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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000 - Commission File Number 0-15829
FIRST CHARTER CORPORATION
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1355866
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10200 DAVID TAYLOR DRIVE, CHARLOTTE, NC 28262-2373
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (704) 688-4300
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
N/A N/A
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
Series X Junior Participating Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of March 20, 2001 was $403,518,908.
As of March 20, 2001 the Registrant had outstanding 31,710,318 shares
of Common Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
PART III: Definitive Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A promulgated pursuant to the
Securities Exchange Act of 1934 in connection with the 2001 Annual Meeting of
Shareholders (with the exception of those portions which are specifically
incorporated by reference in this Form 10-K, the Proxy Statement is not deemed
to be filed as part of this report).
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FIRST CHARTER CORPORATION
AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PART I
Page
----
Item 1. Business......................................................... 3
Item 2. Properties....................................................... 9
Item 3. Legal Proceedings................................................ 9
Item 4. Submission of Matters to a Vote of Security Holders.............. 9
Item 4A. Executive Officers of the Registrant............................. 10
PART II
Item 5. Market For Registrant's Common Stock and Related Shareholder
Matters................................................... 11
Item 6. Selected Financial Data.......................................... 11
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition................................... 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....... 31
Item 8. Financial Statements and Supplementary Data...................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.......................................... 62
PART III
Item 10. Directors and Executive Officers of the Registrant............... 62
Item 11. Executive Compensation........................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management... 62
Item 13. Certain Relationships and Related Transactions................... 62
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 62
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PART I
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 95 percent of the Registrant's consolidated assets and
consolidated revenues. The principal executive offices of the Corporation are
located at 10200 David Taylor Drive, Charlotte, North Carolina 28262. Its
telephone number is (704) 688-4300.
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. 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. On September 30, 1998, the Corporation
acquired HFNC Financial Corp. ("HFNC"), which merged into the Corporation. HFNC
was the unitary holding company of Home Federal Savings and Loan Association
("Home Federal"). Home Federal was based in Charlotte, North Carolina, and
operated nine full service branch offices and a loan origination office in
Mecklenburg County, North Carolina. These offices operated under the Home
Federal name until its merger into FCNB in March 1999. On April 4, 2000, the
Corporation acquired Carolina First BancShares, Inc. ("Carolina First"), the
holding company for Lincoln Bank, which merged into the Corporation. Carolina
First, a North Carolina corporation, operated 31 branch offices principally in
the greater Charlotte, North Carolina area. On September 1, 2000, Business
Insurers of Guilford County ("Business Insurers") was merged into First Charter
Insurer Services. Each of these mergers was accounted for as a pooling of
interests and accordingly, all financial information presented herein has been
restated for all periods presented to reflect the mergers.
FCNB is a full service national bank which now operates 52 financial
centers, and five insurance offices in addition to its main office, as well as
99 ATMs (automated teller machines). These facilities are located in Ashe,
Alleghany, Avery, Buncombe, Cabarrus, Cleveland, Guilford, Iredell, Jackson,
Lincoln, McDowell, Mecklenburg, Rowan, Rutherford, Swain, Transylvania and Union
counties of North Carolina.
Through its financial center locations, the Bank provides a wide range of
banking products, including interest bearing and non-interest bearing checking
accounts; "Money Market Rate" accounts; certificates of deposit; individual
retirement accounts; overdraft protection; commercial, consumer, agriculture,
real estate, residential mortgage and home equity loans; personal and corporate
trust services; safe deposit boxes; and automated banking. In addition, through
First Charter Brokerage Services, a subsidiary of FCNB, the Registrant offers
full service and discount brokerage services, annuity sales and financial
planning services pursuant to a third party arrangement with UVEST Investment
Services. The Bank also operates five other subsidiaries: First Charter
Insurance Services, Inc., First Charter Realty Investment, Inc., FCNB Real
Estate, Inc., CFBI Corp., and CFBI Mortgage, Inc. First Charter Insurance
Services, Inc. is a North Carolina corporation formed to meet the insurance
needs of businesses and individuals throughout the Charlotte metropolitan area.
First Charter Realty Investment, Inc. is a Delaware corporation organized as a
holding company for FCNB Real Estate, Inc. a real estate investment trust
organized in North Carolina. CFBI Corp. is a Delaware corporation organized as a
holding company for CFBI Mortgage, Inc. a real estate investment trust organized
in North Carolina. The Bank also has a majority ownership in Lincoln Center at
Mallard Creek, LLC. Lincoln Center is a three-story office building occupied in
part by a branch of FCNB.
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At December 31, 2000, the Registrant and its subsidiaries had 852 full-time
equivalent 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. 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, 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 Ashe, Alleghany, Avery,
Buncombe, Cabarrus, Cleveland, Guilford, Iredell, Jackson, Lincoln, McDowell,
Mecklenburg, Rowan, Rutherford, Swain, Transylvania and Union counties of North
Carolina. These locations also have numerous branches of money-center,
super-regional, regional, and statewide institutions, some of which have a major
presence 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"). As a national banking
association, the Bank is subject to regulation, supervision and examination by
the Office of the Comptroller of the Currency (the "OCC"). 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 state and federal 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 five percent 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
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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 percent 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 percent 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 percent of the total amount of deposits of insured depository
institutions in the United States and no more than 30 percent 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.
Gramm-Leach Bliley Financial Modernization Act of 1999. The
Gramm-Leach-Bliley Financial Modernization Act of 1999 ("Modernization Act")
allows bank holding companies meeting management, capital and Community
Reinvestment Act standards to engage in substantially broader range of
traditionally nonbanking activities than was permissible before enactment,
including insurance underwriting and making merchant banking investments in
commercial and financial companies. It also allows insurers and other financial
services companies to acquire banks; removes various restrictions that currently
apply to bank holding company ownership of securities firms and mutual fund
advisory companies; and establishes the overall regulatory structure applicable
to bank holding companies that also engage in insurance and securities
operations. The Corporation currently believes it meets the requirements for the
broader range of activities that are permitted by the Modernization Act.
In addition, the Modernization Act also modifies current law related to
financial privacy and community reinvestment. The new privacy provisions
generally will prohibit financial institutions from disclosing nonpublic
personal financial information to nonaffiliated third parties unless the
customer has the opportunity to decline disclosure.
Regulation of FCNB. FCNB is organized as a national banking association and
is subject to regulation, supervision and examination by 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
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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 percent and a minimum ratio of Total Capital (as defined) to risk weighted
assets of 8.00 percent. 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 and the Bank
is the general allowance for loan losses (up to 1.25 percent of risk-weighted
assets). Tier 1 Capital must comprise at least 50 percent of the Total Capital.
Risk-weighted assets refer to the on- and off-balance sheet exposures of the
Corporation and the Bank, as adjusted for one of four categories of applicable
risk-weights established in Federal Reserve, OCC and FDIC regulations, based
primarily on relative credit risk. At December 31, 2000, the Corporation and the
Bank were in compliance with the risk-based capital requirements.
The leverage ratio is determined by dividing Tier 1 Capital by total
adjusted average assets. Although the stated minimum ratio is 3.00 percent, most
banking organizations are required to maintain ratios of at least 100 to 200
basis points above 3.00 percent. 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:
RISK-BASED CAPITAL
-----------------------------------------------------------------
LEVERAGE CAPITAL TIER 1 CAPITAL TOTAL CAPITAL
- -------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) AMOUNT PERCENTAGE (1) AMOUNT PERCENTAGE (2) AMOUNT PERCENTAGE (2)
- -------------------------------------------------------------------------------------------------------------------------------
Actual $288,192 10.27 % $288,192 12.92 % $316,077 14.17 %
Required 112,278 4.00 89,211 4.00 178,421 8.00
Excess 175,914 6.27 198,981 8.92 137,656 6.17
(1) Percentage of total adjusted average assets. The Federal Reserve
minimum leverage ratio requirement is 3.00 percent to 5.00 percent,
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.
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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 percent, a Total Capital ratio of
at least 10.00 percent and a Leverage ratio of at least 5.00 percent 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 percent, a Total Capital ratio
of at least 8.00 percent and a Leverage ratio of at least 4.00 percent, or 3.00
percent in some cases. Under these guidelines, FCNB is considered well
capitalized. See NOTE FIFTEEN of the consolidated financial statements.
