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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, 2001 - 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 6, 2002 was $519,898,621.
As of March 6, 2002 the Registrant had outstanding 30,798,734 shares
of Common Stock, no par value.
DOCUMENTS INCORPORATED BY REFERENCE
PART III: Definitive Proxy Statement filed with the Securities and
Exchange Commission pursuant to Regulation 14A promulgated pursuant to the
Securities Exchange Act of 1934 in connection with the 2002 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).
FIRST CHARTER CORPORATION
AND SUBSIDIARIES
FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business...................................................................................... 3
Item 2. Properties.................................................................................... 8
Item 3. Legal Proceedings............................................................................. 9
Item 4. Submission of Matters to a Vote of Security Holders........................................... 9
Item 4A. Executive Officers of the Registrant.......................................................... 9
PART II
Item 5. Market For Registrant's Common Stock and Related Shareholder Matters.......................... 10
Item 6. Selected Financial Data....................................................................... 10
Item 7. Management's Discussion and Analysis of Financial Conditions and Results
of Operations............................................................................. 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................... 37
Item 8. Financial Statements and Supplementary Data................................................... 38
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................................... 71
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 71
Item 11. Executive Compensation........................................................................ 71
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 71
Item 13. Certain Relationships and Related Transactions................................................ 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 71
2
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 Bank ("FCB" 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.
FCB, a North Carolina state bank, is the successor entity to The
Concord National Bank, which was established in 1888. On December 22, 1997, the
Corporation acquired Carolina State Bank ("CSB") which was also merged into
FCB. 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 FCB in March 1999. On April 4, 2000,
the Corporation acquired Carolina First BancShares, Inc. ("Carolina First"),
the holding company for Lincoln Bank, Cabarrus Bank and Community Bank & Trust,
which merged into the Corporation. Carolina First, a North Carolina
corporation, operated, though its subsidiary banks, 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 Insurance 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. On
June 22, 2001, First Charter's banking subsidiary completed its conversion from
a national bank to First Charter Bank, a North Carolina state bank. The change
was completed after a cost benefit analysis of supervisory regulatory charges
and does not represent any disagreement with the Corporation's or the Bank's
former regulators. The Bank will continue to operate its financial center
network franchise under the "First Charter" brand name.
FCB is a full service bank, which now operates 52 financial centers,
five insurance offices and one mortgage origination office in addition to its
main office, as well as 99 ATMs (automated teller machines). These facilities
are located in Ashe, Alleghany, Avery, Buncombe, Cabarrus, Cleveland, Guilford,
Iredell, Jackson, Lincoln, McDowell, Mecklenburg, Rowan, Rutherford, Swain,
Transylvania and Union counties of North Carolina. Further, FCB recently opened
one mortgage origination office in Virginia.
Through its financial center locations, the Bank provides a wide range
of banking products, including interest bearing and non-interest bearing
checking accounts; "Money Market Rate" accounts; certificates of deposit;
individual retirement accounts; overdraft protection; commercial, consumer,
agriculture, real estate, residential mortgage and home equity loans; personal
and corporate trust services; safe deposit boxes; and automated banking. In
addition, through First Charter Brokerage Services, a subsidiary of FCB, the
Registrant offers full service and discount brokerage services, annuity sales
and financial planning services pursuant to a third party arrangement with
UVEST Investment Services. The Bank also operates six other subsidiaries: First
Charter Insurance Services, Inc., First Charter of Virginia Realty Investments,
Inc., First Charter Realty Investments, Inc., FCB Real Estate, Inc., First
Charter Real Estate Holding, LLC., and First Charter Leasing, Inc. First
Charter Insurance Services, Inc. is a North Carolina corporation formed to meet
the insurance needs of businesses and individuals throughout the Charlotte
metropolitan area. First Charter of Virginia Realty Investments, Inc. is a
Virginia corporation engaged in the mortgage origination business and also acts
as a holding company for First Charter Realty Investments, Inc. a Delaware real
estate investment trust. FCB Real Estate, Inc. is a North Carolina real estate
investment trust and First Charter Real Estate Holdings, LLC is a North
Carolina limited liability
3
company. First Charter Leasing, Inc. is a North Carolina corporation, which
leases commercial equipment. The Bank also has a majority ownership in Lincoln
Center at Mallard Creek, LLC. Lincoln Center is a three-story office building
occupied in part by a branch of FCB.
