Item 1. Business
General
First Charter Corporation (hereinafter referred to as either the "Registrant" or the "Corporation") is a bank holding company established as a North Carolina Corporation in 1983 and is registered under the Bank Holding Company Act of 1956, as amended (the "BHCA"). Its principal asset is the stock of its subsidiary, First Charter National Bank ("FCNB" or the "Bank"). The Bank accounts for over 85% of the Registrant's consolidated assets and consolidated revenues. The principal executive offices of the Corporation are located at 22 Union Street, North, Concord, North Carolina 28025. Its telephone number is (800) 422-4650.
FCNB, a national banking association, is the successor entity to The Concord National Bank, which was established in 1888 and acquired by the Registrant in 1983. On December 21, 1995, the Corporation purchased Bank of Union ("Union"), a state-chartered commercial bank organized under the laws of North Carolina in 1985. Union, a full-service bank with five offices located in Union and southern Mecklenburg Counties, North Carolina, was merged into FCNB effective September 10, 1998. On December 22, 1997, the Corporation acquired Carolina State Bank ("CSB") which was also merged into FCNB. CSB was a state-chartered commercial bank with four banking offices in Cleveland and Rutherford Counties, North Carolina. During 1998, the Corporation acquired HFNC Financial Corp. ("HFNC"), which merged into the Corporation effective September 30, 1998. The merger was accounted for as a pooling of interests, and accordingly all financial information presented herein has been restated for all periods presented to reflect this merger. HFNC was the unitary holding company of Home Federal Savings and Loan Association ("Home Federal"). Home Federal, which dates back to 1883, was based in Charlotte, North Carolina, and operated nine full service branch offices and a loan origination office, all located in Mecklenburg County, North Carolina. These offices operated under the Home Federal name until its merger into FCNB in March 1999. FCNB is a full service bank and trust company which now operates thirty branch offices and two limited service facilities in addition to its main office, as well as sixty-five ATMs (automated teller machines) located in Mecklenburg, Cabarrus, Cleveland, Rutherford, Rowan, and Union Counties in North Carolina.
Through its branch locations, the Bank provides a wide range of banking products, including interest bearing and non-interest bearing checking accounts; "Money Market Rate" accounts; certificates of deposit; individual retirement accounts; overdraft protection; commercial, consumer, agriculture, real estate, residential mortgage and home equity loans; personal and corporate trust services; safe deposit boxes; and automated banking. In addition, through First Charter Brokerage Services, a subsidiary of FCNB, the Registrant offers discount brokerage services, insurance and annuity sales and financial planning services pursuant to a third party arrangement with UVEST Investment Services. FCNB also operates three other subsidiaries. First Charter Insurance Services, Inc. is a North Carolina corporation formed to meet the insurance needs of businesses and individuals throughout the Charlotte metropolitan area. First Charter Realty Investment Inc. is a Delaware corporation organized as a holding company for FCNB Real Estate Inc, a real estate investment trust organized in North Carolina.
At December 31, 1998, the Registrant and its subsidiary had 390 full-time employees and 104 part-time employees. The Registrant had no employees who were not also employees of FCNB. The Registrant considers its relations with its employees to be good.
As part of its operations, the Registrant is not dependent upon a single customer or a few customers whose loss would have a material adverse effect on the Registrant.
As part of its operations, the Registrant regularly holds discussions and evaluates the potential acquisition of, or merger with, various financial institutions. The Registrant does not currently have any specific plans or agreements in effect with respect to any such acquisition or merger. In addition, the Registrant periodically enters new markets and engages in new activities in which it competes with established financial institutions. There can be no assurance as to the success of any such new office or activity. Furthermore, as the result of such expansions, the Registrant may from time to time incur start-up costs that could affect the financial results of the Registrant.
Competition
The banking laws of North Carolina allow banks located in North Carolina to develop branches throughout the state. In addition, as the result of recent federal and state legislation, out-of-state institutions may open de novo branches in North Carolina as well as acquire or merge with institutions located in North Carolina. As a result of such laws, banking activities in North Carolina are highly competitive.
FCNB's service delivery facilities are located in Mecklenburg, Cabarrus, Union, Rowan, Cleveland, and Rutherford counties. These locations also have numerous branches of money-center, super-regional, regional, and statewide institutions, many of them based in Charlotte. In its market area, the Registrant faces competition from other banks, savings and loan associations, savings banks, credit unions, finance companies and major retail stores that offer competing financial services. Many of these competitors have greater resources, broader geographic coverage and higher lending limits than the Bank. The Bank's primary method of competition is to provide quality service and fairly priced products.
Government Supervision and Regulation
General. As a registered bank holding company, the Registrant is subject to the supervision of, and to regular inspection by, the Board of Governors of the Federal Reserve System (the "Federal Reserve"). The Federal Deposit Insurance Corporation ("FDIC") insures FCNB's deposits through the Bank Insurance Fund ("BIF") to the maximum extent permitted by law.