Banking agencies have also adopted 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 FCNB's well-capitalized
status.
Distributions. The primary source of funds for distributions paid by the
Corporation to its shareholders is dividends received from FCNB. Federal
regulatory and other requirements restrict the lending of funds by FCNB to the
Corporation and 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, 2000, FCNB had paid the full allowable amount of dividends to the
Corporation. FCNB obtains regulatory approval prior to payment of dividends to
the Corporation. See NOTE SIXTEEN of the consolidated financial statements.
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. 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 percent of a participating
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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 continued to pay the SAIF assessment
rate on former Home Federal deposits through the end of 1999, and no further
payments are required.
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 economic conditions generally, and would affect other
financial institutions in similar ways. These aspects are discussed under the
heading "Factors that May Affect Future Results" in the accompanying
"Management's Discussion and Analysis of Results of Operations and Financial
Condition". This section addresses particular risks and uncertainties that are
specific to our business.
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ITEM 2. PROPERTIES
The principal offices of the Corporation have been relocated to the new
230,000 square foot First Charter Center located in Charlotte, North Carolina,
which is owned by the Bank. The First Charter Center contains the corporate
offices of the Corporation, the main office of FCNB, as well as the operations
and data processing departments of FCNB. The First Charter Center is expected to
be complete and fully operational in the first six months of 2001. The expected
cost basis of the First Charter Center is approximately $43 million with
expected 2001 depreciation of approximately $0.5 million using 1/2 year
convention for newly acquired assets.
The Corporation also continues to lease various facilities in Concord,
North Carolina, due to the relocation of its principal offices. These leases
will expire during the second and third quarters of 2001.
In addition to its main office, FCNB has 52 financial centers, five
insurance offices and 99 ATMs located in 17 counties throughout North Carolina.
The Corporation's mortgage loan department is located in a fully-owned
building in the SouthPark area of Charlotte, North Carolina.
ITEM 3. LEGAL PROCEEDINGS
From late 1996 through mid 2000, Home Federal, a former subsidiary of the
Corporation that was merged into the Bank in March 1999, was involved in a
series of lawsuits in state and federal courts with a former borrower, companies
controlled by the borrower and with members of the former borrower's family.
That litigation was described in prior quarterly and annual reports and has now
been concluded without liability on the part of the Corporation or the Bank.
The Corporation and the Bank are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of stockholders during the
quarter ended December 31, 2000.
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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.
YEAR POSITION
NAME AGE OFFICE AND POSITION HELD
- ---- --- ------------------- -----
Lawrence M. Kimbrough 60 President and Chief Executive Officer 1986 - Present
of the Registrant and FCNB
Robert O. Bratton 52 Executive Vice President, Chief 1983 - Present
Financial Officer, Treasurer of the
Registrant and Executive Vice
President of FCNB
Vice President Bank of Union 1996 - 1998
Robert E. James, Jr. 50 Executive Vice President of the 1999 - Present
Registrant and Executive Vice
President of FCNB
Group Executive: Market Planning & 1996 - 1998
Customer Development, Centura Bank
Executive Vice President for 1994 - 1998
Metro Markets, Centura Bank
C. Thomas McFarland 43 Executive Vice President 1999 - Present
of the Registrant and Executive
Vice President of FCNB
Executive Vice President and 1996 - 1999
Alternative Delivery Systems
Manager, BB&T
Senior Vice President and Loan 1988 - 1996
Services Manager, BB&T
Stephen M. Rownd 42 Executive Vice President 2000 - Present
of the Registrant and Executive
Vice President and Chief
Credit Officer of FCNB
Director of Risk Management, 1999 - 2000
SunTrust Banks, Inc.
Executive Vice President and 1996 - 1999
Chief Credit Officer, SunTrust
Bank of Gulf Coast
Senior Vice President, Regions Bank 1991 - 1996
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The principal market on which the Common Stock is traded is the Nasdaq
National Market. The following table sets forth the high and low sales prices of
the Common Stock for the periods indicated, as reported on the Nasdaq National
Market:
Quarter High Low
--------------------------------------------
1999 first $19.1250 $16.3750
second 24.7500 18.1250
third 24.8750 17.1250
fourth 19.6250 14.0000
2000 first 14.6250 12.5000
second 17.5000 12.5000
third 16.8750 13.6250
fourth 15.7500 13.0000
As of March 20, 2001, there were 9,456 record holders of the Corporation's
Common Stock. During 1999 and 2000, the Corporation paid dividends on the Common
Stock on a quarterly basis. The following table sets forth dividends declared
per share of Common Stock for the periods indicated:
Quarter Dividend
----------------------------
1999 first $ 0.17
second 0.17
third 0.17
fourth 0.17
2000 first 0.17
second 0.17
third 0.18
fourth 0.18
For additional information regarding the Corporation's ability to pay
dividends, see "Management's Discussion and Analysis of Results of Operations
and Financial Condition - Capital Resources" on page 29.
ITEM 6. SELECTED FINANCIAL DATA
See TABLE ONE in Item 7 for Selected Financial Data.
11
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
The following discussion and analysis should be read in conjunction with
the consolidated financial statements of the Corporation and the notes thereto,
as restated to reflect the Corporation's various mergers.
The following discussion contains certain forward-looking statements about
the Corporation's financial condition and results of operations, which are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's judgment only as of the date hereof. The
Corporation undertakes no obligation to publicly revise these forward-looking
statements to reflect events and circumstances that arise after the date hereof.
Factors that may cause actual results to differ materially from these
forward-looking statements include, but are not limited to, the passage of state
or federal legislation or regulation applicable to the Corporation's operations,
the Corporation's ability to accurately predict the adequacy of the loan loss
allowance needs using its present risk grading system, the ability to generate
liquidity if necessary to meet loan demand or other cash needs, and the ability
to manage unforeseen domestic and global rapid changes in interest rates.
OVERVIEW
The Corporation is a bank holding company established as a North Carolina
Corporation in 1983, with one wholly-owned banking subsidiary, FCNB. The
Corporation's principal executive offices are located in Charlotte, North
Carolina. FCNB is a full-service bank and trust company with 52 financial
centers and five insurance offices located in 17 counties throughout North
Carolina.
Through its financial center locations, the Bank provides a wide range of
banking products, including interest bearing and non-interest bearing checking
accounts; "Money Market Rate" accounts; certificates of deposit; individual
retirement accounts; overdraft protection; commercial, consumer, agricultural,
real estate, residential mortgage and home equity loans; personal and corporate
trust services; safe deposit boxes; and automated banking.
In addition, through its subsidiary First Charter Brokerage Services, the
Bank offers full service and discount brokerage services, insurance and annuity
sales and financial planning services pursuant to a third party arrangement with
UVEST Investment Services. The Bank also operates five other subsidiaries: First
Charter Insurance Services, Inc., First Charter Realty Investment, Inc., FCNB
Real Estate, Inc., CFBI Corp., and CFBI Mortgage, Inc. First Charter Insurance
Services, Inc. is a North Carolina corporation formed to meet the insurance
needs of businesses and individuals throughout the Charlotte metropolitan area.
First Charter Realty Investment, Inc. is a Delaware corporation organized as a
holding company for FCNB Real Estate, Inc. a real estate investment trust
organized in North Carolina. CFBI Corp. is a Delaware corporation organized as a
holding company for CFBI Mortgage, Inc. a real estate investment trust organized
in North Carolina. The Bank also has a majority ownership in Lincoln Center at
Mallard Creek, LLC. Lincoln Center is a three-story office building occupied in
part by a branch of FCNB. The financial results of all subsidiaries are reported
on a consolidated basis as the Corporation.
On September 1, 2000, Business Insurers was merged into First Charter
Insurer Services. As a result of this merger, approximately 283,000 shares of
the Corporation's common stock were issued.
On April 4, 2000, the Corporation completed its merger with Carolina First
(the "Merger"). The shareholders of each company approved the Merger at separate
meetings held on March 21, 2000. In accordance with the terms of the Merger
Agreement, (i) each share of the $2.50 par value common stock of Carolina First
(excluding shares held by Carolina First or the Corporation or their respective
companies, in each case other than in a fiduciary capacity or as a result of
debts previously contracted) was converted into 2.267 shares of the no par value
common stock of the Corporation on April 4, 2000, resulting in the net issuance
of approximately 13.3 million common shares to the former Carolina First
shareholders.
