
$ |
3,061,864 |
|
|
$ |
3,042,768 |
|
Loans held for sale |
|
|
11,471 |
|
|
|
13,691 |
|
|
|
12,292 |
|
|
|
10,923 |
|
|
|
8,382 |
|
Allowance for loan losses |
|
|
44,790 |
|
|
|
35,854 |
|
|
|
34,966 |
|
|
|
29,919 |
|
|
|
29,520 |
|
Securities available for sale |
|
|
898,528 |
|
|
|
897,762 |
|
|
|
906,415 |
|
|
|
899,120 |
|
|
|
884,370 |
|
Assets |
|
|
4,916,721 |
|
|
|
4,884,495 |
|
|
|
4,856,717 |
|
|
|
4,382,507 |
|
|
|
4,361,231 |
|
Deposits |
|
|
3,230,346 |
|
|
|
3,321,366 |
|
|
|
3,248,128 |
|
|
|
2,954,854 |
|
|
|
2,988,802 |
|
Other borrowings |
|
|
1,176,758 |
|
|
|
1,044,229 |
|
|
|
1,098,698 |
|
|
|
1,031,798 |
|
|
|
995,707 |
|
Total liabilities |
|
|
4,470,893 |
|
|
|
4,429,123 |
|
|
|
4,409,355 |
|
|
|
4,033,069 |
|
|
|
4,027,333 |
|
Shareholders equity |
|
|
445,828 |
|
|
|
455,372 |
|
|
|
447,362 |
|
|
|
349,438 |
|
|
|
333,898 |
|
Selected average balances |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio loans |
|
|
3,532,713 |
|
|
|
3,510,437 |
|
|
|
3,336,563 |
|
|
|
3,070,286 |
|
|
|
3,021,005 |
|
Loans held for sale |
|
|
11,127 |
|
|
|
11,431 |
|
|
|
10,757 |
|
|
|
8,792 |
|
|
|
9,810 |
|
Securities available for sale, at cost |
|
|
914,606 |
|
|
|
926,970 |
|
|
|
924,773 |
|
|
|
923,293 |
|
|
|
921,026 |
|
Earning assets |
|
|
4,467,031 |
|
|
|
4,463,161 |
|
|
|
4,284,735 |
|
|
|
4,013,745 |
|
|
|
3,960,835 |
|
Assets |
|
|
4,874,742 |
|
|
|
4,871,083 |
|
|
|
4,664,431 |
|
|
|
4,336,270 |
|
|
|
4,274,345 |
|
Deposits |
|
|
3,226,308 |
|
|
|
3,251,137 |
|
|
|
3,151,120 |
|
|
|
2,970,047 |
|
|
|
2,790,197 |
|
Other borrowings |
|
|
1,131,599 |
|
|
|
1,113,191 |
|
|
|
1,054,550 |
|
|
|
984,504 |
|
|
|
1,108,734 |
|
Shareholders equity |
|
|
456,634 |
|
|
|
451,835 |
|
|
|
407,929 |
|
|
|
340,986 |
|
|
|
332,987 |
|
|
|
|
|
(1) |
|
Annualized. |
|
(2) |
|
Noninterest expense divided by the sum of taxable-equivalent net interest income plus noninterest income less gain (loss) on sale of
securities, net. Excludes the results of discontinued operations. |
31
Critical Accounting Estimates and Policies
The Corporations significant accounting policies are described in Note 1 of the Corporations
Annual Report on Form 10-K for the year ended December 31, 2006, on pages 69 to 76. 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, income taxes, and
identified intangible assets and goodwill. 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 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 affect net income.
As previously discussed, the Corporation recorded an additional provision for loan losses related
to the Penland in the second quarter 2007. The Corporation began evaluating its exposure to
Penland in early June 2007 after the North Carolina Attorney General announced that he had obtained
a court order to appoint a receiver to take control of the development. The Corporation continues
to evaluate the Penland lot loan portfolio. Subsequent developments related to the Penland lot
loans may have a significant impact on the provision for loan losses.
As
described in Note 14 to the consolidated financial statements, on July 31, 2007 the General Assembly of North Carolina passed legislation which includes a provision that disallows the deduction of dividends paid by captive real estate
investment trusts (REITs) for the purposes of determining North Carolina taxable income. The Corporation, through its subsidiaries, participates in two entities classified as captive REITs from which the Corporation has historically received dividends which resulted in certain tax benefits taken within the Corporations tax returns and consolidated financial statements. The Corporation is
currently evaluating the impact that this legislation will have on the Corporations current and prior tax filings, as well as the related financial statement impact to the Corporations effective tax rate and uncertain tax positions.
For more information on the Corporations critical accounting policies, refer to pages 29 to 31 of
the Corporations Annual Report on Form 10-K for the year ended December 31, 2006.
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 and six months ended
June 30, 2007 and 2006 is presented in Table Two and Table Three. Net interest income on a
taxable-equivalent basis 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 six months ended June 30, 2007 and 2006 are
analyzed in Table Four and Table Five. Except as noted, the discussion below is based on net
interest income computed under accounting principles generally accepted in the United States of
America.
Net interest income increased to $37.5 million, representing a $4.9 million, or 15.0 percent,
increase over the second quarter of 2006. The net interest margin (taxable-equivalent net interest
income divided by average earning assets) increased six basis points to 3.42 percent in the second
quarter of 2007 from 3.36 percent in the second quarter of 2006. The margin benefited from
continued disciplined pricing of loans and deposits and a greater concentration of higher-yielding
commercial loans relative to total
32
assets. Placing $5.4 million of the Penland lot loans on nonaccrual status in the second quarter of
2007 partially offset the increase in net interest income and reduced the margin by one basis
point.
Compared to the second quarter of 2006, earning-asset yields increased 57 basis points to 7.08
percent. This increase was driven by several factors. First, loan yields increased 44 basis
points to 7.61 percent. Second, securities yields increased 69 basis points to 5.06 percent.
Third, the mix of higher-yielding (loan) assets improved as a result of the GBC acquisition and a
smaller percentage of lower-yielding mortgage and consumer loans. Lastly, the percentage of
investment securities average balances (which, typically, have lower yields than loans) to total
earning-asset average balances, was reduced from 23.3 percent to 20.5 percent over the past year.
On the liability side of the balance sheet, the cost of interest-bearing liabilities increased 60
basis points to 4.19 percent, compared to the second quarter of 2006. This increase was comprised
of a 71 basis point increase in interest-bearing deposit costs to 3.82 percent, while other
borrowing costs increased 49 basis points to 5.10 percent. During 2006, the Federal Reserve raised
the rate that banks lend funds to each other (the Fed Funds rate) by 100 basis points. Also, as a
result of deposit growth, the percentage of higher-cost, other borrowings average balances was
reduced from 31.9 percent to 29.0 percent of total interest-bearing liabilities average balances
over the past year.
For the six months ended June 30, 2007, net interest income increased to $74.3 million,
representing a $9.5 million, or 14.7 percent, increase from the same period in 2006. The net
interest margin increased two basis points to 3.40 percent for the six months ended June 30, 2007,
compared to 3.38 percent in the same 2006 period. As discussed previously, the improvements in the
margin stemmed from continued disciplined pricing of loans and deposits and a greater concentration
of higher-yielding commercial loans relative to total assets.
Compared to the six months ended June 30, 2006, earning-asset yields increased 67 basis points to
7.07 percent. This increase was driven by two factors. First, loan yields increased 57 basis
points to 7.61 percent and securities yields increased 66 basis points to 5.00 percent. Second, as
discussed above, the mix of higher-yielding (loan) assets improved as a result of the GBC
acquisition and a smaller percentage of lower-yielding mortgage and consumer loans. The percentage
of investment securities average balances (which, typically, have lower yields than loans) to total
earning-asset average balances, was reduced from 23.4 percent to 20.6 percent over the past year.
The cost of interest-bearing liabilities increased 76 basis points, compared to the six months
ended June 30, 2006. This was comprised of an 86 basis point increase in interest-bearing deposit
costs to 3.83 percent, while other borrowing costs increased 65 basis points to 5.09 percent.
During 2006, the Federal Reserve raised the Fed Funds rate by 100 basis points. Also, as a result
of deposit growth, the percentage of higher-cost, other borrowings average balances was reduced
from 31.3 percent to 28.7 percent of total interest-bearing liabilities average balances over the
past year.