In addition to banking laws, regulations and regulatory agencies, the Corporation and FCNB are subject to various other laws and regulations and supervision and examination by other regulatory agencies, all of which directly or indirectly affect the Corporation's operations, management and ability to make distributions. The following discussion summarizes certain aspects of those laws and regulations that affect the Corporation.
Restrictions on Bank Holding Companies. The Federal Reserve is authorized to adopt regulations affecting various aspects of bank holding companies. Under the BHCA, the Corporation's activities, and those of companies which it controls or in which it holds more than 5% of the voting stock, are limited to banking or managing or controlling banks or furnishing services to or performing services for its subsidiaries, or any other activity which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve is required to consider whether the performance of such activities by a bank holding company or its subsidiaries can reasonably be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices.
Generally, bank holding companies are required to obtain prior approval of the Federal Reserve to engage in any new activity not previously approved by the Federal Reserve or to acquire more than 5% of any class of voting stock of any company. The BHCA also requires bank holding companies to obtain the
prior approval of the Federal Reserve before acquiring more than 5% of any class of voting stock of any bank which is not already majority-owned by the bank holding company.
The Corporation is also subject to the North Carolina Bank Holding Company Act of 1984. As required by this state legislation, the Corporation, by virtue of its ownership of FCNB, has registered as a bank holding company with the Commissioner of Banks of the State of North Carolina. The North Carolina Bank Holding Company Act also prohibits the Corporation from acquiring or controlling certain non-bank banking institutions which have offices in North Carolina.
Interstate Banking and Branching Legislation. Pursuant to the Reigle--Neal Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking and Branching Act"), which became effective September 29, 1995, a bank holding company may now acquire banks in states other than its home state, without regard to the permissibility of such acquisition under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, prior to or following the proposed acquisition, controls no more than 10% of the total amount of deposits of insured depository institutions in the United States and no more than 30% of such deposits in that state (or such lesser or greater amount set by state law).
The Interstate Banking and Branching Act also authorized banks to merge across state lines, thereby creating interstate branches beginning June 1, 1997. Under such legislation, each state had the opportunity either to "opt out" of this provision, thereby prohibiting interstate branching in such states, or to "opt in" at an earlier time, thereby allowing interstate branching within that state prior to June 1, 1997. The State of North Carolina elected to "opt in" to such legislation, effective June 22, 1995. Furthermore, pursuant to the Interstate Banking and Branching Act, a bank is now able to open new branches in a state in which it does not already have banking operations, if the laws of such state permit such de novo branching.
Regulation of FCNB. FCNB is organized as a national banking association and is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency (the "OCC") and to regulation by the FDIC. OCC rules and requirements applicable to national banking associations such as FCNB relate to required reserves, allowable investments, loans, mergers, consolidations, issuance of securities, payment of dividends, establishment of branches, limitations on credit to subsidiaries and other aspects of the business of such subsidiaries. The OCC has broad authority to prohibit national banks from engaging in unsafe or unsound banking practices. The Bank is also subject to certain reserve requirements established by the Federal Reserve Board and is a member of the Federal Home Loan Bank ("FHLB") of Atlanta, which is one of the 12 regional banks comprising the FHLB System.
Capital and Operational Requirements.
The Federal Reserve, the OCC and the FDIC have issued substantially similar risk-based and leverage capital guidelines applicable to federally chartered banking organizations. The risk-based guidelines define a two-tier capital framework, under which the Corporation and the Bank are required to maintain a minimum ratio of Tier 1 Capital (as defined) to total risk-weighted assets of 4.00% and a minimum ratio of Total Capital (as defined) to risk weighted assets of 8.00%. With respect to the Corporation, Tier 1 Capital generally consists of total shareholders' equity calculated in accordance with generally accepted accounting principles less certain intangibles, and Total Capital generally consists of Tier 1 Capital plus certain adjustments, the largest of which for the Corporation is the general allowance for loan losses (up to 1.25% of risk-weighted assets). Tier 1 Capital must comprise at least 50% of the Total Capital. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Corporation, as adjusted for one of four
categories of risk-weights established in Federal Reserve, OCC and FDIC regulations, based primarily on relative credit risk. At December 31, 1998, the Corporation the Bank were in compliance with the risk-based capital requirements.
The leverage ratio is determined by dividing Tier 1 Capital by adjusted total assets. Although the stated minimum ratio is 3.00%, most banking organizations are required to maintain ratios of at least 100 to 200 basis points above 3.00%. Management believes that the Corporation and the Bank meet their leverage ratio requirement.
The Corporation's compliance with existing capital requirements is summarized in the table below.