At December 31, 2001, the Registrant and its subsidiaries had 833
full-time equivalent employees. The Registrant had no employees who were not
also employees of FCB. 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.
FCB'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"). First Charter
is a North Carolina chartered banking corporation and a Federal Reserve member
bank, with deposits insured by the Federal Deposit Insurance Corporation's
("FDIC") insurance funds: the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF"). FCB is subject to extensive regulation and
examination by the office of the North Carolina Commissioner of Banks (the "NC
Commissioner") under the direction and supervision of the North Carolina State
Banking Commission (the "NC Banking Commission") and by the FDIC, which insures
its deposits to the maximum extent permitted by law.
In addition to state and federal banking laws, regulations and
regulatory agencies, the Corporation and FCB 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
4
limited to banking or managing or controlling banks or furnishing services to
or performing services for its subsidiaries, or any other activity which the
Federal Reserve determines to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto. In making such
determinations, the Federal Reserve is required to consider whether the
performance of such activities by a bank holding company or its subsidiaries
can reasonably be expected to produce benefits to the public such as greater
convenience, increased competition or gains in efficiency that outweigh
possible adverse effects, such as undue concentration of resources, decreased
or unfair competition, conflicts of interest or unsound banking practices.
Generally, bank holding companies are required to obtain prior
approval of the Federal Reserve to engage in any new activity not previously
approved by the Federal Reserve or to acquire more than 5 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 FCB, 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 a 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.
5
Regulation of FCB. FCB is organized as a North Carolina state
chartered bank subject to regulation, supervision and examination by the
Federal Reserve and NC Banking Commission, and to regulation by the FDIC. The
federal and state laws and regulations are applicable to required reserves
against deposits, 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 federal and state banking agencies have broad authority and
discretion in connection with their supervisory and enforcement activities and
examination policies, including policies involving the classification of assets
and the establishment of loan loss reserves for regulatory purposes. Such
actions by the regulators prohibit member banks from engaging in unsafe or
unsound banking practices. The Bank is also subject to certain reserve
requirements established by the Federal Reserve Board and is a member of the
Federal Home Loan Bank ("FHLB") of Atlanta, which is one of the 12 regional
banks comprising the FHLB System.
CAPITAL AND OPERATIONAL REQUIREMENTS
The Federal Reserve and the FDIC issued substantially similar minimum
capital adequacy standards of which both the Corporation and the Bank must
comply. 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 regulations, based primarily on
relative credit risk. At December 31, 2001, 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 $284,107 8.80% $284,107 12.80% $310,485 13.99%
Required 129,096 4.00 88,773 4.00 177,546 8.00
Excess 155,011 4.80 195,334 8.80 132,939 5.99
(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
6
undercapitalized) and requires the respective federal regulatory agencies to
implement systems for "prompt corrective action" for insured depository
institutions that do not meet minimum capital requirements within such
categories. FDICIA imposes progressively more restrictive constraints on
operations, management and capital distributions, depending on the category in
which an institution is classified. Failure to meet the capital guidelines
could also subject a banking institution to capital raising requirements. In
addition, pursuant to FDICIA, the various regulatory agencies have prescribed
certain non-capital standards for safety and soundness relating generally to
operations and management, asset quality and executive compensation, and such
agencies may take action against a financial institution that does not meet the
applicable standards.
The various regulatory agencies have adopted substantially similar
regulations that define the five capital categories identified by FDICIA, using
the Total Risk-Based Capital, Tier 1 Risk-Based Capital and Leverage Capital
Ratios as the relevant capital measures. Such regulations establish various
degrees of corrective action to be taken when an institution is considered
undercapitalized. Under the regulations, a "well capitalized" institution must
have a Tier 1 Capital ratio of at least 6.00 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, FCB is considered well
capitalized. See NOTE EIGHTEEN 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.