33
Interest income and yields for earning-asset average balances, interest expense and rates paid on
interest-bearing liability average balances, and the net interest margin for the three months ended
June 30, 2007 and 2006 follow:
Table Two
Average Balances and Net Interest Income Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30 |
|
|
2007 |
|
2006 |
|
|
Daily |
|
Interest |
|
Average |
|
Daily |
|
Interest |
|
Average |
|
|
Average |
|
Income/ |
|
Yield/Rate |
|
Average |
|
Income/ |
|
Yield/Rate |
(Dollars in thousands) |
|
Balance |
|
Expense |
|
Paid(5) |
|
Balance |
|
Expense |
|
Paid (5) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale (1) (2) (3) (4) |
|
$ |
3,543,825 |
|
|
$ |
67,243 |
|
|
|
7.61 |
% |
|
$ |
3,030,815 |
|
|
$ |
54,167 |
|
|
|
7.17 |
% |
Securities taxable (4) |
|
|
819,097 |
|
|
|
10,130 |
|
|
|
4.96 |
|
|
|
819,886 |
|
|
|
8,534 |
|
|
|
4.16 |
|
Securities tax-exempt |
|
|
95,509 |
|
|
|
1,428 |
|
|
|
6.00 |
|
|
|
101,140 |
|
|
|
1,520 |
|
|
|
6.01 |
|
Federal funds sold |
|
|
3,777 |
|
|
|
48 |
|
|
|
5.31 |
|
|
|
3,011 |
|
|
|
37 |
|
|
|
4.93 |
|
Interest-bearing bank deposits |
|
|
4,808 |
|
|
|
61 |
|
|
|
5.01 |
|
|
|
5,983 |
|
|
|
60 |
|
|
|
4.02 |
|
|
Total earning assets |
|
|
4,467,016 |
|
|
$ |
78,910 |
|
|
|
7.08 |
% |
|
$ |
3,960,835 |
|
|
$ |
64,318 |
|
|
|
6.51 |
% |
Cash and due from banks |
|
|
80,864 |
|
|
|
|
|
|
|
|
|
|
|
77,115 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
326,862 |
|
|
|
|
|
|
|
|
|
|
|
236,395 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,874,742 |
|
|
|
|
|
|
|
|
|
|
$ |
4,274,345 |
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
413,534 |
|
|
$ |
1,167 |
|
|
|
1.13 |
% |
|
$ |
367,146 |
|
|
$ |
647 |
|
|
|
0.71 |
% |
Money market accounts |
|
|
608,489 |
|
|
|
5,287 |
|
|
|
3.48 |
|
|
|
561,005 |
|
|
|
4,454 |
|
|
|
3.18 |
|
Savings deposits |
|
|
114,656 |
|
|
|
62 |
|
|
|
0.22 |
|
|
|
121,130 |
|
|
|
65 |
|
|
|
0.22 |
|
Certificates of deposit |
|
|
1,631,616 |
|
|
|
19,848 |
|
|
|
4.88 |
|
|
|
1,312,993 |
|
|
|
13,175 |
|
|
|
4.02 |
|
Retail other borrowings |
|
|
94,784 |
|
|
|
774 |
|
|
|
3.58 |
|
|
|
142,645 |
|
|
|
999 |
|
|
|
2.81 |
|
Wholesale other borrowings |
|
|
1,036,815 |
|
|
|
13,609 |
|
|
|
5.26 |
|
|
|
966,089 |
|
|
|
11,755 |
|
|
|
4.88 |
|
|
Total interest-bearing liabilities |
|
|
3,899,894 |
|
|
|
40,747 |
|
|
|
4.19 |
% |
|
|
3,471,008 |
|
|
|
31,095 |
|
|
|
3.59 |
% |
Noninterest-bearing deposits |
|
|
458,013 |
|
|
|
|
|
|
|
|
|
|
|
427,923 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
60,201 |
|
|
|
|
|
|
|
|
|
|
|
42,427 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
456,634 |
|
|
|
|
|
|
|
|
|
|
|
332,987 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity |
|
$ |
4,874,742 |
|
|
|
|
|
|
|
|
|
|
$ |
4,274,345 |
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
2.89 |
% |
|
|
|
|
|
|
|
|
|
|
2.92 |
% |
Contribution of noninterest bearing sources |
|
|
|
|
|
|
|
|
|
|
0.53 |
|
|
|
|
|
|
|
|
|
|
|
0.44 |
|
|
Net interest income/
yield on earning assets |
|
|
|
|
|
$ |
38,163 |
|
|
|
3.42 |
% |
|
|
|
|
|
$ |
33,223 |
|
|
|
3.36 |
% |
|
|
|
|
(1) |
|
The preceding analysis takes into consideration the principal amount of nonaccruing loans and only income actually collected and
recognized on such loans. |
|
(2) |
|
Average loan balances are shown net of unearned income. |
|
(3) |
|
Includes amortization of deferred loan fees of $1,031 and $701 for the three months ended June 30, 2007 and 2006, respectively. |
|
(4) |
|
Yields on tax-exempt securities and loans are stated on a taxable-equivalent basis, assuming a Federal tax rate of 35 percent and
applicable state taxes for 2007 and 2006. The adjustments made to convert to a taxable-equivalent basis were $619 and
$576 for the three months ended June 30, 2007 and 2006, respectively. |
|
(5) |
|
Annualized. |
34
Interest income and yields for earning-asset average balances, interest expense and rates paid on
interest-bearing liability average balances, and the net interest margin for the six months ended
June 30, 2007 and 2006 follow:
Table Three
Average Balances and Net Interest Income Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30 |
|
|
2007 |
|
2006 |
|
|
Daily |
|
Interest |
|
Average |
|
Daily |
|
Interest |
|
Average |
|
|
Average |
|
Income/ |
|
Yield/Rate |
|
Average |
|
Income/ |
|
Yield/Rate |
(Dollars in thousands) |
|
Balance |
|
Expense |
|
Paid (5) |
|
Balance |
|
Expense |
|
Paid (5) |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earning assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale (1) (2) (3) (4) |
|
$ |
3,532,900 |
|
|
$ |
133,482 |
|
|
|
7.61 |
% |
|
$ |
2,988,596 |
|
|
$ |
104,473 |
|
|
|
7.04 |
% |
Securities taxable (4) |
|
|
822,696 |
|
|
|
20,079 |
|
|
|
4.89 |
|
|
|
814,175 |
|
|
|
16,842 |
|
|
|
4.14 |
|
Securities tax-exempt |
|
|
98,057 |
|
|
|
2,919 |
|
|
|
5.95 |
|
|
|
103,735 |
|
|
|
3,063 |
|
|
|
5.91 |
|
Federal funds sold |
|
|
6,410 |
|
|
|
176 |
|
|
|
5.59 |
|
|
|
3,115 |
|
|
|
73 |
|
|
|
4.70 |
|
Interest-bearing bank deposits |
|
|
5,028 |
|
|
|
111 |
|
|
|
4.44 |
|
|
|
5,348 |
|
|
|
99 |
|
|
|
3.75 |
|
|
Total earning assets |
|
|
4,465,091 |
|
|
$ |
156,767 |
|
|
|
7.07 |
% |
|
$ |
3,914,969 |
|
|
$ |
124,550 |
|
|
|
6.40 |
% |
Cash and due from banks |
|
|
80,116 |
|
|
|
|
|
|
|
|
|
|
|
87,409 |
|
|
|
|
|
|
|
|
|
Other assets |
|
|
327,715 |
|
|
|
|
|
|
|
|
|
|
|
237,628 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
4,872,922 |
|
|
|
|
|
|
|
|
|
|
$ |
4,240,006 |
|
|
|
|
|
|
|
|
|
|
Liabilities and shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand deposits |
|
$ |
406,584 |
|
|
$ |
2,225 |
|
|
|
1.10 |
% |
|
$ |
361,693 |
|
|
$ |
1,093 |
|
|
|
0.61 |
% |
Money market accounts |
|
|
625,342 |
|
|
|
10,838 |
|
|
|
3.49 |
|
|
|
568,263 |
|
|
|
8,306 |
|
|
|
2.95 |
|
Savings deposits |
|
|
113,826 |
|
|
|
129 |
|
|
|
0.23 |
|
|
|
120,616 |
|
|
|
130 |
|
|
|
0.22 |
|
Certificates of deposit |
|
|
1,640,463 |
|
|
|
39,712 |
|
|
|
4.88 |
|
|
|
1,316,992 |
|
|
|
25,376 |
|
|
|
3.89 |
|
Retail other borrowings |
|
|
93,445 |
|
|
|
1,437 |
|
|
|
3.10 |
|
|
|
135,903 |
|
|
|
1,777 |
|
|
|
2.64 |
|
Wholesale other borrowings |
|
|
1,029,001 |
|
|
|
26,885 |
|
|
|
5.27 |
|
|
|
943,392 |
|
|
|
21,969 |
|
|
|
4.70 |
|
|
Total interest-bearing liabilities |
|
|
3,908,661 |
|
|
|
81,226 |
|
|
|
4.19 |
% |
|
|
3,446,859 |
|
|
|
58,651 |
|
|
|
3.43 |
% |
Noninterest-bearing deposits |
|
|
452,438 |
|
|
|
|
|
|
|
|
|
|
|
420,364 |
|
|
|
|
|
|
|
|
|
Other liabilities |
|
|
57,576 |
|
|
|
|
|
|
|
|
|
|
|
40,392 |
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
454,247 |
|
|
|
|
|
|
|
|
|
|
|
332,391 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity |
|
$ |
4,872,922 |
|
|
|
|
|
|
|
|
|
|
$ |
4,240,006 |
|
|
|
|
|
|
|
|
|
|
Net interest spread |
|
|
|
|
|
|
|
|
|
|
2.88 |
% |
|
|
|
|
|
|
|
|
|
|
2.97 |
% |
Contribution of noninterest bearing sources |
|
|
|
|
|
|
|
|
|
|
0.52 |
|
|
|
|
|
|
|
|
|
|
|
0.41 |
|
|
Net interest income/
yield on earning assets |
|
|
|
|
|
$ |
75,541 |
|
|
|
3.40 |
% |
|
|
|
|
|
$ |
65,899 |
|
|
|
3.38 |
% |
|
|
|
|
(1) |
|
The preceding analysis takes into consideration the principal amount of nonaccruing loans and only income actually collected and
recognized on such loans. |
|
(2) |
|
Average loan balances are shown net of unearned income. |
|
(3) |
|
Includes amortization of deferred loan fees of $1,859 and $1,446 for the three months ended June 30, 2007 and 2006, respectively. |
|
(4) |
|
Yields on tax-exempt securities and loans are stated on a taxable-equivalent basis, assuming a Federal tax rate of 35 percent and
applicable state taxes for 2007 and 2006. The adjustments made to convert to a taxable-equivalent basis were $1,262 and
$1,162 for the six months ended June 30, 2007 and 2006, respectively. |
|
(5) |
|
Annualized. |
35
The following tables show changes in tax-equivalent interest income, interest expense, and
tax-equivalent net interest income arising from rate and volume changes for major categories of
earning assets and interest-bearing liabilities. The change in interest not solely due to changes
in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in
each.
Table Four
Volume and Rate Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30 |
|
|
2007 vs 2006 |
|
|
Due to Change in |
|
Net |
(In thousands) |
|
Volume |
|
Rate |
|
Change |
|
Increase (decrease) in tax-equivalent
interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale (1) |
|
$ |
9,583 |
|
|
$ |
3,493 |
|
|
$ |
13,076 |
|
Securities taxable (1) |
|
|
(8 |
) |
|
|
1,604 |
|
|
|
1,596 |
|
Securities tax-exempt |
|
|
(84 |
) |
|
|
(8 |
) |
|
|
(92 |
) |
Federal funds sold |
|
|
10 |
|
|
|
3 |
|
|
|
13 |
|
Interest-bearing bank deposits |
|
|
(13 |
) |
|
|
13 |
|
|
|
|
|
|
Total |
|
$ |
9,488 |
|
|
$ |
5,105 |
|
|
$ |
14,593 |
|
|
Increase (decrease) in interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand |
|
$ |
90 |
|
|
$ |
430 |
|
|
$ |
520 |
|
Money market |
|
|
394 |
|
|
|
439 |
|
|
|
833 |
|
Savings |
|
|
(3 |
) |
|
|
|
|
|
|
(3 |
) |
Certificates of deposit |
|
|
3,559 |
|
|
|
3,114 |
|
|
|
6,673 |
|
Retail other borrowings |
|
|
(373 |
) |
|
|
149 |
|
|
|
(224 |
) |
Wholesale other borrowings |
|
|
893 |
|
|
|
961 |
|
|
|
1,854 |
|
|
Total |
|
$ |
4,560 |
|
|
$ |
5,093 |
|
|
$ |
9,653 |
|
|
Increase in tax-equivalent
net interest income |
|
|
|
|
|
|
|
|
|
$ |
4,940 |
|
|
|
|
|
(1) |
|
Income on tax-exempt securities and loans are stated on a taxable-equivalent basis. Refer to Table Two for further details. |
36
Changes in net interest income for the six months ended June 30, 2007 and 2006 are as follows:
Table Five
Volume and Rate Variance Analysis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30 |
|
|
2007 vs 2006 |
|
|
Due to Change in |
|
Net |
(In thousands) |
|
Volume |
|
Rate |
|
Change |
|
Increase (decrease) in tax-equivalent
interest income |
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale (1) |
|
$ |
20,093 |
|
|
$ |
8,916 |
|
|
$ |
29,009 |
|
Securities taxable (1) |
|
|
178 |
|
|
|
3,059 |
|
|
|
3,237 |
|
Securities tax-exempt |
|
|
(169 |
) |
|
|
25 |
|
|
|
(144 |
) |
Federal funds sold |
|
|
89 |
|
|
|
16 |
|
|
|
105 |
|
Interest-bearing bank deposits |
|
|
(6 |
) |
|
|
18 |
|
|
|
12 |
|
|
Total |
|
$ |
20,185 |
|
|
$ |
12,034 |
|
|
$ |
32,219 |
|
|
Increase (decrease) in interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
Demand |
|
$ |
150 |
|
|
$ |
982 |
|
|
$ |
1,132 |
|
Money market |
|
|
889 |
|
|
|
1,643 |
|
|
|
2,532 |
|
Savings |
|
|
(8 |
) |
|
|
7 |
|
|
|
(1 |
) |
Certificates of deposit |
|
|
7,015 |
|
|
|
7,322 |
|
|
|
14,337 |
|
Retail other borrowings |
|
|
(618 |
) |
|
|
278 |
|
|
|
(340 |
) |
Wholesale other borrowings |
|
|
2,097 |
|
|
|
2,819 |
|
|
|
4,916 |
|
|
Total |
|
$ |
9,525 |
|
|
$ |
13,051 |
|
|
$ |
22,576 |
|
|
Increase in tax-equivalent
net interest income |
|
|
|
|
|
|
|
|
|
$ |
9,643 |
|
|
|
|
|
(1) |
|
Income on tax-exempt securities and loans are stated on a taxable-equivalent basis. Refer to Table Three for further details. |
Noninterest Income
The major components of noninterest income are derived from service charges on deposit accounts,
ATM, debit, and merchant fees, and mortgage, brokerage, insurance, and wealth management revenue.