(1) Percentage of total adjusted average assets. The Federal Reserve minimum leverage ratio requirement is 3.00% to 5.00%, depending on the institution's composite rating as determined by its regulators. The Federal Reserve Board has not advised the Corporation of any specific requirement applicable to it.
(2) Percentage of risk-weighted assets.
In addition to the above described capital requirements, the federal regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels whether because of its financial condition or actual or anticipated growth.
Prompt Corrective Action under FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for "prompt corrective action" for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. In addition, pursuant to FDICIA, the various regulatory agencies have prescribed certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation, and such agencies may take action against a financial institution that does not meet the applicable standards.
The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the total risk-based capital, Tier 1 risk-based capital and leverage capital ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a "well capitalized" institution must have a Tier 1 Capital ratio of at least 6.00%, a Total Capital ratio of at least 10.00% and a leverage ratio of at least 5.00% and
not be subject to a capital directive order. An "adequately capitalized" institution must have a Tier 1 Capital ratio of at least 4.00%, a Total Capital ratio of at least 8.00% and a leverage ratio of at least 4.00%, or 3.00% in some cases. Under these guidelines, FCNB is considered well capitalized.
Banking agencies have also adopted final regulations which mandate that regulators take into consideration (i) concentrations of credit risk, (ii) interest rate risk (when the interest rate sensitivity of an institution's assets does not match the sensitivity of its liabilities or its off-balance sheet position) and (iii) risks from non-traditional activities, as well as an institution's ability to manage those risks, when determining the adequacy of an institution's capital. This evaluation is made as a part of the institution's regular safety and soundness examination. In addition, the banking agencies have amended their regulatory capital guidelines to incorporate a measure for market risk. In accordance with amended guidelines, a Corporation or Bank with significant trading activity (as defined) must incorporate a measure for market risk in its regulatory capital calculations effective for reporting periods after January 1, 1998. The revised guidelines do not materially impact the Corporation's or FCNB's regulatory capital ratios or their well-capitalized status.
Distributions. The primary source of funds for distributions paid by the Corporation to its shareholders is dividends received from FCNB. Certain regulatory and other requirements restrict the amount of dividends that FCNB can pay to the Corporation. The OCC regulates the amount of FCNB dividends payable to the Corporation based on undivided profits for the last two years, less dividends already paid. As of December 31, 1998, FCNB had paid the full allowable amount of dividends to the Corporation.
In addition to the foregoing, the ability of the Corporation and FCNB to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. Furthermore, if, in the opinion of a federal regulatory agency, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such agency may require, after notice and hearing, that such bank cease and desist from such practice. The right of the Corporation, its shareholders and its creditors to participate in any distribution of assets or earnings of FCNB is further subject to the prior claims of creditors against the Bank.
Deposit Insurance. The deposits of FCNB are insured up to applicable limits by the FDIC, and are backed by the full faith and credit of the U.S. government. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against banking institutions, after giving the institution's primary regulator an opportunity to take such action. In addition, the Bank is subject to deposit premium assessments by the FDIC. As mandated by FDICIA, the FDIC has adopted regulations for a risk-based insurance assessment system. Under this system, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at a risk assessment for a banking institution, the FDIC places it in one of nine risk categories using a process based on capital ratios and on other relevant information from supervisory evaluations of the bank by the bank's primary federal regulator, the OCC, statistical analyses of financial statements and other relevant information.
The deposits of FCNB are insured by the BIF, administered by the FDIC. Under the FDIC's risk-based insurance system, assessments currently can range from no assessment to 0.27% of a participating bank's average deposits base, with the exact assessment determined by the bank's capital and the applicable regulatory agency's opinion of the bank's operations. The range of deposit
insurance assessment rates can change from time to time, in the discretion of the FDIC, subject to certain limits.
The former Home Federal deposits are insured by the SAIF, also administered by the FDIC. Unlike the BIF, which met its target reserve level in September 1995, the Savings Association Insurance Fund ("SAIF") was not expected to meet its target reserve level until at least 2002. Consequently, while insurance premiums for BIF insured deposits were reduced beginning in 1996, premiums for SAIF members were maintained at their existing levels, creating a significant premium disparity. On September 30, 1996, legislation was passed to eventually eliminate this premium differential between SAIF-insured institutions and BIF-insured institutions by recapitalizing the SAIF's reserves by way of a one-time special assessment equal to 65.7 basis points for all SAIF-assessable deposits as of March 31, 1995. This special assessment was accrued by Home Federal at September 30, 1996 and paid on November 27, 1996. As a result of this recapitalization, during the period from 1997 through 1999, FDIC-insured institutions in the lowest risk category will pay approximately 1.2 basis points of their BIF-assessable deposits and 6.1 basis points of their SAIF-assessable deposits to fund the insurance fund. FCNB will continue to pay the SAIF assessment rate on former Home Federal deposits through the end of 1999.