The revised guidelines do not materially impact the Corporation's or FCB's
regulatory capital ratios or FCB's well-capitalized status.
Distributions. The primary source of funds for distributions paid by
the Corporation to its shareholders is dividends received from FCB. Federal
regulatory and other requirements, as well as laws and regulations of the State
of North Carolina, restrict the lending of funds by FCB to the Corporation and
the amount of dividends that FCB can pay to the Corporation. The Federal
Reserve regulates the amount of FCB dividends payable to the Corporation based
on undivided profits for the last two years, less dividends already paid. As of
December 31, 2001, FCB had paid the full allowable amount of dividends to the
Corporation. FCB obtains regulatory approval prior to payment of dividends to
the Corporation. See NOTE NINETEEN of the consolidated financial statements.
In addition to the foregoing, the ability of the Corporation and FCB
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 FCB is further subject to the prior
claims of creditors against the Bank.
Deposit Insurance. The deposits of FCB 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
7
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 Federal Reserve, statistical
analyses of financial statements and other relevant information.
The deposits of FCB 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 an assessment of 27 basis points per $100 of insured
deposits, 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. Presently FCB is not
required to pay any additional assessment to the FDIC. However, the FDIC has
publicly stated that its Bank Insurance Fund will soon fall below its mandatory
reserve limit and that such an event would likely trigger additional premiums
for all banks. At this time, the amount of any future premiums required to be
paid by FCB is not known.
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 FCB 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 Financial Condition and Results of
Operations". This section addresses particular risks and uncertainties that are
specific to our business.
ITEM 2. PROPERTIES
The principal offices of the Corporation are located in the 230,000
square foot First Charter Center located at 10200 David Taylor Drive in
Charlotte, North Carolina, which is owned by the Bank through its subsidiaries.
The First Charter Center contains the corporate offices of the Corporation, the
main office of FCB, as well as the operations, mortgage loan and data
processing departments of FCB.
The Corporation also leases a facility in Reston, Virginia for the
origination of real estate loans, as well as a holding company for certain
subsidiaries that own real estate and real estate-related assets, including
first and second residential mortgage loans.
In addition to its main office, FCB has 52 financial centers, five
insurance offices, one mortgage origination office and 99 ATMs located in 17
counties throughout North Carolina. Further, FCB recently opened one mortgage
origination office in Virginia.
8
ITEM 3. LEGAL PROCEEDINGS
The Corporation and the Bank are defendants in certain claims and legal
actions arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, the ultimate disposition of
these matters is not expected to have a material adverse effect on the
consolidated operations, liquidity or financial position of the Corporation or
the Bank.
ITEM 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, 2001.
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 61 President and Chief Executive Officer 1986 - Present
of the Registrant and FCB
Robert O. Bratton 53 Executive Vice President, Chief 1983 - Present
Financial Officer, Treasurer of the
Registrant and Executive Vice
President of FCB
Vice President Bank of Union 1996 - 1998
Robert E. James, Jr 51 Executive Vice President of the 1999 - Present
Registrant and Executive Vice
President of FCB
Group Executive: Market Planning & 1996 - 1998
Customer Development, Centura Bank
Executive Vice President for 1994 - 1998
Metro Markets, Centura Bank
C. Thomas McFarland 44 Executive Vice President 1999 - Present
of the Registrant and Executive
Vice President of FCB
Executive Vice President and 1996 - 1999
Alternative Delivery Systems
Manager, BB&T
Stephen M. Rownd 43 Executive Vice President 2000 - Present
of the Registrant and Executive
Vice President and Chief
Credit Officer of FCB
Director of Risk Management, 1999 - 2000
SunTrust Banks, Inc.