In addition, the Corporation realizes gains (and losses) on securities, equity investments, Small
Business Administration loan sales, bank-owned property sales, and income from its BOLI policies.
Historical noninterest income and expense amounts have been restated to reflect the effect of
reporting the previously announced sale of Southeastern Employee Benefits Services (SEBS) in the
fourth quarter of 2006 as discontinued operations and to reflect the implementation of SAB 108 at
year-end 2006.
37
Details of noninterest income follow for the three months ended June 30, 2007 and 2006:
Table Six
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
June 30 |
|
Increase / (Decrease) |
(In thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
Service charges on deposits |
|
$ |
7,942 |
|
|
$ |
7,469 |
|
|
$ |
473 |
|
|
|
6.3 |
% |
ATM, debit, and merchant fees |
|
|
2,636 |
|
|
|
2,117 |
|
|
|
519 |
|
|
|
24.5 |
|
Wealth management |
|
|
944 |
|
|
|
693 |
|
|
|
251 |
|
|
|
36.2 |
|
Equity method investment gains, net |
|
|
678 |
|
|
|
11 |
|
|
|
667 |
|
|
|
6,063.6 |
|
Mortgage services |
|
|
1,056 |
|
|
|
812 |
|
|
|
244 |
|
|
|
30.0 |
|
Gain on sale of Small Business Administration loans |
|
|
132 |
|
|
|
|
|
|
|
132 |
|
|
|
|
|
Brokerage services |
|
|
1,007 |
|
|
|
692 |
|
|
|
315 |
|
|
|
45.5 |
|
Insurance services |
|
|
3,422 |
|
|
|
2,898 |
|
|
|
524 |
|
|
|
18.1 |
|
Bank owned life insurance |
|
|
1,162 |
|
|
|
850 |
|
|
|
312 |
|
|
|
36.7 |
|
Property sale gains, net |
|
|
152 |
|
|
|
107 |
|
|
|
45 |
|
|
|
42.1 |
|
Securities gains, net |
|
|
|
|
|
|
32 |
|
|
|
(32 |
) |
|
|
(100.0 |
) |
Other |
|
|
1,010 |
|
|
|
611 |
|
|
|
399 |
|
|
|
65.3 |
|
|
Noninterest income from continuing operations |
|
|
20,141 |
|
|
|
16,292 |
|
|
|
3,849 |
|
|
|
23.6 |
|
Noninterest income from discontinued operations |
|
|
|
|
|
|
844 |
|
|
|
(844 |
) |
|
|
(100.0 |
) |
|
Total noninterest income |
|
$ |
20,141 |
|
|
$ |
17,136 |
|
|
$ |
3,005 |
|
|
|
17.5 |
% |
|
Selected items included in noninterest income for the three months ended June 30, 2007 and 2006
follow. These items are considered non-core to the Corporations operations.
Table Seven
Selected Items Included in Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30 |
(In thousands) |
|
2007 |
|
2006 |
|
Securities gains, net |
|
$ |
|
|
|
$ |
32 |
|
Equity method investment gains , net |
|
|
678 |
|
|
|
11 |
|
Property sale gains, net |
|
|
152 |
|
|
|
107 |
|
Gains related to reinsurance arrangement |
|
|
288 |
|
|
|
|
|
|
Noninterest income from continuing operations for the second quarter of 2007 was $20.1
million, an increase of $3.8 million, or 23.6 percent, from $16.3 million in the second quarter of
2006. The primary factors for this increase include the following:
|
|
|
Revenue from deposit service charges was $0.5 million higher, principally reflecting a
larger number of checking accounts. |
|
|
|
|
ATM, debit, and merchant card revenue was $0.5 million higher, reflecting both a larger
number of accounts and transactions. |
|
|
|
|
Of the total $0.3 million increase in wealth management income, $0.2 million was related
to transaction fees for a single estate. |
|
|
|
|
Equity method investment gains were $0.7 million higher in the 2007 second quarter. The
returns on the equity method investments vary from period to period and income is recorded
when earned. |
|
|
|
|
Mortgage services revenue increased $0.2 million, due to a rise in originations and
sales. |
|
|
|
|
Although the Corporation originated SBA loans prior to the GBC acquisition, the
Corporation retained these loans. Therefore, gains on SBA loan sales were $0.1 million in
the 2007 second quarter, compared to no sales in the same 2006 period. |
38
|
|
|
Brokerage services revenue was $0.3 million higher in 2007 due to increased production
from the addition of several financial consultants in the latter half of 2006. |
|
|
|
|
Insurance revenues increased $0.5 million in the second quarter of 2007, compared to the
second quarter of 2006 as a result of the majority of contingency income being received in
the first quarter of 2006, versus a more even distribution between the first and second
quarters of 2007. |
|
|
|
|
The restructuring of $21.5 million of Bank Owned Life Insurance (BOLI) in mid-2006, the
purchase of $10.0 million in new coverage, and the addition of $5.9 million of BOLI from
GBC led to the $0.3 million increase in revenue between periods. |
Details of noninterest income follow for the six months ended June 30, 2007 and 2006:
Table Eight
Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
June 30 |
|
Increase / (Decrease) |
(In thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
Service charges on deposits |
|
$ |
15,332 |
|
|
$ |
14,167 |
|
|
$ |
1,165 |
|
|
|
8.2 |
% |
ATM, debit, and merchant fees |
|
|
5,080 |
|
|
|
4,015 |
|
|
|
1,065 |
|
|
|
26.5 |
|
Wealth management |
|
|
1,660 |
|
|
|
1,393 |
|
|
|
267 |
|
|
|
19.2 |
|
Equity method investment gains, net |
|
|
1,805 |
|
|
|
556 |
|
|
|
1,249 |
|
|
|
224.6 |
|
Mortgage services |
|
|
1,957 |
|
|
|
1,335 |
|
|
|
622 |
|
|
|
46.6 |
|
Gain on sale of Small Business Administration loans |
|
|
509 |
|
|
|
|
|
|
|
509 |
|
|
|
|
|
Brokerage services |
|
|
2,088 |
|
|
|
1,403 |
|
|
|
685 |
|
|
|
48.8 |
|
Insurance services |
|
|
7,056 |
|
|
|
7,232 |
|
|
|
(176 |
) |
|
|
(2.4 |
) |
Bank owned life insurance |
|
|
2,301 |
|
|
|
1,677 |
|
|
|
624 |
|
|
|
37.2 |
|
Property sale gains, net |
|
|
215 |
|
|
|
188 |
|
|
|
27 |
|
|
|
14.4 |
|
Securities gains/(losses), net |
|
|
(11 |
) |
|
|
32 |
|
|
|
(43 |
) |
|
|
(134.4 |
) |
Other |
|
|
1,715 |
|
|
|
1,285 |
|
|
|
430 |
|
|
|
33.5 |
|
|
Noninterest income from continuing operations |
|
|
39,707 |
|
|
|
33,283 |
|
|
|
6,424 |
|
|
|
19.3 |
|
Noninterest income from discontinued operations |
|
|
|
|
|
|
1,809 |
|
|
|
(1,809 |
) |
|
|
(100.0 |
) |
|
Total noninterest income |
|
$ |
39,707 |
|
|
$ |
35,092 |
|
|
$ |
4,615 |
|
|
|
13.2 |
% |
|
Selected items included in noninterest income for the six months ended June 30, 2007 and 2006
follow. These items are considered non-core to the Corporations operations.