Source of Strength. According to Federal Reserve policy, bank holding companies are expected to act as a source of financial strength to subsidiary banks and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guaranty provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC, either as a result of default of a banking or thrift subsidiary of the Corporation or related to FDIC assistance provided to a subsidiary in danger of default, the other banking subsidiaries of the Registrant may be assessed for the FDIC's loss, subject to certain exceptions.
Future Legislation. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such proposals or bills being enacted and the impact they might have on the Corporation and FCNB cannot be determined at this time.
Other Considerations
There are particular risks and uncertainties that are applicable to an investment in our common stock. Specifically, there are risks and uncertainties that bear on our future financial results that may cause our future earnings and financial condition to be less than our expectations. Some of the risks and uncertainties relate to the Year 2000 issue or to economic conditions generally, and would affect other financial institutions in similar ways. These aspects are discussed under the headings "Year 2000 Consideration" and "Factors that May Affect Future Results" in the accompanying "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the First Charter Corporation 1998 Annual Report to Shareholders, incorporated herein by reference. This section addresses particular risks and uncertainties that are specific to our business.
Completion of the merger with HFNC significantly expanded the scope and complexity of our business and operations and more than doubled our asset base. While the merger with HFNC represents significant opportunities for us to expand our franchise and increase shareholder value, it also creates certain risks of execution in successfully assimilating the HFNC franchise and achieving our previous financial performance level. Successful assimilation of HFNC's operations will require that we:
- hire and retain additional senior management personnel,
- upgrade the technological and other platforms utilized by HFNC,
- retrain the HFNC workforce as well as instill in that workforce a sales culture,
- conform HFNC's funding cost to that of our cost, and
- otherwise integrate two companies that have previously operated independently pursuant to different cultures.
Successful integration of HFNC's operations will depend in part on our ability to consolidate operations, systems, and procedures, and to eliminate redundancies in costs. We may not be successful in integrating our operations with those of HFNC without encountering difficulties, including, without limitation, the loss of key employees and customers, the disruption of its business, or possible inconsistencies in standards, controls, procedures, and policies.
In addition to the execution risks related to the assimilation of HFNC, due to the increase in interest rates that has occurred since January 1999, we are considering the possible sale or securitization of up to $250 million of our loans, primarily consisting of one- to four-family residential mortgages, and the repayment of Federal Home Loan Bank ("FHLB") advances with the proceeds of such sales. If we are unable to reinvest the sales proceeds of these loans in comparable or higher yielding assets, or if our costs of future borrowings from FHLB increase, the sale of such loans could have an adverse impact on our future earnings.
Statistical Information
The following tables present certain statistical information relating to the Corporation. The tables should be read in conjunction with the Corporations's Consolidated Financial Statements and Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations, both of which are incorporated by reference herein. All historical financial data for the periods prior to the respective dates of the mergers with Union, CSB, and Home Federal (each of which was accounted for as a pooling of interests) have been restated to combine the accounts of Union, CSB and Home Federal with those of the Corporation.
The following table includes for the years ended December 31, 1998, 1997,and 1996 interest income on interest earning assets and related average yields, as well as interest expense on interest bearing liabilities and related average rates paid. In addition, the table includes the average net yield on average earning assets. Average balances were calculated based on daily averages.
Table 1 Average Balances and Net Interest Income Analysis
(1) Includes loan fees of approximately $3,482,000 in 1998, $2,375,000 in 1997 and $2,307,000 in 1996.
(2) The preceding analysis takes into consideration the principal amount of nonaccruing loans and only income actually collected on such loans.
(3) Loans are shown net of unearned income.
(4) Yields on nontaxable securities are stated on a fully taxable equivalent basis, assuming a Federal tax rate of 35% for 1998, 1997 and 1996. The adjustments made to convert to a fully taxable equivalent basis were $2,324,000 for 1998, $1,918,000 for 1997, and $1,826,000 for 1996.
(5) Represents net interest income as a percentage of total average interest earning assets.
Changes in Interest Income and Expense
The following table contains the dollar amount of change in interest income and interest expense and segregates the dollar amount of change due to rate and volume variances for the years ended December 31, 1998 and 1997. The change in interest income, stated on a tax equivalent basis, or interest expense attributable to the combination of rate variance and volume variance is included in the table, but such amount has also been allocated between, and included in the amounts shown as, changes due to rate and changes due to volume. The allocation of the change due to rate/volume variance was made equally to rate variance and to volume variance. Interest income related to tax exempt securities is stated on a tax equivalent basis using a Federal income tax rate of 35% in 1998, 1997 and 1996.