12
13
During 1998, the Corporation acquired HFNC. HFNC was merged into the
Corporation effective September 30, 1998.
During 1995, the Corporation acquired Union. In September 1998, Union was
merged into FCNB. During 1997, the Corporation acquired CSB, which was merged
into FCNB at that time. Union and CSB financial centers now operate as FCNB
financial centers.
Each of these mergers was accounted for as a pooling of interests and,
accordingly, all financial data for the periods prior to the respective dates of
the mergers have been restated to combine the accounts of Union, CSB, HFNC,
Carolina First, and Business Insurers with those of the Corporation.
On November 17, 2000, the Corporation purchased four financial centers with
total loans of $9.4 million and total deposits of $88.3 million. The financial
centers are located in Bryson City, Jefferson, West Jefferson and Sparta, North
Carolina.
The Corporation's results of operations and financial position are
described in the following sections.
Refer to TABLE ONE and TABLE FIVE for annual and quarterly selected
financial data, respectively.
RESULTS OF OPERATIONS
2000 VERSUS 1999
The following discussion and analysis provides a comparison of the
Corporation's results of operations for the years ended December 31, 2000 and
1999. This discussion should be read in conjunction with the consolidated
financial statements and related notes on pages 32 through 61.
Net income amounted to $24.8 million, or $0.79 diluted net income per share
for the year ended December 31, 2000, compared to $35.3 million or $1.11 diluted
net income per share for the year ended December 31, 1999, representing a
decrease of $10.5 million. This decrease was attributable to the differences in
the non-core items described below. Net income for the year ended December 31,
2000 includes the following non-core earnings items: (i) $16.3 million pre-tax
($12.3 million after-tax) merger and restructuring charge primarily associated
with the merger of Carolina First; (ii) $4.6 million pre-tax earnings ($3.2
million after-tax) from equity method income on certain investments due to
unrealized gains in underlying equity investments during the period; (iii) $2.8
million pre-tax ($1.9 million after-tax) gain on sale of property related to the
sale of four duplicate branch facilities and one office building; (iv) $3.9
million pre-tax ($2.7 million after-tax) loss associated with the restructuring
of the available-for-sale securities portfolio; (v) $1.6 million pre-tax ($1.1
million after-tax) loss associated with the write down of certain equity
securities due to other-than-temporary impairment in value; (vi) $0.1 million
pre-tax ($0.1 million after-tax) loss associated with the sale of mortgage
loans; and (vii) $1.0 million pre-tax ($0.7 million after-tax) charitable trust
contribution. Net income for the year ended December 31, 1999 includes the
following non-core earnings items: (i) $1.8 million pre-tax ($1.1 million
after-tax) gain associated with the sale of mortgage loans; (ii) $0.1 million
pre-tax earnings ($0.1 million after-tax) from equity method income on certain
investments due to unrealized gains in underlying equity investments during the
period; (iii) $1.8 million pre-tax ($1.1 million after-tax) gain associated with
the sale of property; and (iv) $66,000 pre-tax ($43,000 after-tax) loss
associated with the write down of certain equity securities due to
other-than-temporary impairment in value.
Core operating earnings for the year ended December 31, 2000 increased 11
percent to $36.6 million, or $1.16 per diluted share. This is compared to core
operating earnings for the year ended December 31, 1999 of $33.0 million, or
$1.04 per diluted share. The increase is primarily due to a $4.0 million
increase in net interest income, a $3.6 million increase in noninterest income
and a $0.5 million decrease in noninterest expense offset by a $2.6 million
increase in the provision for loan losses. Core operating earnings in 2000
equated to a return on average assets of 1.32 percent compared to 1.28 percent
for 1999, and a return on average equity of 12.21 percent in 2000, versus 11.28
percent in 1999.
13
14
TABLE ONE
SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------
Years ended December 31,
---------------------------------------------------------------------
(Dollars in thousands, except per share amounts) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
AS REPORTED
INCOME STATEMENT
Interest income $ 216,244 $ 194,271 $ 188,561 $ 168,367 $ 155,499
Interest expense 108,314 90,299 92,694 82,400 74,426
- ---------------------------------------------------------------------------------------------------------------------
Net interest income 107,930 103,972 95,867 85,967 81,073
Provision for loan losses 7,615 5,005 3,741 3,681 2,660
Noninterest income 30,565 28,795 23,912 21,845 13,789
Noninterest expense 92,727 75,991 86,888 63,984 57,552
- ---------------------------------------------------------------------------------------------------------------------
Income before income taxes 38,153 51,771 29,150 40,147 34,650
Income taxes 13,312 16,480 12,859 14,255 11,996
- ---------------------------------------------------------------------------------------------------------------------
Net income $ 24,841 $ 35,291 $ 16,291 $ 25,892 $ 22,654
=====================================================================================================================
PER COMMON SHARE
Basic net income $ 0.79 $ 1.12 $ 0.51 $ 0.84 $ 0.74
Diluted net income 0.79 1.11 0.50 0.83 0.73
Cash dividends declared (1) 0.70 0.68 0.61 0.53 0.50
Period-end book value 9.79 9.33 9.66 9.29 8.91
Average shares outstanding - basic 31,435,342 31,504,746 31,782,843 30,712,930 30,760,246
Average shares outstanding - diluted 31,580,328 31,772,060 32,423,533 31,411,944 31,079,168
RATIOS
Return on average shareholders' equity 8.29 % 12.08 % 5.30 % 8.80 % 8.23 %
Return on average assets 0.90 1.37 0.67 1.26 1.10
Net interest margin 4.26 4.43 4.29 4.35 4.42
Average loans to average deposits 110.52 104.60 113.42 97.03 92.99
Average equity to average assets 10.84 11.31 12.56 14.31 13.34
SELECTED YEAR END BALANCES
Securities available for sale $ 441,031 $ 486,905 $ 483,292 $ 438,244 $ 374,568
Securities held to maturity - 36,082 33,307 36,709 61,507
Loans, net 2,128,960 1,942,830 1,876,353 1,644,416 1,464,886
Allowance for loan losses 28,447 25,002 22,278 21,100 19,453
Total assets 2,932,199 2,679,728 2,594,940 2,289,458 2,092,647
Deposits 1,998,234 1,816,491 1,775,638 1,604,312 1,477,668
Borrowings 570,024 542,021 480,344 361,002 317,064
Total liabilities 2,622,912 2,389,460 2,288,034 1,990,596 1,816,402
Total shareholders' equity 309,287 290,268 306,906 298,860 276,487
- -----------------------------------------------------------------------------------------------------------------------
CORE OPERATING (2)
CORE OPERATING EARNINGS
Noninterest income $ 28,810 $ 25,214 $ 21,565 $ 21,845 $ 13,789
Noninterest expense 75,477 75,991 66,626 60,584 57,552
Income before income taxes 53,648 48,190 47,065 43,547 34,650
Income taxes 17,037 15,227 17,159 15,071 11,996
Net income 36,611 32,963 29,906 28,476 22,654
PER COMMON SHARE
Basic core operating earnings 1.16 1.05 0.94 0.93 0.74
Diluted core operating earnings 1.16 1.04 0.92 0.91 0.73
Cash dividends declared (1) 0.70 0.68 0.61 0.53 0.50
Period-end book value 9.79 9.33 9.66 9.29 8.91
Average shares outstanding - basic 31,435,342 31,504,746 31,782,843 30,712,930 30,760,246
Average shares outstanding - diluted 31,580,328 31,772,060 32,423,533 31,411,944 31,079,168
RATIOS
Return on average shareholders' equity 12.21 % 11.28 % 9.73 % 9.68 % 8.23 %
Return on average assets 1.32 1.28 1.22 1.39 1.10
Operating efficiency (3) 54.93 58.45 56.19 58.52 59.96
- -----------------------------------------------------------------------------------------------------------------------
The table above sets forth certain selected financial data concerning the
Corporation for the five years ended December 31, 2000. All financial data has
been restated to reflect the acquisition of Carolina State Bank in 1997, the
acquisition of HFNC in 1998, the acquisition of Business Insurers in 2000, and
the acquisition of Carolina First BancShares, Inc. in 2000, each of which was
accounted for as a pooling of interests. Additionally, all per share data has
been retroactively adjusted to reflect a 6-for-5 stock split declared in the
second quarter of 1997.