Table Nine
Selected Items Included in Noninterest Income
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30 |
(In thousands) |
|
2007 |
|
2006 |
|
Securities gains (losses), net |
|
$ |
(11 |
) |
|
$ |
32 |
|
Equity method investment gains, net |
|
|
1,805 |
|
|
|
556 |
|
Property sale gains, net |
|
|
215 |
|
|
|
188 |
|
Gains related to reinsurance arrangement |
|
|
288 |
|
|
|
99 |
|
|
Noninterest income from continuing operations increased $6.4 million, or 19.3 percent, to
$39.7 million for the six months ended June 30, 2007 compared to the same period in 2006. The
primary factors for this increase include the following:
|
|
|
Revenue from deposit service charges increased $1.2 million, principally reflecting a
larger number of checking accounts. |
|
|
|
|
ATM, debit and merchant card services revenue was $1.1 million higher due to both a
larger number of accounts and transactions. |
39
|
|
|
Equity method investment gains were $1.2 million higher in the six months ended June 30,
2007, versus the same period of 2006. The returns on the equity method investments vary
from period to period and income is recorded when earned. |
|
|
|
|
Mortgage services revenue increased $0.6 million due to increased originations and
sales. |
|
|
|
|
Although the Corporation originated SBA loans prior to the GBC acquisition, the
Corporation retained these loans. Therefore, gains on SBA loan sales were $0.5 million in
the first half of 2007, compared to no sales in the same 2006 period. |
|
|
|
|
Brokerage service revenue increased $0.7 million due to increased production from the
addition of several financial consultants in the latter half of 2006. |
|
|
|
|
The previously mentioned restructuring of bank owned life insurance led to an increase
of $0.6 million in revenue between the periods. |
|
|
|
|
These revenue increases and gains were partially offset by $0.2 million lower insurance
services revenue, primarily due to less contingency income recognized in the first six
months of 2007, compared with the first six months of 2006. |
Noninterest Expense
Details of noninterest expense for the three months ended June 30, 2007 and 2006 follow:
Table Ten
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
June 30 |
|
Increase / (Decrease) |
(In thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
Salaries and employee benefits |
|
$ |
19,576 |
|
|
$ |
16,343 |
|
|
$ |
3,233 |
|
|
|
19.8 |
% |
Occupancy and equipment |
|
|
4,759 |
|
|
|
4,826 |
|
|
|
(67 |
) |
|
|
(1.4 |
) |
Data processing |
|
|
1,492 |
|
|
|
1,448 |
|
|
|
44 |
|
|
|
3.0 |
|
Marketing |
|
|
1,055 |
|
|
|
1,196 |
|
|
|
(141 |
) |
|
|
(11.8 |
) |
Postage and supplies |
|
|
1,164 |
|
|
|
1,282 |
|
|
|
(118 |
) |
|
|
(9.2 |
) |
Professional services |
|
|
3,181 |
|
|
|
2,258 |
|
|
|
923 |
|
|
|
40.9 |
|
Telecommunications |
|
|
519 |
|
|
|
513 |
|
|
|
6 |
|
|
|
1.2 |
|
Amortization of intangibles |
|
|
314 |
|
|
|
107 |
|
|
|
207 |
|
|
|
193.5 |
|
Foreclosed properties |
|
|
226 |
|
|
|
418 |
|
|
|
(192 |
) |
|
|
(45.9 |
) |
Other |
|
|
2,921 |
|
|
|
2,297 |
|
|
|
624 |
|
|
|
27.2 |
|
|
Noninterest expense from continuing operations |
|
|
35,207 |
|
|
|
30,688 |
|
|
|
4,519 |
|
|
|
14.7 |
|
Noninterest expense from discontinued operations |
|
|
|
|
|
|
794 |
|
|
|
(794 |
) |
|
|
(100.0 |
) |
|
Total noninterest expense |
|
$ |
35,207 |
|
|
$ |
31,482 |
|
|
$ |
3,725 |
|
|
|
11.8 |
% |
|
Full-time equivalent employees at June 30 |
|
|
1,109 |
|
|
|
1,098 |
|
|
|
11 |
|
|
|
1.0 |
% |
|
Efficiency ratio (1) |
|
|
60.4 |
% |
|
|
62.0 |
% |
|
|
-1.6 |
% |
|
|
(2.6) |
% |
|
|
|
|
(1) |
|
Noninterest expense divided by the sum of taxable-equivalent net interest income plus noninterest income
less securities gains (losses), net. Excludes the results of discontinued operations. |
40
Selected items included in noninterest expense for the three months ended June 30, 2007 and
2006 follow:
Table Eleven
Selected Items Included in Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
June 30 |
(In thousands) |
|
2007 |
|
2006 |
|
Separation agreements |
|
$ |
183 |
|
|
$ |
|
|
GBC related executive retirement expense |
|
|
245 |
|
|
|
|
|
Reduction of incentive compensation |
|
|
(518 |
) |
|
|
|
|
Merger-related costs |
|
|
|
|
|
|
|
|
|
Noninterest expense from continuing operations for the 2007 second quarter was $35.2 million, a
$4.5 million increase, compared to the second quarter of 2006. Of this increase, $3.2 million was
attributable to salaries and employee benefits expense. Salaries and benefits expense increased in
2007 compared to 2006 primarily due to higher salaries and wages which were driven by an increased
number of full-time equivalent employees as a result of the GBC acquisition, increased equity-based
compensation, and offset partially by lower incentive compensation due to a reduction in earnings.
Additionally, salaries and employee benefits expense included merger-related costs of $0.2 million,
representing severance and other compensation-related bonuses for certain employees to remain with
Gwinnett Bank for a period of transition following the acquisition. Professional fees increased
$0.9 million primarily related to remediation efforts in connection with the Corporations internal
control weaknesses, additional costs related to the Corporations delayed filing of Form 10-K for
the year-ended December 31, 2006, and costs associated with the previously disclosed first quarter
2007 audit committee inquiry. The Corporation expects that professional fees will decline over
time to more historically normalized levels. Other noninterest expense increased $0.6 million
between comparable quarters, principally consisting of increases in insurance, franchise tax,
travel, and other miscellaneous operational expense.
Details of noninterest expense for the six months ended June 30, 2007 and 2006 follow:
Table Twelve
Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
|
June 30 |
|
Increase / (Decrease) |
(In thousands) |
|
2007 |
|
2006 |
|
Amount |
|
Percent |
|
Salaries and employee benefits |
|
$ |
39,163 |
|
|
$ |
33,543 |
|
|
$ |
5,620 |
|
|
|
16.8 |
% |
Occupancy and equipment |
|
|
9,371 |
|
|
|
9,531 |
|
|
|
(160 |
) |
|
|
(1.7 |
) |
Data processing |
|
|
3,282 |
|
|
|
2,858 |
|
|
|
424 |
|
|
|
14.8 |
|
Marketing |
|
|
2,406 |
|
|
|
2,484 |
|
|
|
(78 |
) |
|
|
(3.1 |
) |
Postage and supplies |
|
|
2,336 |
|
|
|
2,464 |
|
|
|
(128 |
) |
|
|
(5.2 |
) |
Professional services |
|
|
6,767 |
|
|
|
4,161 |
|
|
|
2,606 |
|
|
|
62.6 |
|
Telecommunications |
|
|
1,190 |
|
|
|
1,076 |
|
|
|
114 |
|
|
|
10.6 |
|
Amortization of intangibles |
|
|
537 |
|
|
|
209 |
|
|
|
328 |
|
|
|
156.9 |
|
Foreclosed properties |
|
|
379 |
|
|
|
472 |
|
|
|
(93 |
) |
|
|
(19.7 |
) |
Other |
|
|
5,696 |
|
|
|
4,631 |
|
|
|
1,065 |
|
|
|
23.0 |
|
|
Noninterest expense from continuing operations |
|
|
71,127 |
|
|
|
61,429 |
|
|
|
9,698 |
|
|
|
15.8 |
|
Noninterest expense from discontinued operations |
|
|
|
|
|
|
1,611 |
|
|
|
(1,611 |
) |
|
|
(100.0 |
) |
|
Total noninterest expense |
|
$ |
71,127 |
|
|
$ |
63,040 |
|
|
$ |
8,087 |
|
|
|
12.8 |
% |
|
Full-time equivalent employees at June 30 |
|
|
1,109 |
|
|
|
1,098 |
|
|
|
11 |
|
|
|
1.0 |
% |
|
Efficiency ratio (1) |
|
|
61.7 |
% |
|
|
62.0 |
% |
|
|
-0.3 |
% |
|
|
(0.5) |
% |
|
|
|
|
(1) |
|
Noninterest expense divided by the sum of taxable-equivalent net interest income plus noninterest income
less securities gains (losses), net. Excludes the results of discontinued operations. |
41
Selected items included in noninterest expense for the six months ended June 30, 2007 and 2006
follow:
Table Thirteen
Selected Items Included in Noninterest Expense
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
June 30 |
(In thousands) |
|
2007 |
|
2006 |
|
Separation agreements |
|
$ |
241 |
|
|
$ |
105 |
|
GBC related executive retirement expense |
|
|
245 |
|
|
|
|
|
Reduction of incentive compensation |
|
|
(518 |
) |
|
|
|
|
Merger-related costs |
|
|
237 |
|
|
|
|
|
|
42
Noninterest expense from continuing operations for the first six months of 2007 was $71.1 million,
a $9.7 million increase over the same period of 2006. Of this increase, $5.6 million was
attributable to salaries and employee benefits expense. Salaries and benefits expense increased in
2007 compared to 2006 primarily due to higher salaries and wages which were driven by an increased
number of full-time equivalent employees as a result of the GBC acquisition, as well as normal
salary increases, and offset partially by lower incentive compensation due to a reduction in
earnings. Additionally, salaries and employee benefits expense included merger-related costs of
$0.5 million, representing severance and other compensation-related bonuses for certain employees
to remain with Gwinnett Bank for a period of transition following the acquisition as well as
executive retirement expenses related to Gwinnett Bank. Professional Fees increased $2.6 million
primarily related to remediation efforts in connection with the Corporations internal control
weaknesses, additional costs related to the Corporations delayed filing of Form 10-K for the
year-ended December 31, 2006, and costs associated with the previously disclosed first quarter 2007
audit committee inquiry. The Corporation expects that professional fees will decline over time to
more historically normalized levels. Data processing expense increased $0.4 million on a
year-over-year basis for the second half of 2007 due to increased transaction volume. Other
noninterest expense increased $1.1 million between compared periods, principally consisting of
increases in insurance, franchise tax, travel and other miscellaneous operational expense.
Income Tax
Income tax expense for the three months ended June 30, 2007, was $4.4 million, for an effective tax
rate of 33.0 percent, compared with $5.9 million, for an effective tax rate of 34.3 percent in the
second quarter of 2006. For the six months ended June 30, 2007, income tax expense was $11.1
million, for an effective tax rate of 34.2 percent, compared with $11.6 million, for an effective
tax rate of 34.0 percent in the six months ended June 30, 2006. The effective tax rate decreased
for the three and six months ended June 30, 2007 as a result of a higher proportion of tax-exempt
income to total income.
The Corporation is under examination by the North Carolina Department of Revenue for tax years 1999
through 2004 and is subject to examination for subsequent tax years. The Corporation is also under
routine examination by the Internal Revenue Service for the 2004 tax year. For additional
information regarding these examinations refer to Note 2 of the consolidated financial statements.
As
described in Note 14 of the consolidated financial statements, on
July 31, 2007, the General Assembly of North Carolina passed House
Bill 1473 which includes a provision that disallows the deduction of dividends paid by captive real estate investment trusts (REITs) for the purposes of determining North Carolina taxable income. The Corporation,
through its subsidiaries, participates in two entities classified as captive REITs from which the Corporation has historically received dividends which resulted in certain tax benefits taken within the Corporations tax
returns and consolidated financial statements.
This legislation is effective for taxable years beginning on or after January 1, 2007.
The Corporation is currently evaluating the impact that this legislation will have on the Corporations current and prior tax filings, as well as the related financial statement
impact to the Corporations effective tax rate and uncertain tax positions.
Assuming the legislation eliminates the deductibility of the REIT dividends for North
Carolina state income tax purposes, the Corporation expects an
increase in its effective tax rate for 2007 and subsequent fiscal years.