Table 2 Volume and Rate Variance Analysis
Interest Rate Sensitivity
The following table presents the Corporations's interest sensitivity analysis for December 31, 1998 and sets forth at various maturity periods the cumulative interest sensitivity gap, which is the difference between rate sensitive assets and rate sensitive liabilities for assets and liabilities that management considers rate sensitive. The mortgage-backed securities are shown at their weighted average expected life obtained from an outside evaluation of the average remaining life of each security based on historic prepayment speeds of the underlying mortgages at December 31, 1998. Demand deposits, money market accounts and certain savings deposits are presented in the earliest repricing window because the rates are subject to immediate repricing.
Table 3 Interest Rate Sensitivity As of December 31, 1998
Distribution of Assets and Liabilities
The following table shows the distribution of the Corporation's assets, liabilities and shareholders' equity at December 31, 1998, 1997, and 1996. Average balances were calculated based on daily averages.
Table 4 Average Balance Sheet
(l) Loans, net is net of unearned income and the allowance for loan losses.
(2) Demand includes non-interest bearing and interest bearing demand deposits.
Securities Available for Sale
The following table shows, as of December 31, 1998, 1997 and 1996, the carrying value of (i) U.S. Government obligations, (ii) U.S. Government agency obligations, (iii) mortgage-backed securities, (iv) state and municipal obligations, and (v) equity securities.
Table 5 Securities Available for Sale
Investment Securities Held to Maturity
The following table shows, as of December 31, 1998, 1997 and 1996, the amortized cost (face amount, plus unamortized premiums, less unamortized discounts), of U.S. Government obligations, included in investment securities held to maturity.
Table 6 Investment Securities Held to Maturity
Securities Available for Sale - Maturities
The following table indicates the carrying value of each significant securities available for sale category due within one year, after one year but within five years, after five years but within ten years, and after ten years, together with the weighted average yield for each range of maturities, as of December 31, 1998. Mortgage-backed securities are presented at their contractual maturity date. Actual maturities will differ from contractual maturities because borrowers have the right to pre-pay these obligations without pre-payment penalties. Yields are determined based on amortized cost. Yields are stated on a tax equivalent basis assuming a Federal income tax rate of 35% in 1998.
Table 7 Securities Available for Sale As of December 31, 1998 (Dollars in thousands)
As of December 31, 1998, there were no issues of securities available for sale (excluding U.S. government obligations and U.S. government agency obligations) which had carrying values that exceeded 10% of shareholders' equity of the Corporation.
As of December 31, 1998, there were no investment securities classified as held to maturity.
Loan Portfolio
The table below summarizes loans in the classifications indicated as of December 31, 1998, 1997, 1996, 1995, and 1994.
Table 8 Loan Portfolio Composition
Maturities and Sensitivities of Loans to Change in Interest Rates
Set forth in the table below are the amounts of each loan type, except installment loans and real estate mortgage loans, due in one year, after one year through five years, and after five years, at December 31, 1998. This table excludes non-accrual loans.
Table 9 Maturities and Sensitivity to Change in Interest Rates
The amounts of the above loans with a maturity over one year which have a predetermined interest rate or a floating or adjustable interest rate are as follows:
Non-performing Loans
Non-performing loans include non-accrual loans, restructured loans and accruing loans which are contractually 90 days or more past due.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Balance Sheet Analysis - Asset Quality" in the Corporation's 1998 Annual Report to Shareholders, incorporated herein by reference, for additional information.
Accruing Loans 90 Days or More Past Due
The following table reflects the dollar amount of loans outstanding in each category and the amount and percentage of those accruing loans which are 90 days or more past due as of December 31, 1998, 1997, 1996, 1995, and 1994.
Table 10 Accruing Loans 90 Days or More Past Due
Table 10 is continued on next page.
Table 10 (Continued) Accruing Loans 90 Days or More Past Due
Non-Accrual Loans and Restructured Loans
The determination to discontinue the accrual of interest is based on a review of each loan. Interest is discontinued on loans 90 days past due as to principal or interest unless in management's 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. The table below summarizes the Corporation's non-accrual loans and restructured loans as of the dates indicated.
Table 11 Non-accrual and Restructured Loans
Summary of Loan Loss and Recovery Experience
The table below presents certain data for the years ended December 31, 1998, 1997, 1996, 1995, and 1994, including the following: (i) the average amount of net loans outstanding during the year, (ii) the allowance for loan losses at the beginning of the year, (iii) the provision for loan losses, (iv) loans charged off and recoveries of loans previously charged off presented by major loan categories, (v) loan charge-offs, net, (vi) the allowance for loan losses at the end of the year, (vii) the ratio of net charge-offs to average loans, (viii) the ratio of the allowance for loan losses to average loans and (ix) the ratio of the allowance for loan losses to loans at year-end, excluding loans held for sale.