(1) First Charter Corporation historical cash dividends declared.
(2) Core operating financial data excludes other non-core items. See Table Two
on page 15 for a reconciliation of core operating earnings to net income.
(3) Core operating noninterest expense divided by the sum of taxable equivalent
net interest income plus core operating noninterest income less core gain on
sale of securities.
14
15
The following table presents a reconciliation of core operating earnings to
net income for the years ended December 31, 2000, 1999, 1998, 1997 and 1996:
TABLE TWO
OTHER NON-CORE ITEMS
- ------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
-------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
SCHEDULE OF OTHER NON-CORE ITEMS
Core operating earnings $ 36,611 $ 32,963 $ 29,906 $ 28,476 $ 22,654
Other non-core items
Noninterest income
Gain (loss) on sale of loans (99) 1,757 - - -
Gain on sale of merchant card business - - 385 - -
Fixed income portfolio restructuring (loss) gain (3,913) - 1,962 - -
Equity investment write down (1,601) (66) - - -
Equity method income 4,580 138 - - -
Gain on sale of property 2,788 1,752 - - -
Noninterest expense
Charitable trust (1,000) - - - -
Merger and restructuring charges (16,250) - (20,262) (3,400) -
- ------------------------------------------------------------------------------------------------------------------------
Total other non-core items (15,495) 3,581 (17,915) (3,400) -
- ------------------------------------------------------------------------------------------------------------------------
Other non-core items, net of tax (11,770) 2,328 (13,615) (2,584) -
- ------------------------------------------------------------------------------------------------------------------------
Net income $ 24,841 $ 35,291 $ 16,291 $ 25,892 $ 22,654
========================================================================================================================
NET INTEREST INCOME
An analysis of the Corporation's net interest income on a
taxable-equivalent basis and average balance sheet for the last three years is
presented in TABLE THREE. The changes in net interest income from year to year
are analyzed in TABLE FOUR.
Net interest income, the difference between total interest income and total
interest expense, is the Corporation's principal source of earnings. For the
year ended December 31, 2000, net interest income amounted to $107.9 million, an
increase of approximately 3.8 percent from net interest income of $104.0 million
in 1999. This was attributable to an increase in average interest earning assets
of $158.8 million to $2.58 billion for the year ended December 31, 2000. This
increase is primarily due to the growth in the Corporation's average loan
portfolio, which increased $196.5 million. The increase in average yield on
interest earning assets to 8.46 percent during 2000, compared to 8.11 percent
during 1999, resulted principally from the increase in the average prime rate
during 2000, from 8.02 percent in 1999 to 9.23 percent in 2000. The average
yield earned on loans was 8.89 percent in 2000, compared to 8.66 percent in
1999.
In addition to the increase in average interest earning assets, the
Corporation experienced an increase in average interest-bearing liabilities of
$169.7 million, or 8.4 percent from the prior year, due to the use of FHLB
advances and increases in deposits to fund loan growth. The average rate paid on
interest bearing liabilities increased during the period to 4.94 percent in
2000, compared to 4.47 percent in 1999, due to a shift in the deposit mix and
higher rates on FHLB advances. The average rate paid on interest-bearing
deposits was 4.61 percent in 2000, up from 4.20 percent in 1999. Similarly, the
rate paid on other borrowed funds increased to 5.94 percent in 2000, compared to
5.41 percent in 1999.
The net interest margin (tax adjusted net interest income divided by
average interest-earning assets) decreased 11 basis points to 4.26 percent in
2000, compared to 4.37 percent in 1999. This reflects the impact of higher
levels of borrowings and competitive forces related to loan and deposit pricing.
See "Asset-Liability Management and Interest Rate Sensitivity" for additional
discussion on the Corporation's management of rate sensitive assets and
liabilities.
15
16
The following table includes for the years ended December 31, 2000, 1999,
and 1998 interest income on interest earning assets and related average yields,
as well as interest expense on interest bearing liabilities and related average
rates paid. In addition, the table includes the net yield on average earning
assets. Average balances were calculated based on daily averages.
TABLE THREE
AVERAGE BALANCES AND NET INTEREST INCOME ANALYSIS
- ----------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------------------------------------------------------------------------
INTEREST AVERAGE Interest Average Interest Average
AVERAGE INCOME/ YIELD/RATE Average Income/ Yield/Rate Average Income/ Yield/Rate
(Dollars in thousands) BALANCE EXPENSE PAID Balance Expense Paid Balance Expense Paid
- ----------------------------------------------------------------------------------------------------------------------------
INTEREST EARNING ASSETS:
Loans (1) (2) (3) $2,074,971 $184,489 8.89 % $1,878,509 $162,726 8.66 % $1,783,271 $157,442 8.83 %
Securities - taxable 400,306 27,274 6.81 423,894 26,053 6.15 381,545 24,146 6.33
Securities - nontaxable 93,226 5,885 6.31 101,184 6,488 6.41 90,242 6,097 6.76
Federal funds sold 3,997 250 6.26 9,105 501 5.50 43,222 2,325 5.38
Interest bearing bank deposits 4,353 224 5.15 5,319 314 5.90 4,616 221 4.79
- ----------------------------------------------------------------------------------------------------------------------------
Total earning assets (4) 2,576,853 218,122 8.46 2,418,011 196,082 8.11 2,302,896 190,231 8.26
- ----------------------------------------------------------------------------------------------------------------------------
Cash and due from banks 67,836 65,602 63,220
Other assets 119,231 100,190 82,268
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $2,763,920 $2,583,803 $2,448,384
============================================================================================================================
INTEREST BEARING LIABILITIES:
Demand deposits 485,230 12,454 2.57 472,212 12,100 2.56 356,191 10,574 2.97
Savings deposits 149,812 3,765 2.51 192,744 5,945 3.08 196,825 6,813 3.46
Other time deposits 998,866 59,044 5.91 908,479 48,055 5.29 894,068 50,326 5.63
Other borrowings 556,859 33,051 5.94 447,633 24,199 5.41 443,344 24,981 5.63
- ----------------------------------------------------------------------------------------------------------------------------
Total interest bearing
liabilities 2,190,767 108,314 4.94 2,021,068 90,299 4.47 1,890,428 92,694 4.90
- ----------------------------------------------------------------------------------------------------------------------------
Noninterest bearing sources:
Noninterest bearing deposits 243,517 222,486 203,928
Other liabilities 29,891 48,066 46,568
Shareholders' equity 299,745 292,183 307,460
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,763,920 $2,583,803 $2,448,384
============================================================================================================================
Net interest spread 3.52 3.64 3.36
Impact of noninterest bearing sources 0.74 0.73 0.88
- ----------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/
YIELD ON EARNINGS ASSETS $109,808 4.26 % $105,783 4.37 % $97,537 4.24 %
============================================================================================================================
(1) The preceding analysis takes into consideration the principal amount of
nonaccruing loans and only income actually collected on such loans.
(2) Average loan balances are shown net of unearned income.
(3) Includes amortization of deferred loan fees of approximately $3,501, $3,875,
and $4,854, for 2000, 1999, and 1998, respectively.
(4) Yields on nontaxable securities and loans are state on a taxable-equivalent
basis, assuming a Federal tax rate of 35 percent, applicable state taxes and
TEFRA disallowances for 2000, 1999, and 1998. The adjustments made to convert
to a taxable-equivalent basis were $1,878, $1,811 and $1,670 for 2000, 1999, and
1998, respectively.