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. The
valuation is determined as of 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 June 30, 2007, securities available for sale were $898.5 million, compared to $906.4 million at
December 31, 2006. Pretax unrealized net losses on securities available for sale were $14.4
million at June 30, 2007, compared to pretax unrealized net losses of $9.8 million at December 31,
2006. The unrealized losses in the securities portfolio have primarily resulted from the rise in
interest rates. These unrealized losses have been partially offset by paydowns and maturities of
existing securities, totaling $126.0 million, along with the sale of $25.2 million of securities.
43
During the first half of 2007, proceeds from the aforementioned maturities, along with the sales,
paydowns, and calls were used to purchase $148.1 million of securities, principally mortgage-backed
and U.S. government agency securities. The asset-backed securities purchased are collateralized
debt obligations, representing securitizations of financial company capital securities and were
purchased for portfolio risk diversification and their higher yields.
The following table shows the carrying value of (i) U.S. government agency obligations, (ii)
mortgage-backed securities, (iii) state, county, and municipal obligations, (iv) asset-backed
securities, and (v) equity securities, which are primarily comprised of Federal Reserve and Federal
Home Loan Bank stock.
Table Fourteen
Investment Portfolio
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
December 31 |
(In thousands) |
|
2007 |
|
2006 |
|
U.S. government agency obligations |
|
$ |
236,702 |
|
|
$ |
275,394 |
|
Mortgage-backed securities |
|
|
458,504 |
|
|
|
412,020 |
|
State, county, and municipal obligations |
|
|
92,189 |
|
|
|
102,602 |
|
Asset-backed securities |
|
|
56,057 |
|
|
|
65,115 |
|
Equity securities |
|
|
55,076 |
|
|
|
51,284 |
|
|
Total securities |
|
$ |
898,528 |
|
|
$ |
906,415 |
|
|
Loan Portfolio
The Corporations loan portfolio at June 30, 2007, consisted of six major categories: Commercial
Non Real Estate, Commercial Real Estate, Construction, Mortgage, Home Equity, and Consumer. 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 terms can range
out to 30 years. In addition, the Corporation has a program in which it buys and sells portions of
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 strategic partners portfolio includes commercial real estate,
commercial non real estate, and construction loans. This program enables the Corporation to
diversify both its geographic risk and its total exposure risk. From time to time, the Corporation
also sources commercial real estate, commercial non real estate, construction, and consumer loans
through correspondent relationships. As of June 30, 2007, the Corporations total loan portfolio
included $336.5 million of loans originated through the strategic partners program and
correspondent relationships.
Total portfolio loan average balances for the 2007 second quarter increased $511.7 million, or 16.9
percent, to $3.5 billion, compared to $3.0 billion for the 2006 second quarter. Included in the
increase was approximately $337 million of total loans that were added as a result of the GBC
acquisition during the fourth quarter of 2007. The increase in average loan balances was offset by
$8 million of loan balances that were included in the sale of two financial centers during the
third quarter of 2006. Commercial loan growth drove the increase, rising $598 million, or 36.5
percent, of which $322 million were added as a result of the GBC acquisition. The remaining growth
of $276 million, or 16.9 percent, was the result of commercial lending growth in the Charlotte and
Raleigh markets.
Consumer loan average balances decreased $42 million and mortgage loan average balances decreased
$45 million compared to the 2006 second quarter. The consumer loan balance decline was driven, in
part, by lower consumer borrowing costs of refinancing first mortgages relative to current rates on
home equity products. The decline in mortgage loan balances was due to normal loan amortization
and First Charters strategy of selling most of its new mortgage production in the secondary
market. GBC had no residential mortgages on its balance sheet at the time of the acquisition.
44
At
June 30, 2007, Raleigh-related loans totaled $153.0 million, representing a $19.2 million
increase from $133.8 million at December 31, 2006.
A summary of the composition of the loan portfolio follows:
Table Fifteen
Loan Portfolio Composition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
Percent of |
|
December 31 |
|
Percent of |
(In thousands) |
|
2007 |
|
Total Loans |
|
2006 |
|
Total Loans |
|
Commercial real estate |
|
$ |
1,094,866 |
|
|
|
30.8 |
% |
|
$ |
1,034,317 |
|
|
|
29.7 |
% |
Commercial non real estate |
|
|
317,984 |
|
|
|
8.9 |
|
|
|
301,958 |
|
|
|
8.7 |
|
Construction |
|
|
859,301 |
|
|
|
24.2 |
|
|
|
793,294 |
|
|
|
22.8 |
|
Mortgage |
|
|
589,976 |
|
|
|
16.6 |
|
|
|
618,142 |
|
|
|
17.7 |
|
Consumer |
|
|
276,005 |
|
|
|
7.8 |
|
|
|
289,493 |
|
|
|
8.3 |
|
Home equity |
|
|
415,705 |
|
|
|
11.7 |
|
|
|
447,849 |
|
|
|
12.8 |
|
|
Total portfolio loans |
|
|
3,553,837 |
|
|
|
100.0 |
% |
|
|
3,485,053 |
|
|
|
100.0 |
% |
Allowance for loan losses |
|
|
(44,790 |
) |
|
|
|
|
|
|
(34,966 |
) |
|
|
|
|
|
Portfolio loans, net |
|
$ |
3,509,047 |
|
|
|
|
|
|
$ |
3,450,087 |
|
|
|
|
|
|
Deposits
A summary of the composition of deposits follows:
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
December 31 |
(In thousands) |
|
2007 |
|
2006 |
|
Noninterest bearing demand |
|
$ |
480,078 |
|
|
$ |
454,975 |
|
Interest bearing demand |
|
|
427,899 |
|
|
|
420,774 |
|
Money market accounts |
|
|
587,691 |
|
|
|
620,699 |
|
Savings deposits |
|
|
114,245 |
|
|
|
111,047 |
|
Certificates of deposit |
|
|
1,620,433 |
|
|
|
1,640,633 |
|
|
Total deposits |
|
$ |
3,230,346 |
|
|
$ |
3,248,128 |
|
|
Deposits totaled $3.2 billion at June 30, 2007 and December 31, 2006. Compared to June 30, 2006,
deposits increased by $241.5 million, as a result of overall growth in interest checking balances,
combined with the addition of $357.3 million of deposits acquired in the fourth quarter 2006
acquisition of
GBC, offset partially by a relatively large number of CDs that matured during the first half of
2007. These maturities included a number of high-rate public fund CDs which the Corporation chose
not to renew. Additionally, money market balances decreased $24.2 million from June 30, 2006
primarily due to interest rates on CDs being more favorable than money market rates.
Deposit balances in Raleigh were $53.8 million at June 30, 2007, an increase of $22.0 million from
$31.8 million at December 31, 2006.
Deposit growth, particularly low-cost transaction (or core) deposit growth (money market, demand,
and savings accounts), continues to be an area of emphasis for the Corporation. For the second
quarter of 2007, core deposit average balances increased $117.5 million, or 8.0 percent, compared
to the second quarter of 2006. This includes the benefit of the GBC acquisition which included
$106.5 million of core deposits and the impact of First Charters sale of two financial centers in
the third quarter of 2006 which involved the sale of $24 million of core deposits. The total core
deposit increase was primarily driven by a $47.5 million, or 8.5 percent, increase in money market
average balances, a $39.9 million, or 8.2
45
percent, increase in interest checking and savings
average balances, and a $30.1 million, or 7.0 percent, increase in noninterest-bearing demand
deposit average balances.
Certificate of deposit (CD) average balances for the second quarter of 2007 decreased $17.8 million
from the fourth quarter of 2006 but grew $318.6 million from the second quarter of 2006. The
decrease during the first half of 2007 was primarily due to a relatively large number of CDs that
matured. These maturities included a number of high rate public fund CDs which First Charter chose
not to renew. The increase in average balances over second quarter 2006 primarily related to the
GBC acquisition which added $248.6 million of CD balances. Additionally, CD growth was somewhat
offset by the sale of $14 million of CDs in conjunction with the previously mentioned financial
center sale that occurred in the third quarter of 2006.
Other Borrowings
Other borrowings consist of federal funds purchased, securities sold under agreement to repurchase,
commercial paper and other short- and long-term borrowings. Federal funds purchased represent
unsecured overnight borrowings from other financial institutions by the Bank. At June 30, 2007, the
Bank had federal funds back-up lines of credit totaling $363.0 million with $88.0 million
outstanding, compared to similar lines of credit totaling $188.2 million with $41.5 million
outstanding at December 31, 2006. Securities sold under agreements to repurchase represent
short-term borrowings by the Bank with maturities less than one year collateralized by a portion of
the Corporations United States government or agency securities. Securities sold under agreements
to repurchase totaled $190.0 million at June 30, 2007, compared to $160.2 million at December 31,
2006. These borrowings are an important source of funding to the Corporation. Access to alternate
short-term funding sources allows the Corporation to meet funding needs without relying on
increasing deposits on a short-term basis.
The Corporation issues commercial paper as another source of short-term funding. It is purchased
primarily by the Banks commercial deposit clients. Commercial paper outstanding at June 30, 2007
was $77.8 million, compared to $38.2 million at December 31, 2006.
Other short-term borrowings consist of the Federal Home Loan Bank (FHLB) borrowings with an
original maturity of one year or less. FHLB borrowings are collateralized by securities from the
Corporations investment portfolio, and a blanket lien on certain qualifying commercial and
single-family loans held in the Corporations loan portfolio. At June 30, 2007, the Bank had
$265.0 million of short-term FHLB borrowings, compared to the Banks $371.0 million at December 31,
2006. The Corporation, in its overall management of interest-rate risk, is opportunistic in
evaluating alternative funding sources. While balancing the funding needs of the Corporation,
management considers the duration of available maturities, the relative attractiveness of funding
costs, and the diversification of funding sources, among other factors, in order to maintain
flexibility in the nature of deposits and borrowings the Corporation holds at any given time.
Long-term borrowings represent FHLB borrowings with original maturities greater than one year and
subordinated debentures related to trust preferred securities. At June 30, 2007, the Bank had
$555.9 million of long-term FHLB borrowings, compared to $425.9 million at December 31, 2006. In
addition, the Corporation had $61.9 million of outstanding subordinated debentures at June 30,
2007, and December 31, 2006.
The Corporation formed First Charter Capital Trust I and First Charter Capital Trust II, in June
2005 and September 2005, respectively; both are wholly-owned business trusts. First Charter Capital
Trust I and First Charter Capital Trust II issued $35.0 million and $25.0 million, respectively, of
trust preferred securities that were sold to third parties. The proceeds of the sale of the trust
preferred securities were used to purchase subordinated debentures discussed above from the
Corporation, which are presented as long-term borrowings in the consolidated balance sheet and
qualify for inclusion in Tier 1 capital for regulatory capital purposes, subject to certain
limitations.