Executive Vice President and 1996 - 1999
Chief Credit Officer, SunTrust
Bank of Gulf Coast
9
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
---------------------------------------------
2000 first $14.6250 $12.5000
second 17.5000 12.5000
third 16.8750 13.6250
fourth 15.7500 13.0000
2001 first 16.0000 13.4380
second 18.7500 15.1250
third 18.4500 15.4600
fourth 18.4900 15.8500
As of March 6, 2002, there were 9,123 record holders of the
Corporation's Common Stock. During 2000 and 2001, 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
------------------------
2000 first $0.17
second 0.17
third 0.18
fourth 0.18
2001 first 0.18
second 0.18
third 0.18
fourth 0.18
For additional information regarding the Corporation's ability to pay
dividends, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Capital Resources" on page 33.
ITEM 6. SELECTED FINANCIAL DATA
See TABLE ONE in Item 7 for Selected Financial Data.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the consolidated financial statements of the Corporation and the notes
thereto, 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 those
contemplated by such forward looking statements include, among others, the
following possibilities: (1) projected business increases in connection with
the implementation of our business plan are lower than expected; (2)
competitive pressure among financial services companies increases
significantly; (3) costs or difficulties related to the integration of
acquisitions or expenses in general are greater than expected; (4) general
economic conditions, in the markets in which the company does business, are
less favorable than expected; (5) changes in the interest rate environment
reduce interest margins and affect funding sources; (6) changes in market rates
and prices may adversely affect the value of financial products; (7) any
inability to generate liquidity necessary to meet loan demand or other cash
needs; (8) any inability to accurately predict the adequacy of the loan loss
allowance needs; (9) legislation or regulatory requirements or changes
adversely affect the businesses in which the company is engaged; and (10)
decisions to change the business mix of the company.
OVERVIEW
The Corporation is a bank holding company established as a North
Carolina Corporation in 1983, with one wholly-owned banking subsidiary, FCB.
The Corporation's principal executive offices are located in Charlotte, North
Carolina. FCB is a full-service bank and trust company with 52 financial
centers, five insurance offices and one mortgage origination office located in
17 counties throughout North Carolina. Further, FCB recently opened one
mortgage origination office in Virginia.
Through its financial center locations, the Bank provides a wide range
of banking products, including interest bearing and non-interest bearing
checking accounts; "Money Market Rate" accounts; certificates of deposit;
individual retirement accounts; overdraft protection; commercial, consumer,
agriculture, real estate, residential mortgage and home equity loans; personal
and corporate trust services; safe deposit boxes; and automated banking.
In addition, through First Charter Brokerage Services, a subsidiary of
FCB, the Registrant offers full service and discount brokerage services,
annuity sales and financial planning services pursuant to a third party
arrangement with UVEST Investment Services. The Bank also operates six other
subsidiaries: First Charter Insurance Services, Inc., First Charter of Virginia
Realty Investments, Inc., First Charter Realty Investments, Inc., FCB Real
Estate, Inc., First Charter Real Estate Holding, LLC., and First Charter
Leasing, Inc. First Charter Insurance Services, Inc. is a North Carolina
corporation formed to meet the insurance needs of businesses and individuals
throughout the Charlotte metropolitan area. First Charter of Virginia Realty
Investments, Inc. is a Virginia corporation organized as a holding company for
First Charter Realty Investments, Inc. a real estate investment trust organized
in Delaware, FCB Real Estate, Inc. a real estate investment trust organized in
North Carolina and First Charter Real Estate Holdings, LLC. First Charter
Leasing, Inc. is a North Carolina corporation, which leases commercial
equipment. The Bank also has a majority ownership in Lincoln Center at Mallard
Creek, LLC. Lincoln Center is a three-story office building occupied in part by
a branch of FCB.
On June 22, 2001, First Charter's banking subsidiary completed its
conversion from a national bank to First Charter Bank, a North Carolina state
Bank. The change was completed after a cost benefit analysis
11
of supervisory regulatory charges and does not represent any disagreement with
the Corporation's or the Bank's former regulators. The Bank will continue to
operate its financial center network franchise under the "First Charter" brand
name.