16
17
TABLE FOUR
VOLUME AND RATE VARIANCE ANALYSIS
- ------------------------------------------------------------------------------------------------------------------------------------
FROM DEC. 31, 1999 TO DEC. 31, 2000 From Dec. 31, 1998 to Dec. 31, 1999
--------------------------------------------------- ------------------------------------------------
INCREASE (DECREASE) Increase (Decrease)
DUE TO CHANGE IN (1) Due to Change in (1)
--------------------------------------------------- ------------------------------------------------
1999 2000 1998 1999
INCOME/ INCOME/ Income/ Income/
(DOLLARS IN THOUSANDS) EXPENSE RATE VOLUME EXPENSE Expense Rate Volume Expense
- ------------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $ 162,726 $ 4,520 $ 17,243 $184,489 $ 157,442 $ (3,045) $ 8,329 $ 162,726
Securities - taxable 26,053 2,750 (1,529) 27,274 24,146 (734) 2,641 26,053
Securities - nontaxable 6,488 (97) (506) 5,885 6,097 (329) 720 6,488
Federal funds sold 501 49 (300) 250 2,325 32 (1,856) 501
Interest bearing bank deposits 314 (37) (53) 224 221 55 38 314
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $ 196,082 $7,185 $ 14,855 $ 218,122 $ 190,231 $ (4,021) $ 9,872 $ 196,082
====================================================================================================================================
INTEREST EXPENSE:
Demand deposits $ 12,100 $ 20 $ 334 $ 12,454 $ 10,574 $ (1,683) $ 3,209 $ 12,100
Savings deposits 5,945 (978) (1,202) 3,765 6,813 (734) (134) 5,945
Other time deposits 48,055 5,927 5,062 59,044 50,326 (3,058) 787 48,055
Other borrowings 24,199 2,658 6,194 33,051 24,981 (1,019) 237 24,199
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 90,299 7,627 10,388 108,314 92,694 (6,494) 4,099 90,299
- ------------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $ 105,783 $(442) $ 4,467 $109,808 $ 97,537 $ 2,473 $ 5,773 $ 105,783
====================================================================================================================================
(1) The changes for each category of income and expense are divided between the
portion of change attributable to the variance in rate or volume for that
category. The amount of change that cannot be separated is allocated to each
variance proportionately.
PROVISION FOR LOAN LOSSES
The provision for loan losses in 2000 amounted to $7.6 million compared to
the provision for loan losses of $5.0 million in 1999. The increase in the
provision over prior year levels was due to: (i) loan growth, primarily in the
commercial portfolio; (ii) increases in net charge-offs; and (iii) increases in
nonperforming assets. See "Allowance for Loan Losses" for additional discussion
of trends within the allowance for loan losses in current year and for a
discussion of the Corporation's management of credit risk related to the loan
portfolio.
Net charge-offs for 2000 were $4.1 million or 0.20 percent of average loans
compared to $1.9 million or 0.10 percent of average loans in 1999. The increase
in net charge-offs in 2000 was primarily due to the effect of higher interest
rates and slower economic growth on some customers within the portfolio.
NONINTEREST INCOME
Noninterest income increased $1.8 million to $30.6 million for the year
ended December 31, 2000, compared to $28.8 million for the same period in 1999.
Excluding the non-core items noted in TABLE TWO on page 15, core operating
noninterest income for the year ended December 31, 2000 amounted to $28.8
million compared to $25.2 million for the same period in 1999, an increase of
14.3 percent. The increase was primarily due to increases in service charge
income resulting from applying FCNB's service charge rates to Carolina First
deposit accounts subsequent to the merger, as well as continued growth of First
Charter Insurance Services.
NONINTEREST EXPENSE
Noninterest expense totaled $92.7 million compared to $76.0 million for the
same period in 1999. Excluding the non-core items noted in TABLE TWO on page 15,
core operating noninterest expense for the year ended December 31, 2000 totaled
$75.5 million compared to $76.0 million for the same period in 1999. This
decrease was primarily the result of synergies realized as a result of the
Carolina First merger.
17
18
TABLE FIVE
SELECTED QUARTERLY FINANCIAL DATA
- ----------------------------------------------------------------------------------------------------------------------------------
2000 QUARTERS 1999 Quarters
--------------------------------------------------------------------------------------------
(Dollars in thousands, except
per share amounts) FOURTH THIRD SECOND FIRST Fourth Third Second First
- ----------------------------------------------------------------------------------------------------------------------------------
AS REPORTED
INCOME STATEMENT
Total interest income $ 56,524 $ 54,739 $ 53,343 $ 51,638 $ 50,223 $ 48,252 $ 47,372 $ 48,424
Total interest expense 29,451 28,065 26,199 24,599 23,226 22,000 21,821 23,252
- ----------------------------------------------------------------------------------------------------------------------------------
Net interest income 27,073 26,674 27,144 27,039 26,997 26,252 25,551 25,172
Provision for loan losses 2,075 2,200 1,370 1,970 1,235 815 1,597 1,358
Total noninterest income 7,791 7,686 7,813 7,275 6,191 8,057 8,105 6,442
Total noninterest expense 19,469 17,757 35,670 19,831 20,262 19,065 18,883 17,781
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) before income taxes 13,320 14,403 (2,083) 12,513 11,691 14,429 13,176 12,475
Income taxes 4,223 4,464 681 3,944 3,827 4,678 4,019 3,956
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 9,097 $ 9,939 $ (2,764) $ 8,569 $ 7,864 $ 9,751 $ 9,157 $ 8,519
==================================================================================================================================
PER SHARE DATA:
Basic income (loss) $ 0.29 $ 0.32 $ (0.09) $ 0.27 $ 0.25 $ 0.31 $ 0.29 $ 0.27
Diluted income (loss) 0.29 0.31 (0.09) 0.27 0.25 0.31 0.29 0.26
- ----------------------------------------------------------------------------------------------------------------------------------
CORE OPERATING
INCOME STATEMENT
Total noninterest income $ 6,792 $ 6,478 $ 7,765 $ 7,775 $ 6,257 $ 6,167 $ 6,348 $ 6,442
Total noninterest expense 18,469 17,757 19,420 19,831 20,262 19,065 18,883 17,781
Net income before income taxes 13,321 13,195 14,119 13,013 11,757 12,539 11,419 12,475
Income taxes 4,224 4,081 4,630 4,102 3,850 4,017 3,404 3,956
Net income 9,097 9,114 9,489 8,911 7,907 8,522 8,015 8,519
PER SHARE DATA:
Basic core operating earnings 0.29 0.29 0.30 0.29 0.25 0.27 0.25 0.27
Diluted core operating earnings 0.29 0.29 0.30 0.28 0.25 0.27 0.25 0.26
- ----------------------------------------------------------------------------------------------------------------------------------
SCHEDULE OF OTHER NON-CORE ITEMS
Noninterest income
Gain (loss) on sale of loans $ - $ - $ (99) $ - $ - $ - $ 1,757 $ -
Fixed income portfolio restructuring
loss (1,059) (2,854) - - - - - -
Equity investment write down (231) (571) (299) (500) (66) - - -
Equity method income 28 4,106 446 - - 138 - -
Gain on sale of properties 2,261 527 - - - 1,752 - -
Noninterest expense
Charitable trust (1,000) - - - - - - -
Merger and restructuring charges - - (16,250) - - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total other non-core items (1) 1,208 (16,202) (500) (66) 1,890 1,757 -
- ----------------------------------------------------------------------------------------------------------------------------------
Other non-core items, net of tax $ - $ 825 $(12,253) $ (342) $ (43) $ 1,229 $ 1,142 $ -
==================================================================================================================================
INCOME TAX EXPENSE
Total income tax expense amounted to $13.3 million for the year ended
December 31, 2000 and $16.5 million for the same comparable 1999 period. The
decrease in the income tax expense was attributable to a decrease in taxable
income. The decrease in income tax expense, however, was not proportionate with
the decrease in net income because portions of the merger and acquisition costs
in 2000 were not deductible. This created an increase in the effective tax rate
from 31.8 percent in 1999 to 34.9 percent in 2000.
18
19
1999 VERSUS 1998
The following discussion and analysis provides a comparison of the
Corporation's results of operations for the years ended December 31, 1999 and
1998. This discussion should be read in conjunction with the consolidated
financial statements and related notes on pages 32 through 61.
OVERVIEW
Net income amounted to $35.3 million or $1.11 diluted net income per share
for the year ended December 31, 1999, compared to $16.3 million or $0.50 diluted
net income per share for the year ended December 31, 1998, representing an
increase of $19.0 million. Net income for the year ended December 31, 1999
includes the following non-core earnings items: (i) $1.8 million pre-tax ($1.1
million after-tax) gain associated with the sale of mortgage loans; (ii) $0.1
million pre-tax earnings ($0.1 million after-tax) from equity method income on
certain investments due to unrealized gains in underlying equity investments
during the period; (iii) $1.8 million pre-tax ($1.1 million after-tax) gain
associated with the sale of property; and (iv) $66,000 pre-tax ($43,000
after-tax) loss associated with the write down of certain equity securities due
to other-than-temporary impairment in value. Net income for the year ended
December 31, 1998 includes the following non-core earnings items: (i) $20.3
million pre-tax ($15.4 million after-tax) merger and restructuring charge
primarily associated with the merger with HFNC; (ii) $0.4 million pre-tax ($0.3
million after-tax) gain associated with the sale of First Charter's merchant
card program; (iii) $2.0 million pre-tax ($1.5 million after-tax) gain
associated with the restructuring of the available-for-sale securities
portfolio.