46
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
generally flow through an independent closing unit to ensure proper documentation. Loans originated
by the Corporations Atlanta-based lenders are currently being processed and closed independently
from the Corporations centralized credit structure. 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
watchlist 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 of 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 and certain 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. Relationships totaling
$5.0 million or more are further reviewed by senior lending officers of the Bank, the Chief Risk
Officer, and the Credit Risk Management Committee comprised of certain executive and senior
management. In addition, relationships totaling $10.0 million or more are reviewed by the Board of
Directors Credit and Compliance Committee. These oversight committees provide policy, process,
product and specific relationship direction to the lending personnel. As of June 30, 2007, the
Corporation had a legal lending limit of $68.4 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.
During 2006, the Corporation implemented a new consumer loan platform to improve servicing for
customers by providing loan officers with additional tools and real-time access to credit bureau
information at the time of loan application. This platform also delivers increased reporting
capabilities and improved credit risk management by having the Corporations policies embedded into
the decision process while also managing approval authority limits for credit exposure and
reporting.
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
47
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 decision-making 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.
Periodically, the Corporation finances consumer lot loans in association with developer lot loan
programs. As previously disclosed, during the second quarter, the Bank identified a large exposure
to undeveloped lots in real estate development projects in Spruce Pine, NC. As a result of this
finding, policies and procedures associated with participation in developer lot programs have been
enhanced to mitigate potential concentration and construction risk. Enhancements include: 1)
commercial underwriting of development projects prior to entering into lot programs to identify
potential construction risks, 2) modification of the consumer loan application to include the
collection of data for developer, subdivision, and development status of the financed lot in order
to provide improved concentration reporting, 3) adjustments in policy to restrict consumer loan
origination to borrowers located in the Corporations primary markets, and 4) strengthened internal
controls to enhance the Corporations ability to identify fraud.
At June 30, 2007, the substantial majority of the total loan portfolio, including the commercial
and real estate portfolio, represented loans to borrowers within the Metro regions of Charlotte and
Raleigh, North Carolina and Atlanta, Georgia. The diverse economic base of these regions tends to
provide a stable lending environment; however, an economic downturn in the Charlotte region, the
Corporations primary market area, could adversely affect its business.
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 of June 30, 2007, and December 31, 2006, 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
48
condition, that the borrower has the ability and intent to meet the contractual obligations of the
loan agreement. As of June 30, 2007, no loans were 90 days or more past due and still accruing
interest.
A summary of nonperforming assets follow:
Table Seventeen
Nonperforming Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
|
March 31 |
|
|
December 31 |
|
|
September 30 |
|
|
June 30 |
|
(In thousands) |
|
2007 |
|
|
2007 |
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
Nonaccrual loans |
|
$ |
17,387 |
|
|
$ |
10,943 |
|
|
$ |
8,200 |
|
|
$ |
7,090 |
|
|
$ |
7,763 |
|
Loans 90 days or more past due accruing interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans |
|
|
17,387 |
|
|
|
10,943 |
|
|
|
8,200 |
|
|
|
7,090 |
|
|
|
7,763 |
|
Other real estate |
|
|
2,726 |
|
|
|
6,330 |
|
|
|
6,477 |
|
|
|
5,601 |
|
|
|
5,902 |
|
|
Nonperforming assets |
|
$ |
20,113 |
|
|
$ |
17,273 |
|
|
$ |
14,677 |
|
|
$ |
12,691 |
|
|
$ |
13,665 |
|
|
Nonaccrual loans as a percentage of total portfolio loans |
|
|
0.49 |
% |
|
|
0.31 |
% |
|
|
0.24 |
% |
|
|
0.23 |
% |
|
|
0.25 |
% |
Nonperforming assets as a percentage of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
0.41 |
|
|
|
0.35 |
|
|
|
0.30 |
|
|
|
0.29 |
|
|
|
0.31 |
|
Total portfolio loans and other real estate owned |
|
|
0.57 |
|
|
|
0.49 |
|
|
|
0.42 |
|
|
|
0.41 |
|
|
|
0.44 |
|
Net charge-offs to average portfolio loans |
|
|
0.02 |
|
|
|
0.06 |
|
|
|
0.08 |
|
|
|
0.13 |
|
|
|
0.11 |
|
Allowance for loan losses to portfolio loans |
|
|
1.26 |
|
|
|
1.02 |
|
|
|
1.00 |
|
|
|
0.97 |
|
|
|
0.96 |
|
Allowance for loan losses to net charge-offs |
|
|
59.40 |
x |
|
|
18.50 |
x |
|
|
13.56 |
x |
|
|
7.50 |
x |
|
|
8.51 |
x |
Allowance for loan losses to nonperforming loans |
|
|
2.58 |
x |
|
|
3.28 |
x |
|
|
4.26 |
x |
|
|
4.22 |
x |
|
|
3.80 |
x |
|
Nonaccrual loans totaled $17.4 million, or 0.49 percent of total portfolio loans, at June 30, 2007,
representing a $9.2 million increase from $8.2 million, or 0.24 percent of total portfolio loans at
December 31, 2006, and a $9.6 million increase from $7.8 million, or 0.25 percent, of total
portfolio loans at June 30, 2006. Nonperforming assets as a percentage of total loans and OREO
increased to 0.57 percent at June 30, 2007, compared to 0.42 percent at December 31, 2006 and 0.44
percent at June 30, 2006.
During the second quarter of 2007, $5.4 million of Penland lot loans were placed on nonaccrual
status. One commercial relationship was the principal contributor to the remaining increase in
nonperforming loans between December 31, 2006, and June 30, 2007. As of December 31, 2006,
management had identified a $2.8 million commercial acquisition and development loan as a potential
problem loan. At that time, management anticipated the borrower would cure the delinquency to keep
the loan from reaching 90 days past due. In January 2007, this loan became 90 days past due and
was placed on nonaccrual status. During the first six months of 2007, payments of $0.3 million
were received, and as of June 30, 2007, the outstanding balance on this loan was $2.5 million.
Nonaccrual loans at June 30, 2007 were concentrated 31 percent in the Penland lot loans and 33
percent in loans originated in the Atlanta market. There were no other significant geographic
concentrations. Nonaccrual loans primarily consisted of loans secured by real estate, including
single-family residential and development construction loans. Nonaccrual loans as a percentage of
loans may increase or decrease as economic conditions change. Management takes 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 114, Accounting by Creditors for Impairment of a
Loan an Amendment to FASB Statements No. 5 and No. 15; (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 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. Beginning January 1, 2007, the
Corporation began including consumer and residential mortgage loans with outstanding principal
balances of $150,000 or greater in its
49
computation of impaired loans calculated under SFAS 114.
The application of this methodology conforms the consumer and residential mortgage loan analysis to
the Corporations SFAS 114 analysis for commercial loans.
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. Because 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 areas. Changes in these
areas can increase or decrease the provision for loan losses.
During the six months ended June 30, 2007, 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 six months ended June 30,
2007, the Corporation noted that economic conditions are mixed; however, management concluded that
the impact on borrowers and local industries in the Corporations primary market areas 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 risk concentrations to borrowers by industry, as well as reports showing total risk
concentrations to one borrower. At the present time, the Corporation does not believe it has
concentrations of risk in any one 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. During the quarter ended June 30, 2007, the Corporation increased the
additional allocation for operational reserve on its consumer lot loan portfolio. This increase
was tied to weaknesses uncovered in identifying and reporting consumer lot loan exposure. As
previously discussed, steps have been taken to mitigate the increased risk identified. This was
the only change to the additional allocation for operational reserve during the six months ended
June 30, 2007.
50
Changes in the allowance for loan losses follow:
Table Eighteen
Allowance For Loan Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
|
|
June 30 |
|
June 30 |
(In thousands) |
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
Balance at beginning of period |
|
$ |
35,854 |
|
|
$ |
29,505 |
|
|
$ |
34,966 |
|
|
$ |
28,725 |
|
Charge-offs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial non real estate |
|
|
113 |
|
|
|
108 |
|
|
|
359 |
|
|
|
359 |
|
Commercial real estate |
|
|
127 |
|
|
|
260 |
|
|
|
140 |
|
|
|
335 |
|
Mortgage |
|
|
35 |
|
|
|
10 |
|
|
|
68 |
|
|
|
21 |
|
Home equity |
|
|
64 |
|
|
|
447 |
|
|
|
194 |
|
|
|
948 |
|
Consumer |
|
|
208 |
|
|
|
310 |
|
|
|
572 |
|
|
|
701 |
|
|
Total charge-offs |
|
|
547 |
|
|
|
1,135 |
|
|
|
1,333 |
|
|
|
2,364 |
|
|
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial non real estate |
|
|
229 |
|
|
|
111 |
|
|
|
317 |
|
|
|
439 |
|
Mortgage |
|
|
27 |
|
|
|
|
|
|
|
52 |
|
|
|
|
|
Consumer |
|
|
103 |
|
|
|
159 |
|
|
|
298 |
|
|
|
321 |
|
|
Total recoveries |
|
|
359 |
|
|
|
270 |
|
|
|
667 |
|
|
|
760 |
|
|
Net charge-offs |
|
|
188 |
|
|
|
865 |
|
|
|
666 |
|
|
|
1,604 |
|
|
Provision for loan losses |
|
|
9,124 |
|
|
|
880 |
|
|
|
10,490 |
|
|
|
2,399 |
|
|
Balance at end of period |
|
$ |
44,790 |
|
|
$ |
29,520 |
|
|
$ |
44,790 |
|
|
$ |
29,520 |
|
|
Average portfolio loans |
|
$ |
3,532,713 |
|
|
$ |
3,021,004 |
|
|
$ |
3,521,637 |
|
|
$ |
2,980,344 |
|
Net charge-offs to average portfolio loans (annualized) |
|
|
0.02 |
|
|
|
0.11 |
% |
|
|
0.04 |
|
|
|
0.11 |
% |
Allowance for loan losses to portfolio loans |
|
|
1.26 |
|
|
|
0.96 |
|
|
|
1.26 |
|
|
|
0.96 |
|
|
The allowance for loan losses was $44.8 million, or 1.26 percent of portfolio loans, at June 30,
2007, compared to $29.5 million, or 0.96 percent of portfolio loans, at June 30, 2006. The
increase includes the previously discussed $7.8 million provision recorded in connection with the
Penland lot loans. Additionally, the Corporations addition of GBCs largely commercial lot loan
portfolio, a smaller concentration of lower risk home equity and mortgage loan balances, and First
Charters credit migration trends led to the higher allowance for loan loss ratio.
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.
51
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 amounts of
loans outstanding, which are used to estimate current probable loan losses; (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 mix of
types of loans. 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 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 was $9.1 million for the 2007 second quarter, while net charge-offs
were $0.2 million, or 0.02 percent of average portfolio loans. For the same year-ago period, the
provision for loan losses was $0.9 million and net charge-offs were $0.9 million, or 0.11 percent
of average portfolio loans. For the six months ended June 30, 2007, the provision for loan losses
was $10.5 million, while net charge-offs were $0.7 million, or 0.04 percent of average portfolio
loans. For the six months ended June 30, 2006, the provision for loan losses was $2.4 million,
while net charge-offs were $1.6 million, or 0.11 percent of average portfolio loans.