Table 12 Summary of Loan Loss and Recovery Experience
For a discussion of management's evaluation of the allowance for loan loss, see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Earnings Performance - Provision for Loan Losses" and "Balance Sheet Analysis - Asset Quality" in the First Charter Corporation 1998 Annual Report to Shareholders, incorporated herein by reference.
Allowance for Loan Losses
The following table presents the dollar amount of the allowance for loan losses applicable to major loan categories (including pro rata share of unallocated reserves), the percentage of the allowance amount in each category to the total allowance and the percentage of the loans in each category to total loans as of December 31, 1998, 1997, 1996, 1995, and 1994. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Earnings Performance - Provision for Loan Losses" and "- Balance Sheet Analysis - Asset Quality" in the First Charter Corporation 1998 Annual Report to Shareholders, incorporated herein by reference.
Table 13 Allowance for Loan Losses
Table 13 is continued on next page.
Table 13 Allowance for Loan Losses (Continued)
Deposits
The Bank primarily serves individuals and small- to medium-sized businesses with a variety of deposit accounts, such as NOW accounts, money market accounts, certificates of deposit and individual retirement accounts. The following table presents average balances by category and average rates paid for the years ended December 31, 1998, 1997, and 1996. Average balances were calculated based on daily averages.
Table 14 Deposits
As of December 31, 1998, domestic time deposits of $100,000 or more totaled $201,918,000, with the following maturities: $89,846,436, three months or less; $47,105,916, over three months through six months; $38,983,074, over six months through twelve months and $25,982,574, over one year.
Other Borrowings
The following is a schedule of other borrowings which consists of the following categories: securities sold under repurchase agreements, federal funds purchased and Federal Home Loan Bank ("FHLB") borrowings for the years ended December 31, 1998, 1997 and 1996.
Table 15 Other Borrowings
At December 31, 1998, the FCNB and Home Federal had two available lines of credit with the FHLB totaling $405,000,000 with approximately $345,000,000 outstanding. The outstanding amounts consisted of $202,152,000 maturing in 1999, $857,000 maturing in 2001, $102,000,000 maturing in 2002, $13,500,000 maturing in 2003, $26,000,000 maturing in 2008, and $490,000 maturing in 2011. At December 31, 1998, such amounts were outstanding at market interest rates for the specific advance program and maturity. In addition, the FHLB requires banks to pledge collateral to secure the advances as described in the line of credit agreements. The collateral consists of FHLB stock and qualifying 1-4 family residential mortgage loans.
See also note 9 to Consolidated Financial Statements.
Return on Equity and Assets
The table below indicates the return on average assets (net income divided by average total assets), return on average equity (net income divided by average equity), dividend payout ratio (dividends declared divided by net income), and average equity to average assets ratio (average equity divided by average total assets) and other key operating data for the years ended December 31, 1998, 1997, and 1996. Averages are based on daily balances.
Table 16 Return on Equity and Assets
*Excludes HFNC Financial information for comparison purposes.
(1) Computed using the Corporation's historical dividends declared per share. Dividends declared per share were $0.61 per share, $0.53 per share and $0.50 per share for the years ended December 31, 1998, 1997 and 1996, respectively. Dividends declared per share by HFNC were $0.24, $5.28 per share and $0.12 per share for the years ended December 31, 1998, 1997 and 1996, as adjusted to conform to the Corporation's December 31 fiscal year. Dividends declared per share by HFNC in the year ended December 31, 1997 includes a special distribution of $5.00 per share to HFNC shareholders, substantially all of which was deemed to be a return of capital to shareholders.
Item 2.
Item 2. Properties
The corporate and accounting offices of the Corporation are located in various leased facilities in Concord, North Carolina.
The main office of FCNB is located in a facility the bank owns in Concord, North Carolina, while the operations and data processing departments of FCNB are currently located in another fully-owned facility in Concord, North Carolina.
In addition to its main office, FCNB has thirty full service branches and two limited service facilities in the following North Carolina locations:
-------------------------------------------------------------- (1) Branch maintains an ATM on site (2) Facility is leased. (3) Limited service facility
In addition to the above-noted ATMs, FCNB owns fourteen remote ATMs in various convenience-style locations in Cabarrus, northeast Mecklenburg and Cleveland counties of North Carolina.
FCNB also owns two separate properties in northeast Mecklenburg County for future branch expansion. Both properties could accommodate full service branches with drive-in teller facilities, if desired.
The Corporation's mortgage loan department is located in a fully-owned building in the SouthPark area of Charlotte, North Carolina.
Item 3.