Core operating earnings for the year ended December 31, 1999 amounted to
$33.0 million, or $1.04 per diluted share. This is compared to core operating
earnings for the year ended December 31, 1998 of $29.9 million, or $0.92 per
diluted share. The increase is primarily due to an $8.1 million increase in net
interest income, a $3.6 million increase in noninterest income offset by a $1.3
million increase in the provision for loan losses and a $9.4 million increase in
noninterest expense. Core operating earnings in 1999 equated to a return on
average assets of 1.28 percent compared to 1.22 percent for 1998, and a return
on average equity of 11.28 percent in 1999, versus 9.73 percent in 1998.
NET INTEREST INCOME
For the year ended December 31, 1999, net interest income was $104.0
million, an increase of 8.5 percent from net interest income of $95.9 million in
1998. The increase is attributable to an increase in average interest earning
assets of $115.1 million from $2.3 billion during 1998 to $2.4 billion during
1999. The net interest margin (tax adjusted net interest income divided by
average interest earning assets) increased to 4.37 percent in 1999 from 4.24
percent in 1998.
The average yield on interest-earning assets was 8.11 percent in 1999
compared to 8.26 percent in 1998. The average rate paid on interest-bearing
liabilities was 4.47 percent in 1999, compared to 4.90 percent in 1998. The
average yield earned on loans was 8.66 percent in 1999, compared to 8.83 percent
in 1998. The average rate paid on interest-bearing deposits was 4.20 percent in
1999, from 4.68 percent in 1998. The decreases in the average yields and average
rates for 1999 compared to 1998, resulted from the reduction in the average
prime rate during 1999, from 8.31 percent in 1998 to 8.02 percent on 1999.
PROVISION FOR LOAN LOSSES
The provision for loan losses for 1999 was $5.0 million compared to $3.7
million in 1998. The increase in the provision was due to significant growth in
the commercial loan portfolio during 1999. Also impacting the provision for loan
losses was an increase in nonperforming loans, from $7.8 million at December 31,
1998 to $10.4 million at December 31, 1999.
19
20
NONINTEREST INCOME
Noninterest income was $28.8 million in 1999 compared to $23.9 million in
1998, for an increase of 20.3 percent. The increase in other noninterest income
is attributable to an increase in fee income from the Bank's Insurance Agency
subsidiary as well as increases in service charge income, trust income and
mortgage loan fees.
NONINTEREST EXPENSE
Noninterest expense was $76.0 million in 1999 compared to $86.9 million in
1998. Excluding the $20.3 million in non-core costs primarily associated with
the 1998 merger with HFNC, total noninterest expense was $66.6 million in 1998,
compared to noninterest expense of $76.0 million in 1999. The increase was
primarily attributable to increases in costs associated with salaries and
benefits, occupancy and equipment and other noninterest expense.
Salaries and fringe benefits increased $8.5 million, or 27.6 percent,
primarily due to regular salary increases and investment in additional
personnel, as well as the increased commissions paid on higher levels of
mortgage and brokerage activity.
INCOME TAX EXPENSE
Total income tax expense for 1999 was $16.5 million versus $12.9 million in
1998. The increase is attributable to an increase in taxable income. The
increase in tax expense, however, was not proportionate with the increase in
income because portions of the merger and acquisition costs in 1998 were not
deductible. This created a decrease in the effective tax rate from 44.1 percent
in 1998 to 31.8 percent in 1999.
20
21
FINANCIAL CONDITION
SUMMARY
Total assets at December 31, 2000 and 1999 were $2.9 billion and $2.7
billion, respectively. Gross loans at December 31, 2000 and 1999 were $2.2
billion and $2.0 billion, respectively. Due to increases in certain interest
rates during 2000, and the resulting impact on the Corporation's interest rate
risk, the Corporation sold $45.3 million in lower-yielding mortgage loans in the
second quarter of 2000. Continued strong commercial loan volume during 2000
allowed the Corporation to replace the lower-yielding mortgage loans, which were
sold. Total deposits increased $181.7 million, or 10 percent, to $2.0 billion
and other borrowings increased $28.0 million, or 5.2 percent, to $570.0 million.
INVESTMENT PORTFOLIO
Securities available for sale are a component of the Corporation's
asset-liability management strategy and may be sold in response to liquidity
needs, changes in interest rates, changes in prepayment risk, and other factors.
They are accounted for at fair value, with unrealized gains and losses recorded
net of tax as a component of other comprehensive income.
All securities are classified as available for sale at December 31, 2000.
As maturities, sales, or paydowns occur on securities, the proceeds are utilized
to meet loan demand and to reinvest in additional securities.
At December 31, 2000, securities available for sale were $441.0 million or
15.0 percent of total assets, compared to $486.9 million, or 18.2 percent of
total assets, at December 31, 1999. The carrying value of these securities was
approximately $3.3 million above their amortized cost at December 31, 2000 and
$13.0 million below their amortized cost at December 31, 1999. The tax
equivalent average yield on the securities available for sale portfolio was 6.72
percent for 2000 and 6.20 percent for 1999. The weighted-average life of the
portfolio was 6.19 years at December 31, 2000. In conjunction with the Merger,
the Corporation transferred $35.3 million of Carolina First's securities
classified as held to maturity to available for sale due to the significance of
the impact on the Corporation's interest rate forecast as compared to Corporate
policy. See NOTE FOUR of the consolidated financial statements for further
details on securities.
The following table shows, as of December 31, 2000, 1999 and 1998, 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 SIX
INVESTMENT PORTFOLIO
- -------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------
(Dollars in thousands) 2000 1999 1998
- -------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
US government obligations $ - $ 21,532 $ 52,869
US government agency obligations 158,228 285,080 263,617
Mortgage-backed securities 153,276 56,970 36,944
State, county, and municipal obligations 94,024 88,450 97,435
Equity securities 35,503 34,873 32,427
- -------------------------------------------------------------------------------------------------------
TOTAL $441,031 $486,905 $483,292
=======================================================================================================
SECURITIES HELD TO MATURITY
US government obligations $ - $ 1,996 $ 6,010
US government agency obligations - 7,831 3,035
Mortgage-backed securities - 17,668 16,106
State, county, and municipal obligations - 8,587 8,156
- -------------------------------------------------------------------------------------------------------
TOTAL $ - $ 36,082 $ 33,307
=======================================================================================================
21
22
LOAN PORTFOLIO
Due to increases in certain interest rates during 2000, and the resulting
impact on the Corporation's interest rate risk, the Corporation sold $45.3
million in lower-yielding mortgage loans in the second quarter of 2000. Strong
commercial loan volume during 2000 allowed the Corporation to replace the
lower-yielding mortgage loans which were sold. As a result, gross loans totaled
$2.2 billion and $2.0 billion at December 31, 2000 and 1999, respectively.
The loan portfolio at December 31, 2000 was composed of 10.0 percent
commercial, financial, and agricultural loans, 15.4 percent real estate
construction loans, 69.5 percent real estate mortgage loans, and 5.1 percent
installment loans. This compares to a composition of 10.4 percent commercial,
financial and agricultural, 16.1 percent real estate construction, 68.0 percent
real estate mortgage, and 5.6 percent installment at December 31, 1999.
Approximately $13.6 million of the real estate mortgage loans at December 31,
2000 are loans for which the principal source of repayment comes from the sale
of real estate. The remaining $1.8 billion of loans collateralized by real
estate at December 31, 2000 are (i) other commercial loans for which the primary
source of repayment is derived from the ongoing cash flow of the business and
which are also collateralized by real estate - $897.0 million, (ii) personal
installment loans which are collateralized by real estate - $10.6 million, (iii)
home equity loans - $179.0 million, and (iv) individual residential mortgage
loans - $742.3 million.