The provision for loan losses for the three and six months ended June 30, 2007 increased primarily
as a result of recording an addition provision of $7.8 million related to the previously discussed
Penland lot loans. The remainder of the increase was primarily due to a change in the composition
of the loan portfolio as the percentage of commercial loans continues to increase.
Market Risk Management
Asset-Liability Management and Interest Rate Risk
Interest rate risk is the exposure of earnings and capital to changes in interest rates. The
objective of Asset-Liability Management (ALM) is to quantify and manage the change in interest
rate risk associated with the Corporations balance sheet. The management of the ALM program
includes oversight from the Board of Directors Asset and Liability Committee (Board ALCO) and
the Management Asset and Liability Committee (Management ALCO). Two primary metrics used in
analyzing interest rate risk are earnings at risk (EAR) and economic value of equity (EVE). The
Board of Directors has established limits on the EAR and EVE risk measures. Management ALCO,
comprised of select members of executive and senior management, is charged with measuring
performance relative to those limits and reporting the Banks performance to Board ALCO. Interest
rate risk is measured and monitored through simulation modeling. The process is validated regularly
by an independent third party.
Both the EAR and the EVE risk measures were within policy guidelines as of June 30, 2007, and
December 31, 2006.
Management considers EAR to be the best measure of short-term interest rate risk. This measure
reflects the amount of net interest income that will be impacted by a change in interest rates over
a 12- month time
frame. A simulation model is used to run immediate and parallel changes in interest rates (rate
52
shocks) from a base scenario using implied forward rates. At a minimum, rate shock scenarios are
run at plus and minus 100, 200, and 300 basis points. From time to time, additional simulations are
run to assess risk from changes in the slope of the yield curve. The simulation model projects the
net interest income over the next 12 months for each scenario using consistent balance sheet growth
projections and calculates the percentage change from the base scenario. Board ALCO has approved a
policy limit for the change in EAR over a 12-month period of minus 10 percent to a plus or minus
200 basis point shock to interest rates. At June 30, 2007, the estimated EAR to a 200 basis point
increase in rates was plus 4.4 percent while the estimated EAR to a 200 basis point decrease in
rates was minus 7.1 percent. This compares with plus 4.7 percent and minus 5.6 percent,
respectively, at December 31, 2006. A change in the earning asset and funding mix contributed to
the change in the EAR measures from December 31, 2006.
Management considers EVE to be the best measure of long-term interest rate risk. This measure
reflects the amount of net equity that will be impacted by changes in interest rates. Through
simulation modeling, the Corporation estimates the economic value of assets and the economic value
of liabilities. The difference between these two measures is the EVE. The EVE is calculated for a
series of scenarios in which current rates are shocked up and down by 100, 200, and 300 basis
points and compared to a base scenario using the current yield curve. Board ALCO has approved a
policy limit for the percentage change in EVE of minus 15 percent to a plus or minus 200 basis
point shock to interest rates. At June 30, 2007, the estimated EVE to a 200 basis point increase in
rates was minus 9.2 percent, while the estimated EVE to a 200 basis point decrease in rates was
plus 3.6 percent. At December 31, 2006, EVE risk was minus 7.4 percent and plus 3.1 percent,
respectively. Changes in market rates and prepayment expectations accounted for the majority of the
change in the EVE measure from December 31, 2006.
The result of any simulation is inherently uncertain and will not precisely estimate the
impact of changes in rates on net interest income or the economic value of assets and liabilities.
Actual results may differ from simulated results due to, but not limited to, the timing and
magnitude of the change in interest rates, changes in management strategies, and changes in market
conditions.
Table Nineteen summarizes, as of June 30, 2007, 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 Nineteen as their respective carrying values approximate fair
value. 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 independent evaluation of the average remaining
life of each security based on expected prepayment speeds of the underlying mortgages at June 30,
2007. These expected maturities, weighted-average effective yields, and fair values would change if
interest rates change. Expected maturities for indeterminate demand, money market and savings
deposits are estimated based on historical average lives.
53
Table Nineteen
Market Risk
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity |
(Dollars in thousands) |
|
Total |
|
1 Year |
|
2 Years |
|
3 Years |
|
4 Years |
|
5 Years |
|
Thereafter |
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
$ |
735,571 |
|
|
$ |
342,550 |
|
|
$ |
217,796 |
|
|
$ |
102,183 |
|
|
$ |
41,777 |
|
|
$ |
8,730 |
|
|
$ |
22,535 |
|
Weighted-average effective yield |
|
|
4.81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
725,881 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost |
|
$ |
177,313 |
|
|
|
26,562 |
|
|
|
26,393 |
|
|
|
26,586 |
|
|
|
9,626 |
|
|
|
5,038 |
|
|
|
83,108 |
|
Weighted-average effective yield |
|
|
4.39 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
172,647 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value |
|
$ |
990,947 |
|
|
|
232,169 |
|
|
|
213,689 |
|
|
|
171,377 |
|
|
|
120,030 |
|
|
|
121,088 |
|
|
|
132,594 |
|
Weighted-average effective yield |
|
|
7.15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
976,903 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value |
|
$ |
2,529,571 |
|
|
|
1,287,254 |
|
|
|
333,563 |
|
|
|
194,519 |
|
|
|
98,979 |
|
|
|
72,320 |
|
|
|
542,936 |
|
Weighted-average effective yield |
|
|
7.83 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
2,527,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value |
|
$ |
1,620,433 |
|
|
|
1,443,986 |
|
|
|
152,169 |
|
|
|
11,061 |
|
|
|
6,742 |
|
|
|
5,353 |
|
|
|
1,122 |
|
Weighted-average effective yield |
|
|
4.79 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
1,624,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate
Book value |
|
$ |
1,129,834 |
|
|
|
354,624 |
|
|
|
250,258 |
|
|
|
249,746 |
|
|
|
122,553 |
|
|
|
71,700 |
|
|
|
80,953 |
|
Weighted-average effective yield |
|
|
2.23 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
1,049,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term borrowings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value |
|
$ |
345,905 |
|
|
|
200,056 |
|
|
|
70,058 |
|
|
|
25,062 |
|
|
|
50,054 |
|
|
|
22 |
|
|
|
653 |
|
Weighted-average effective yield |
|
|
4.65 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
339,224 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Book value |
|
$ |
271,857 |
|
|
|
185,000 |
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,857 |
|
Weighted-average effective yield |
|
|
5.32 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value |
|
$ |
271,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. Included in loan commitments are commitments of $38.6 million
to cover customer deposit account overdrafts should they occur. 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 12 of the
consolidated financial statements for further discussion of these commitments. The Corporation
does not have any off-balance sheet financing arrangements, other than the trust preferred
securities.
54
The following table presents, as of June 30, 2007, aggregated information and expected maturities
of commitments.
Table Twenty
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
Timing not |
|
|
(In thousands) |
|
1 year |
|
1-3 Years |
|
4-5 Years |
|
Over 5 Years |
|
determinable |
|
Total |
|
Loan commitments |
|
$ |
703,813 |
|
|
$ |
118,172 |
|
|
$ |
42,662 |
|
|
$ |
59,637 |
|
|
$ |
|
|
$ |
924,284 |
|
Lines of credit |
|
|
31,390 |
|
|
|
1,639 |
|
|
|
2,921 |
|
|
|
455,613 |
|
|
|
|
|
|
491,563 |
|
Standby letters of credit |
|
|
22,920 |
|
|
|
3,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,468 |
|
Anticipated tax settlements |
|
|
584 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,551 |
|
|
11,135 |
|
|
Total commitments |
|
$ |
758,707 |
|
|
$ |
123,359 |
|
|
$ |
45,583 |
|
|
$ |
515,250 |
|
|
$ |
10,551 |
|
$ |
1,453,450 |
|
|
Commitments to extend credit, including loan
commitments, standby letters of credit, anticipated tax settlements and
commercial letters of credit do not necessarily represent future cash requirements, in that these
commitments often expire without being drawn upon.
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 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 common stock. In addition, the Corporation had commercial paper
outstanding of $77.8 million at June 30, 2007. Primary uses of funds for the Corporation include
repayment of commercial paper, share repurchases, operating expenses, and dividends paid to
shareholders. During 2005, the Corporation issued trust preferred securities through specially
formed trusts in an aggregate amount of $60.0 million. The proceeds from the sale of the trust
preferred securities were used to purchase $61.9 million of subordinated debentures from the
Corporation (the Notes). The Notes 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 available-for-sale securities. 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 June 30, 2007, the Bank had a maximum line of credit with the FHLB totaling $1.5
billion with $820.9 million outstanding. At June 30, 2007, the Bank also had $363.0 million of
federal funds lines with $88.0 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.
55
Capital Management
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.
Select capital measures follow:
Table Twenty-one
Capital Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30 |
|
December 31 |
|
|
2007 |
|
2006 |
(Dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Total equity/total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
445,828 |
|
|
|
9.07 |
% |
|
$ |
447,362 |
|
|
|
9.21 |
% |
First Charter Bank |
|
|
481,001 |
|
|
|
9.82 |
|
|
|
371,459 |
|
|
|
8.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible equity/tangible assets (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
361,721 |
|
|
|
7.48 |
% |
|
$ |
362,294 |
|
|
|
7.59 |
% |
First Charter Bank |
|
|
396,894 |
|
|
|
8.24 |
|
|
|
351,246 |
|
|
|
8.03 |
|
|
|
|
|
(1) |
|
The tangible equity ratio excludes goodwill and other intangible assets from both the numerator and the denominator. |
Shareholders equity at June 30, 2007, decreased to $445.8 million, representing 9.1
percent of period-end total assets, compared to $447.4 million, or 9.2 percent,
of period-end total assets at December 31, 2006. This decrease was primarily due to
cash dividends of $0.39 per common share, which resulted in cash dividend declarations
of $13.6 million for the six months ended June 30, 2007 and the repurchase of 500,000 shares of stock during the second quarter which decreased equity $10.6 million.
In addition, accumulated other comprehensive loss (after-tax unrealized
losses on available-for-sale securities) increased $2.8 million to $8.7 million
at June 30, 2007, compared to $5.9 million at December 31, 2006. The decrease in
shareholders equity was partially offset by net income of $21.3 million and $4.9 million of stock issued under stock-based compensation plans and the Corporations dividend reinvestment plan.
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 June 30, 2007, the Corporation had
repurchased all of shares of its common stock under this authorization, including 125,400 shares
repurchased during the second quarter of 2007, at an average per-share price of $17.82, which has reduced
shareholders equity by $27.1 million.
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. During the quarter ending June 30,
2007, the Corporation repurchased 374,600 shares under this authorization at an average per-share
price of $21.19, which has reduced shareholders equity by $8.0 million.