Item 3. Legal Proceedings
In June 1995, a lawsuit was initiated against Home Federal by a borrower's affiliated companies in which the plaintiffs alleged that Home Federal wrongfully set-off certain funds in an account being held and maintained by Home Federal. In addition, the plaintiffs alleged that as a result of the wrongful set-off, Home Federal wrongfully dishonored a check in the amount of $270,000. Plaintiffs further alleged that the actions on behalf of Home Federal constituted unfair and deceptive trade practices, thereby entitling plaintiffs to recover treble damages and attorneys' fees. Home Federal denied any wrongdoing and filed a motion for summary judgment. Upon consideration of the motion, the United States Bankruptcy Judge entered a Recommended Order Granting Summary Judgement, recommending the dismissal of all claims asserted against Home Federal. In October 1997, the United States District Court entered an order granting summary judgment in favor of Home Federal. The plaintiff has appealed the order of summary judgment and the case is presently pending in the Fourth Circuit Court of Appeals.
In December 1996, Home Federal filed a suit against the borrower and his company and against the borrower's wife, daughters, and a company owned by his wife and daughter, alleging transfers of assets to the wife, daughter, and their company
in fraud of creditors, and asking that the fraudulent transfers be set aside. The objective of the lawsuit is to recover assets, which may be used to satisfy a portion of the judgments obtained in favor of Home Federal prior to litigation. The borrower's wife filed a counterclaim against Home Federal alleging that she borrowed $750,000 from another financial institution, secured by a deed of trust on her principal residence, the proceeds of which were paid to Home Federal for application on a debt owed by one of her husband's corporations, claiming that officers of Home Federal promised to resume making loans to her husband's corporation after the payment. Home Federal and its officers vigorously deny all of her allegations. Home Federal filed a motion for summary judgment and dismissal of the counterclaim. The motion for summary judgment was heard in the Superior Court division of the Mecklenburg County General Court of Justice in April 1998; however, an order has not been entered. In June 1998, Home Federal removed this case to the United States Bankruptcy Court for the Western District of North Carolina, Charlotte Division, due to the fact that the defendant was the debtor in a pending bankruptcy case. Home Federal believes it has strong defenses to the defendant's counterclaim.
In February 1997, two companies affiliated with those referred to in the first paragraph above filed an additional action against two executive officers of Home Federal and against an officer of another financial institution. The action was removed from the state court to the United States Bankruptcy Court for the Western District of North Carolina. At the same time, the borrower, who is affiliated with all of these companies, also filed an action in the Superior Court of Mecklenburg County, North Carolina against the two executive officers of Home Federal and against an officer of another financial institution. The Complaints in both actions assert virtually identical claims. The plaintiffs in both lawsuits allege that the officers of both financial institutions engaged in a conspiracy to wrongfully declare loans to be in default so as to eliminate those companies as borrowers of Home Federal. Plaintiffs claim actual damages, treble damages, and punitive damages together with interest, attorneys' fees, and other costs. Plaintiffs allege misrepresentation, breach of fiduciary duty, constructive fraud, interference with business expectancy, wrongful bank account set-off, and unfair and deceptive acts and practices. The action pending in the bankruptcy court has been stayed. All defendants filed motions for summary judgment in the state court action, which were granted, and that lawsuit was dismissed in January 1998 by the Superior Court of Mecklenburg County. The plaintiff appealed the order granting summary judgment to the North Carolina Court of Appeals. In July 1998, the defendants removed the state court case to the United States Bankruptcy Court for the Western District of North Carolina, Charlotte Division, due to the fact that the plaintiff was a debtor in a pending bankruptcy case. As a result of the removal, the North Carolina Court of Appeals entered an order staying further proceedings in the North Carolina Court of Appeals in August 1998. Home Federal has agreed to indemnify both of its officers with respect to costs, expense, and liability which might arise in connection with both of these cases.
In July 1997, the above borrower and affiliated companies filed an additional action against HFNC, Home Federal, and the other financial institution referred to in the paragraph above, alleging that previous judgments in favor of Home Federal and the other financial institution obtained in prior litigation were obtained by the perpetration of fraud on the Bankruptcy Court, U.S. District Court, and the Fourth Circuit Court of Appeals. The plaintiffs are seeking to have the judgments set aside on that basis. All defendants filed motions for summary judgment and dismissal, which were granted, and the lawsuit was dismissed on September 24, 1998. The borrower, individually, has appealed the Order dismissing the lawsuit to the Fourth Circuit Court of Appeals. That appeal is pending.
Management continues to deny any liability in the above-described cases and continues to vigorously defend against the claims. However, there can be no assurance of the ultimate outcome of the litigation, or the range of potential loss, if any.