The Corporation's primary market area includes the state of North Carolina,
and predominately centers on the Metro region of Charlotte. At December 31,
2000, the majority of the total loan portfolio, as well as a substantial portion
of the commercial and real estate loan portfolio, represents loans to borrowers
within this region. The diversity of the region's economic base tends to provide
a stable lending environment. No significant concentration of credit risk has
been identified due to the diverse industrial base in the region.
In the normal course of business, there are various outstanding commitments
to extend credit, which are not reflected in the consolidated financial
statements. At December 31, 2000, pre-approved but unused lines of credit for
loans totaled $488.6 million and standby letters of credit aggregated $10.9
million. These amounts represent the Bank's exposure to credit risk, and in the
opinion of management, have no more than the normal lending risk that the Bank
commits to its borrowers. If these commitments are drawn, the Bank will obtain
collateral if it is deemed necessary based on management's credit evaluation of
the borrower. Such obtained collateral varies, but may include accounts
receivable, inventory, and commercial or residential real estate. Management
expects that these commitments can be funded through normal operations.
The table below summarizes loans in the classifications indicated as of
December 31, 2000, 1999, 1998, 1997, and 1996.
TABLE SEVEN
LOAN PORTFOLIO COMPOSITION
- ------------------------------------------------------------------------------------------------------------------
December 31,
-----------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Commercial, financial and
agricultural $ 216,515 $ 204,360 $ 161,808 $ 128,924 $ 110,133
Real estate - construction 332,474 316,794 234,916 170,182 132,594
Real estate - mortgage 1,499,618 1,337,369 1,377,372 1,227,049 1,099,421
Installment 109,015 109,512 125,240 140,159 142,843
- ------------------------------------------------------------------------------------------------------------------
Total loans 2,157,622 1,968,035 1,899,336 1,666,314 1,484,991
- ------------------------------------------------------------------------------------------------------------------
Less - allowance for loan
losses (28,447) (25,002) (22,278) (21,100) (19,453)
Unearned income (215) (203) (721) (812) (690)
- ------------------------------------------------------------------------------------------------------------------
LOANS, NET $2,128,960 $1,942,830 $1,876,337 $1,644,402 $1,464,848
- ------------------------------------------------------------------------------------------------------------------
22
23
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, 2000. This table
excludes non-accrual loans.
TABLE EIGHT
MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
- --------------------------------------------------------------------------------------------------
DECEMBER 31, 2000
-----------------------------------------------------
COMMERCIAL,
FINANCIAL, AND REAL ESTATE -
(Dollars in thousands) AGRICULTURAL CONSTRUCTION TOTAL
- --------------------------------------------------------------------------------------------------
Fixed rate:
1 year or less $ 7,987 $ 42,927 $ 50,914
1-5 years 73,506 78,334 151,840
After 5 years 18,074 20,888 38,962
- --------------------------------------------------------------------------------------------------
TOTAL FIXED RATE 99,567 142,149 241,716
- --------------------------------------------------------------------------------------------------
Variable rate:
1 year or less 76,311 111,581 187,892
1-5 years 29,190 66,611 95,801
After 5 years 7,498 7,774 15,272
- --------------------------------------------------------------------------------------------------
TOTAL VARIABLE RATE 112,999 185,966 298,965
- --------------------------------------------------------------------------------------------------
TOTAL SELECTED LOANS $212,566 $328,115 $540,681
- --------------------------------------------------------------------------------------------------
23
24
NONPERFORMING ASSETS
Nonperforming assets, which consist of foreclosed assets, nonaccrual loans,
and restructured loans, were $29.6 million at December 31, 2000, as compared to
$12.7 million at December 31, 1999. As a percentage of total assets,
nonperforming assets have increased to 1.01 percent at December 31, 2000
compared to 0.47 percent at December 31, 1999. This increase was primarily due
to the effect of higher interest rates and slower economic growth on some
customers.
Total nonperforming assets and loans 90 days or more past due and still
accruing interest at December 31, 2000 were $30.0 million or 1.39 percent of
total loans and other real estate, compared to $16.3 million or 0.83 percent of
total loans and other real estate at December 31, 1999. Total nonperforming
assets and loans 90 days or more past due and still accruing interest have
increased during the period due to an increase in other real estate of $0.7
million and an increase in nonaccrual loans of $16.2 million mitigated by a $3.2
million decrease in loans 90 days or more past due and still accruing. The
increase in nonaccrual loans was not concentrated in any one industry and was
primarily due to the effect of higher interest rates and slower economic growth
on some customers. These relationships are currently in the process of
collection. Interest income that would have been recorded on nonaccrual loans
and restructured loans for the years ended December 31, 2000, 1999 and 1998, had
they performed in accordance with their original terms, amounted to
approximately $2.3 million, $1.0 million, and $0.5 million, respectively.
Interest income on all such loans included in the results of operations for
2000, 1999 and 1998 amounted to approximately $1.3 million, $0.4 million, and
$0.2 million, respectively.
The determination to discontinue the accrual of interest is based on a
review of each loan. Generally, accrual of 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. Management's 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. Based on such a
review, Management has determined it is probable that the principal as well as
the accruing interest on these loans will be collected in full.
The table below summarizes the Corporation's nonperforming assets and loans
90 days or more past due and still accruing interest as of the dates indicated.
TABLE NINE
NONPERFORMING AND PROBLEM ASSETS
- ---------------------------------------------------------------------------------------------------------------------
December 31,
------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
Nonaccrual loans $26,587 $10,353 $ 7,190 $ 6,839 $ 8,639
Restructured loans - 37 577 587 643
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING LOANS 26,587 10,390 7,767 7,426 9,282
- ---------------------------------------------------------------------------------------------------------------------
Other real estate 2,989 2,262 3,863 4,520 1,771
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS 29,576 12,652 11,630 11,946 11,053
- ---------------------------------------------------------------------------------------------------------------------
Loans 90 days or more past due and
still accruing interest 430 3,638 2,381 2,261 736
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NONPERFORMING ASSETS AND LOANS 90 DAYS OR
MORE PAST DUE AND STILL ACCRUING INTEREST $30,006 $16,290 $14,011 $14,207 $11,789
=====================================================================================================================
Nonperforming assets as a % of
Total assets 1.01% 0.47% 0.45% 0.52% 0.53%
Loans and other real estate 1.37% 0.64% 0.61% 0.72% 0.74%
Ratio of allowance for loan losses to
nonperforming loans 1.07X 2.41x 2.87x 2.84x 2.10x
- ---------------------------------------------------------------------------------------------------------------------
24
25
SUMMARY OF LOAN LOSS AND RECOVERY EXPERIENCE
The table below presents certain data for the years ended December 31,
2000, 1999, 1998, 1997, and 1996, 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 (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 and
(viii) the ratio of the allowance for loan losses to loans at year-end.
TABLE TEN
ALLOWANCE FOR CREDIT LOSSES
- -----------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31,
--------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1 $ 25,002 $ 22,278 $ 21,100 $ 19,453 $ 17,959
- -----------------------------------------------------------------------------------------------------------------------------------
LOAN CHARGE-OFFS:
Commercial, financial and
agricultural 2,532 951 870 741 646
Real estate - construction
and development 351 36 390 - -
Real estate - mortgage 519 138 173 344 135
Installment 1,661 1,648 1,984 1,814 1,449
- -----------------------------------------------------------------------------------------------------------------------------------
Total loans charged-off 5,063 2,773 3,417 2,899 2,230
- -----------------------------------------------------------------------------------------------------------------------------------
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial, financial and agricultural 623 295 305 176 682
Real estate - construction - - 76 - 3
Real estate - mortgage 49 72 51 71 75
Installment 334 494 422 349 304
- -----------------------------------------------------------------------------------------------------------------------------------
Total recoveries of loans previously charged-off 1,006 861 854 596 1,064
- -----------------------------------------------------------------------------------------------------------------------------------
Net charge-offs 4,057 1,912 2,563 2,303 1,166
- -----------------------------------------------------------------------------------------------------------------------------------
Provision for loan losses 7,615 5,005 3,741 3,681 2,660
Adjustment for merged banks - - - 269 -
Adjustment for loan sales (113) (369) - - -
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31 $ 28,447 $ 25,002 $ 22,278 $ 21,100 $ 19,453
===================================================================================================================================
Average loans, net of unearned
income $ 2,074,971 $ 1,878,509 $ 1,783,271 $ 1,517,358 $ 1,350,636
Net charge-offs to average loans 0.20 % 0.10 % 0.14 % 0.15 % 0.09 %
Allowance for loan losses to
gross loans at year-end 1.32 1.27 1.17 1.27 1.31
- -----------------------------------------------------------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
All estimates of the loan portfolio risk, including the adequacy of the
allowance for loan losses, are subject to general and local economic conditions,
among other factors, which are unpredictable and beyond the Corporation's
control. Since a significant portion of the loan portfolio is comprised of real
estate loans and loans to area businesses, a continued risk is that the real
estate market and economic conditions could change and could result in future
losses or require increases in the provision for loan losses.