The Corporation has remaining authority to repurchase 1.1 million shares of its common stock.
During 2005, the Corporation issued trust preferred securities through specially formed trusts in
an aggregate amount of $60.0 million. The proceeds from the sale of the trust preferred securities
were used to purchase $61.9 million of subordinated debentures from the Corporation (the Notes).
The Notes 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
56
discretionary actions by regulators that could have a material effect on the
Corporations financial position and results of operations. At June 30, 2007, the Corporation and
the Bank were classified as well capitalized under these regulatory frameworks.
The Corporations and the Banks actual capital amounts and ratios at June 30, 2007 follow:
Table Twenty-two
Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Capital |
|
|
|
|
|
|
|
|
|
|
|
|
Adequacy Purposes |
|
To Be Well Capitalized |
|
|
Actual |
|
|
|
|
|
|
|
|
|
Minimum |
|
|
|
|
|
Minimum |
(Dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
|
Leverage |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
430,373 |
|
|
|
8.97 |
% |
|
$ |
192,023 |
|
|
|
4.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
411,177 |
|
|
|
8.57 |
|
|
|
191,914 |
|
|
|
4.00 |
|
|
$ |
239,893 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier I Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
430,373 |
|
|
|
10.57 |
% |
|
$ |
162,932 |
|
|
|
4.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
411,177 |
|
|
|
10.10 |
|
|
|
162,782 |
|
|
|
4.00 |
|
|
$ |
244,174 |
|
|
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Risk-Based Capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Charter Corporation |
|
$ |
475,358 |
|
|
|
11.67 |
% |
|
$ |
325,863 |
|
|
|
8.00 |
% |
|
None |
|
None |
First Charter Bank |
|
|
455,967 |
|
|
|
11.20 |
|
|
|
325,565 |
|
|
|
8.00 |
|
|
$ |
406,956 |
|
|
|
10.00 |
% |
|
In the third quarter 2007, the Corporation anticipates opening a new branch in Cabarrus County,
North Carolina. The opening of this branch will result in additional depreciation and related
expenses. Opening this new branch is part of the Corporations growth strategy for generating new
deposit growth and the related revenues associated with the accounts and other products.
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.
Recent Accounting Pronouncements and Developments
Note 2 to the consolidated financial statements discusses new accounting pronouncements
adopted by the Corporation during 2007 and other recently issued pronouncements that have not yet
been adopted by the Corporation. To the extent the adoption of new accounting pronouncements
materially affects financial condition, results of operations, or liquidity, the effects are
discussed in the applicable section of Managements Discussion and Analysis of Financial Condition
and Results of Operations and Notes to Consolidated Financial Statements.
From time to time, the FASB issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the public, to revisions by
the FASB and to final issuance by the FASB as statements of financial accounting standards.
Management considers the effect of the proposed statements on the consolidated financial statements
of the Corporation and monitors the status of changes to and proposed effective dates of exposure
drafts.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
See Managements Discussion and Analysis of Financial Condition and Results of Operations Market
Risk Management Asset-Liability Management and Interest Rate
Risk on pages 52-54 for Quantitative
and Qualitative Disclosures about Market Risk.
57
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 2007, the end of the period covered by this Quarterly Report on Form 10-Q, 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 Principal Financial Officer.
Based on that evaluation and the identification of the material weaknesses in the Registrants
internal control over financial reporting as described in the Registrants Annual Report on Form
10-K for the year ended December 31, 2006 (the Material Weaknesses), the Registrants Chief
Executive Officer and Principal Financial Officer have concluded that the Registrants disclosure
controls and procedures were not 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 (i) recorded,
processed, summarized and reported within the time periods specified in the Securities Exchange
Commissions rules and forms, and (ii) accumulated and communicated to the Registrants management,
including the Chief Executive Officer and Principal Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
As disclosed in Item 9A. Controls and Procedures of the Registrants Annual Report on Form 10-K for
the year ended December 31, 2006, management has begun to implement a comprehensive plan for
remedying the Material Weaknesses (the Remediation Plan). In furtherance of the Remediation Plan,
the following changes in the Registrants internal control over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) of the Exchange Act), have occurred during or following the quarter
ended June 30, 2007.
The Registrant has enhanced its internal governance and compliance function. Periodic and regular
meetings are being held with the internal governance and compliance functions to discuss and
coordinate operational, compliance and financial matters as well as the progress of the Remediation
Plan.
|
|
|
The Registrant has reassessed, reviewed, and approved the charters that govern
the internal governance and compliance functions which include, but are not limited
to, the Disclosure Committee, Compliance Risk Committee, Asset and Liability
Committee, Technology Steering Committee, Sarbanes Oxley Review Committee. Where
deemed
necessary, various amendments to these documents have also been adopted. The
Registrants Management has communicated the charters to the respective internal
governance and compliance functions. |
|
|
|
|
These functions also have reassessed their reporting practices and have enhanced
their evaluation processes. |
Except as discussed above, there have been no changes in the Registrants internal control over
financial reporting that occurred during the quarter ended June 30, 2007, that have materially
affected, or are reasonably likely to materially affect, the Registrants internal control over
financial reporting.
58
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 results of operations, liquidity, or financial condition of the Corporation or the
Bank.
Item 1A. Risk Factors
As previously disclosed, on April 5, 2007, the Corporation filed its Annual Report on Form 10-K for
the year ended December 31, 2006. As a result of this filing, on April 9, 2007, NASDAQ notified
the Corporation that it had regained compliance with NASDAQ Rule 4310 (c) (14). Consequently, the
Corporations common stock is no longer subject to delisting by NASDAQ.
With the exception of the change noted above, 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, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Sale of Unregistered Equity Securities
As previously disclosed, on December 1, 2004, the Corporation, through First Charter Bank, its
primary banking subsidiary, acquired substantially all of the assets of Smith & Associates
Insurance Services Inc., a property and casualty insurance agency (the Agency), pursuant to an
Asset Purchase Agreement, dated as of the same date (the Purchase Agreement). No underwriters
were used in connection with this transaction. In connection with this transaction, the Corporation
has previously issued an aggregate of 42,198 shares of Common Stock valued at $1,112,000 to the
Agency. On May 1, 2007, pursuant to the Purchase Agreement and based upon the performance of the
business for the period December 1, 2005 through November 30, 2006 the Corporation issued 10,632
additional shares of Common Stock valued at $256,000. The issuance of the shares in connection
with this transaction was exempt from the registration requirements of the Securities Act of 1933,
as amended, in accordance with Section 4(2) thereof, as a transaction by an issuer not involving a
public offering. The Purchase Agreement also contemplates one additional, subsequent issuance of
Common Stock based upon the future performance of the acquired business. The Corporation presently
expects the value of this future issuance, if earned, to total approximately $200,000.
(c) Issuer Repurchases of Equity Securities
The following table summarizes the Corporations repurchases of its common stock during the quarter
ended June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of |
|
Maximum Number |
|
|
|
|
|
|
|
|
|
|
Shares Purchased |
|
of Shares |
|
|
Total Number |
|
Average Price |
|
as Part of |
|
That May Yet be |
|
|
of Shares |
|
Paid |
|
Publicly-Announced |
|
Purchased under |
Period |
|
Purchased |
|
Per Share |
|
Plans or Programs |
|
the Plans or Programs |
|
April 1, 2007 - April 30, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,625,400 |
|
May 1, 2007 - May 31, 2007 |
|
|
243,500 |
|
|
|
21.07 |
|
|
|
243,500 |
|
|
|
1,381,900 |
|
June 1, 2007 - June 30, 2007 |
|
|
256,500 |
|
|
|
21.25 |
|
|
|
256,500 |
|
|
|
1,125,400 |
|
|
Total |
|
|
500,000 |
|
|
|
21.20 |
|
|
|
500,000 |
|
|
|
1,125,400 |
|
|
59
On January 23, 2002, the Corporations Board of Directors authorized a stock repurchase plan to
acquire up to 1.5 million shares of the Corporations common stock from time to time. As of June
30, 2007, the Corporation had repurchased all shares under this authorization.
On October 24, 2003, the Corporations Board of Directors 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 June 30, 2007, the Corporation had repurchased 374,600 shares under this authorization.
There were 500,000 shares of the Corporations common stock repurchased during the three months
ended June 30, 2007. The maximum number of shares that may yet be repurchased under the plans or
programs was 1,125,400 at June 30, 2007. The October 24, 2003 stock repurchase authorization has
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
(a) First Charter Corporations Annual Meeting of Shareholders was held on May 23, 2007.
(c) The following are the voting results on each matter (exclusive of procedural matters) submitted
to the shareholders:
1. To elect five directors to the Corporations Board of Directors with terms expiring in 2010 and
one director with a term expiring in 2008.
|
|
|
|
|
|
|
|
|
|
|
For |
|
Withheld |
Terms expiring in 2010 |
|
|
Jewell D. Hoover |
|
|
26,205,922 |
|
|
|
912,047 |
|
Walter H. Jones, Jr |
|
|
22,155,428 |
|
|
|
4,962,541 |
|
Samuel C. King, Jr. |
|
|
25,955,112 |
|
|
|
1,162,857 |
|
Jerry E. McGee |
|
|
25,988,347 |
|
|
|
1,129,622 |
|
John S. Poelker |
|
|
26,148,813 |
|
|
|
969,156 |
|
|
|
|
|
|
|
|
|
|
Term expiring in 2008 |
|
|
|
|
|
|
|
|
Richard F. Combs |
|
|
26,337,344 |
|
|
|
780,625 |
|
2. To ratify the action of the Corporations Audit Committee in appointing KPMG LLP, an
independent registered public accounting firm, as their auditor for 2007.
|
|
|
|
|
For |
|
|
26,269,777 |
|
Against |
|
|
720,111 |
|
Abstain |
|
|
128,081 |
|
Broker Non-Votes |
|
|
|
|
Item 5. Other Information
Not Applicable.
60
Item 6. Exhibits
|
|
|
Exhibit No. |
|
Description of Exhibits |
|
10.1
|
|
Transition Agreement, dated May 16, 2007, by and between the Registrant and Charles
A. Caswell, incorporated herein by reference to Exhibit 10.1 of the Registrants Current
Report on Form 8-K, dated May 16, 2007 |
|
|
|
10.2
|
|
Description of retention bonus
compensation arrangement between the Registrant and Sheila A. Stoke,
incorporated herein by reference to the
Registrants
Current Report on Form 8-K, dated May 16, 2007 |
|
|
|
12.1
|
|
Computation of Ratio of Earnings to Fixed Charges |
|
|
|
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 Principal 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 Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
61
SIGNATURE
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: August 8, 2007 |
By: |
/s/ Sheila A. Stoke
|
|
|
|
Sheila A. Stoke |
|
|
|
Senior Vice President,
Corporate Controller
(Principal Financial Officer duly
authorized to sign on behalf of the
Registrant) |
|
|
62