The Corporation and the Bank are defendants in certain other claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these other matters is not expected to have a material adverse effect on the consolidated operations, liquidity or financial position of the Corporation or the Bank.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
A special meeting of the shareholders of the Registrant was held on September 29, 1998 (the "Corporation Special Meeting"). One purpose of the meeting was to consider and vote upon a proposal to approve the Amended and Restated Agreement and Plan of Merger, dated as of May 17, 1998, and amended and restated as of July 29, 1998, by and between the Corporation and HFNC, pursuant to which HFNC would merge with and into the Corporation. This motion was adopted by a vote of the majority of the Corporation's issued and outstanding common stock entitled to vote at the meeting, as follows:
An additional purpose of the Corporation Special Meeting was to consider and vote upon a proposal to approve an amendment to the Corporation's Amended and Restated Articles of Incorporation to increase the number of authorized shares of the Corporation's common stock from 25,000,000 to 50,000,000. This motion was adopted by a vote of the majority of the votes cast by shareholders of the Registrant, as follows:
Item 4A. Executive Officers of the Registrant
The following list sets forth with respect to each of the current executive officers of the registrant his or her name, age, positions and offices held with the Registrant and the Banks, the period served in such positions or offices and, if such person has served in such position and office for less than five years, the prior employment of such person.
PART II
Item 5.
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters
The information called for by Item 5 with respect to the market price of and dividends on the Registrant's Common Stock is set forth on the inside back cover of the Corporation's 1998 Annual Report to Shareholders (included herewith as Exhibit 13.1) under the caption "Stock Information and Dividends" and is hereby incorporated by reference.
The Registrant periodically issues unregistered shares of its Common Stock to key employees pursuant to the exercise of options granted under its Comprehensive Stock Option Plan pursuant to the exemption from registration set forth in Section 4(2) of the Securities Act of 1993, as amended. During the year ended December 31, 1998, the Registrant issued the following shares pursuant to such option exercises:
On January 22, 1998, the Registrant issued 200 shares for an aggregate of $2,454.
On February 3, 1998, the Registrant issued 1,856 shares for an aggregate of $14,036.
On February 6, 1998, the Registrant issued 3,372 shares for an aggregate of $28,956.
On April 16, 1998, the Registrant issued 100 shares for an aggregate of $1,226.
On April 22, 1998, the Registrant issued 100 shares for an aggregate of $1,885.
Item 6.
Item 6. Selected Financial Data
The information called for by Item 6 is set forth on page 1 of the Corporation's 1998 Annual Report to Shareholders (included herein as Exhibit 13.l) under the caption "Selected Consolidated Financial Data" and is hereby incorporated by reference.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The information called for by Item 7 is set forth on pages 40 through 57 of the Corporation's 1998 Annual Report to Shareholders (included herein as Exhibit 13.1) under the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and is hereby incorporated by reference.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The information called for by Item 7A is set forth on pages 42 and 43 of the Corporation's 1998 Annual Report to Shareholders (included herein as Exhibit 13.1) under the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Results of Operations and Financial Condition" and is hereby incorporated by reference.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information called for by Item 8 is set forth on pages 9 through 39 of the Corporation's 1998 Annual Report to Shareholders (included herein as Exhibit 13.1) and is hereby incorporated by reference.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information called for by Item 10 with respect to directors and Section 16 matters is set forth in the Registrant's Proxy Statement for its 1999 Annual Meeting of Shareholders under the captions "Election of Directors", and "Section 16(a) Beneficial Ownership Reporting Compliance," respectively, and is hereby incorporated by reference. The information called for by Item 10 with respect to executive officers is set forth in Part I, Item 4A hereof.
Item 11.
Item 11. Executive Compensation
The information called for by Item 11 is set forth in the Registrant's Proxy Statement for its 1999 Annual Meeting of Shareholders under the captions "Election of Directors - Compensation of Directors", "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation in Compensation Decisions," respectively, and is hereby incorporated by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information called for by Item 12 is set forth in the Registrant's Proxy Statement for its 1999 Annual Meeting of Shareholders under the captions "Principal Shareholders" and "Management Ownership of Common Stock," respectively, and is hereby incorporated by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information called for by Item 13 is set forth in the Registrant's Proxy Statement for its 1999 Annual Meeting of Shareholders under the caption "Certain Relationships and Related Transactions" and is hereby incorporated by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (l) Financial Statements.
The following financial statements, together with a report thereon of independent certified public accountants, are included in this report by incorporation by reference to the Corporation's 1998 Annual Report to Shareholders (included herein as Exhibit 13.1) as set forth in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules.
Financial statement schedules, for which provision for filing is made in the applicable accounting regulations of the Securities and Exchange Commission for bank holding companies, are omitted because the required information is not applicable or is included elsewhere herein.
(3) Exhibits.
* Indicates a management contract or compensatory plan required to be filed herein.
(b) Reports on Form 8-K.
On December 2, 1998, the Registrant filed a Current Report on Form 8-K, reporting pursuant to Item 5 thereof to announce the unaudited financial information for the one month ended October, 31, 1998 and 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) 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)
By: /s/ Lawrence M. Kimbrough --------------------------------------- Lawrence M. Kimbrough, President
Date: March 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Exhibit Index
* Indicates a management contract or compensatory plan required to be filed herein.