Management currently uses several measures to assess and control the loan
portfolio risk. For example, all loans over a certain dollar amount must receive
an in-depth review by an analyst in the Bank's Credit Department. Any issues
regarding risk assessments of those credits are addressed by the Bank's Senior
Risk Managers and factored into management's decision to originate or renew the
loan. Furthermore, large commitments are reviewed by both an Executive Loan
Committee and a Board of Directors Loan Committee comprised of executive
management, the chief credit officer and senior lending officers of the Bank.
The Corporation also continues to employ an independent third party risk
assessment group to review the underwriting, documentation and risk grading
analysis. This third party group reviews all loan relationships above a certain
dollar amount and a sampling of all other credits. The third party's evaluation
and report is shared with Executive Management, the Loan and Audit Committee of
the Bank and, ultimately, is reported to the Bank and Corporation Board of
Directors.
25
26
Management uses the information developed from the procedures described
above in evaluating and grading the loan portfolio. This continual grading
process is used to monitor the credit quality of the loan portfolio and to
assist management in determining the appropriate levels of the allowance for
loan losses.
As part of the continual grading process, individual commercial loans are
assigned a credit risk grade based on their credit quality, which is subject to
change as conditions warrant. Any changes in those risk assessments as
determined by the outside risk assessment group, regulatory examiners or the
Corporation's Risk Management Division are also considered. Management considers
certain commercial loans within weaker credit risk grades to be individually
impaired and measures such impairment based upon the value of the collateral. An
estimate of an allowance is made for all other graded loans in the portfolio
based on their assigned credit risk grade, type of loan and other matters
related to credit risk. In the allowance for loan loss analysis process, the
Bank also aggregates non-graded loans into pools of similar credits and reviews
the historical loss experience associated with these pools as additional
criteria to allocate the allowance to each category.
At December 31, 2000 the allowance for loan losses was $28.4 million or
1.32 percent of gross loans compared to $25.0 million or 1.27 percent at
December 31, 1999 and $22.3 million, or 1.17 percent at December 31, 1998. The
allowance for loan losses increased over the periods presented as a result of
changes in the portfolio's perceived risk profile. The increase in the allowance
at December 31, 2000 and 1999 was due to loan growth, increased nonperforming
assets and the effect of higher interest rates and slower economic growth on
some customers.
Management considers the allowance for loan losses adequate to cover
inherent losses in the Bank's loan portfolio as of the date of the financial
statements. Management believes it has established the allowance in accordance
with accounting principles generally accepted in the United States of America
and in consideration of the current economic environment. While management uses
the best information available to make evaluations, future additions to the
allowance may be necessary based on changes in economic and other conditions.
Additionally, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowances for loan losses.
Such agencies may require the recognition of adjustments to the allowances based
on their judgments of information available to them at the time of their
examinations.
The following table presents the dollar amount of the allowance for loan
losses applicable to major loan categories, 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, 2000, 1999, 1998, 1997, and
1996.
TABLE ELEVEN
Allocation of the Allowance for Loan Losses (1)
- -----------------------------------------------------------------------------------------------------------------------
December 31,
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------
LOAN/ Loan/ Loan/ Loan/ Loan/
(Dollars in thousands) AMOUNT TOTAL LOANS Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
- -----------------------------------------------------------------------------------------------------------------------
Commercial, financial
and agricultural $ 5,465 10 % $ 4,773 10 % $ 3,322 8 % $ 2,240 8 % $ 1,984 7 %
Real estate -
construction 6,568 15 5,276 16 3,408 12 2,952 10 4,065 9
Real estate - mortgage 15,120 70 12,583 68 13,378 73 13,355 74 11,941 74
Installment 1,294 5 2,370 6 2,170 7 2,553 8 1,463 10
- -----------------------------------------------------------------------------------------------------------------------
TOTAL $28,447 100 % $25,002 100 % $22,278 100 % $21,100 100 % $19,453 100 %
=======================================================================================================================
(1) The allowance amounts assigned to each category of loans represent the
historical loss experience of the loans adjusted for current economic events or
conditions.
26
27
DEPOSITS
TABLE THREE provides information on the average amounts of deposits and the
rates paid by deposit category. Total deposits at December 31, 2000 were $2.00
billion, a 10 percent increase from December 31, 1999. Insured money market
accounts increased $8.6 million or 3.5 percent; and certificates of deposit
increased $225.6 million or 24.8 percent; while demand deposits decreased $2.7
million or 5.3 percent; and savings deposits decreased $49.8 million or 28.9
percent. Increases in money market accounts and certificates of deposit were due
to marketing campaigns directed toward packaging and promoting these accounts
more effectively as well as the purchase of four branches, while the reduction
in demand deposit and savings were due to the Corporation's management of
interest rates paid. See NOTE EIGHT of the consolidated financial statements for
further details on deposits.
OTHER BORROWINGS
Other borrowings increased $28.0 million during the year, to $570.0 million
at December 31, 2000, from $542.0 million at December 31, 1999. The components
of this increase consisted primarily of an increase of $20.9 million in FHLB
advances and an increase of $7.7 million in short term borrowings consisting
primarily of federal funds purchased and securities sold under agreements to
repurchase. These borrowings were principally used to fund loan growth.
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 of Atlanta ("FHLB") borrowings for the
years ended December 31, 2000, 1999 and 1998.
TABLE TWELVE
OTHER BORROWINGS
- ----------------------------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------
Federal funds purchased,
securities sold under
agreements to repurchase
and FHLB borrowings:
Balance as of Dec. 31 $ 570,024 $ 542,021 $ 481,019
Average balance 556,859 447,633 443,344
Maximum outstanding at
any month end 627,916 633,519 505,900
Interest rate as of Dec. 31 5.98% 5.18% 5.48%
Average interest rate 5.94% 5.41% 5.63%
- ----------------------------------------------------------------------------------
At December 31, 2000, FCNB had one available line of credit with the FHLB
totaling $514.2 million with approximately $455.7 million outstanding. The
outstanding amounts consisted of $187.3 million maturing in 2001, $30.0 million
maturing in 2003, $55.0 million maturing in 2004, $76.0 million in 2009, $107.0
million maturing in 2010, and $0.4 million maturing in 2011. At December 31,
2000, such amounts were outstanding at market interest rates for the specific
advance program and maturity. In addition, the FHLB requires the Bank to pledge
collateral to secure the advances in the form of the Bank's FHLB stock and
qualifying 1-4 family residential mortgage loans.
LIQUIDITY
Liquidity is the ability to maintain cash flows adequate to fund operations
and meet obligations and other commitments on a timely and cost-effective basis.
Liquidity is provided by the ability to attract deposits, flexible repricing
schedules in a sizable portion of the loan portfolio, current earnings, a strong
capital base and the ability to use alternative funding sources that complement
normal sources. Management's asset-liability policy is to maximize net interest
income while continuing to provide adequate liquidity to meet continuing loan
demand and deposit withdrawal requirements and to service normal operating
expenses.
27
28
If additional funding sources are needed, the Bank has access to federal
fund lines at correspondent banks and borrowings from the Federal Reserve
discount window. In addition to these sources, as described above, the Bank is a
member of the FHLB, which provides access to FHLB lending sources. At December
31, 2000, the Bank had an available line of credit with the FHLB totaling $514.2
million with $58.5 million available. At December 31, 2000, FCNB also had
federal funds back-up lines of credit totaling $56.0 million, of which there
were no amounts outsta