The Corporation's operations are divided into five operating segments:
commercial banking, brokerage services, insurance services, mortgage and
financial management. These segments are identified based on the Corporation's
organizational structure and the Corporation's chief operating decision makers
review separate results of operations of each of these operating segments. Of
these segments, the results of operations of First Charter Bank (commercial
banking) comprise the substantial majority of the consolidated net income,
revenues and assets of the Corporation, as set forth in NOTE TWO of the
consolidated financial statements. Accordingly, a substantial portion of the
discussion contained herein relates to the results of operations of First
Charter Bank.
MERGER AND ACQUISITIONS
Poolings-of-Interests. 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.
During 1998, the Corporation acquired HFNC. HFNC was merged into the
Corporation effective September 30, 1998.
During 1997, the Corporation acquired CSB, which was merged into FCB
at that time. CSB financial centers now operate as FCB 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.
Purchases. Insurance Agencies. Since 1999, the Corporation has
acquired five insurance agencies using the purchase accounting method. The
majority of the year over year increases we have experienced in insurance
services income is due to the acquisition noted below. The five insurance
agencies acquired since 1999 and the respective date of acquisition include:
Franklin Brown Company (January 31, 1999), J. L. Suttle, Jr. and Co., Inc.
(December 31, 1999), Faulkner Investments, Inc. (January 1, 2000), Banner and
Greene Agency, Inc. (April 1, 2001), and Hoffman & Young, Inc. (July 31, 2001).
Financial Centers. 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.
Each of these acquisitions was accounted for as a purchase.
Accordingly, the results of operations of these companies have been included in
the consolidated results of operations of the Corporation since the date of the
respective acquisition.
12
CRITICAL ACCOUNTING POLICIES
The Corporation's significant accounting policies are set forth in
NOTE ONE of the consolidated financial statements. Of these policies, the
Corporation considers its policy regarding the allowance for loan losses to be
one of its most critical accounting policies, because it requires management's
most subjective and complex judgments. The Corporation has developed
appropriate policies and procedures for assessing the adequacy of the allowance
for loan losses, recognizing that this process requires a number of assumptions
and estimates with respect to its loan portfolio. The Corporation's assessments
may be impacted in future periods by changes in economic conditions, the impact
of regulatory examinations and the discovery of information with respect to
borrowers which is not known to management at the time of the issuance of the
consolidated financial statements. For additional discussion concerning the
Corporation's allowance for loan losses and related matters, see ALLOWANCE FOR
LOAN LOSSES.
In addition, the Corporation also considers its policy regarding
equity method investees to be a critical accounting policy due to the
assumptions in the valuation of these investments and other subjective factors.
The Corporation's equity method investments represent investments in venture
capital limited partnerships which invest in early stage companies.
The Corporation's recognition of earnings or losses from equity method
investees is determined by the Corporation's share of the investee's earnings
on a quarterly basis. The limited partnerships provide their quarterly
financial information on a quarter lag basis, so the Corporation's policy is to
record its share of earnings or losses on these equity method investments on a
quarter lag basis.
These limited partnerships record their investments in investee
companies on a fair value basis, with changes in the underlying fair values
being reflected as an adjustment to their earnings in the period such changes
are determined. The earnings of these limited partnerships, and therefore the
amount recorded on an equity-method basis by the Corporation, are impacted
significantly by changes in the underlying value of the companies in which
these limited partnerships invest. All of the companies in which these limited
partnerships invest are privately held, and their market values are not readily
available. Estimations of these values are made quarterly by the management of
the limited partnerships, and are subject to review by the Corporation for
reasonableness. The assumptions in the valuation of these investments by the
limited partnerships include the viability of the business model, the ability
of the company to obtain alternative financing, their ability to generate
revenues in future periods and other subjective factors. Given the inherent
risks associated with this type of investment in the current economic
environment, there can be no guarantee that there will not be widely varying
gains or losses on these equity method investments in future periods.
13
RESULTS OF OPERATIONS
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.
2001 VERSUS 2000
The following discussion and analysis provides a comparison of the
Corporation's results of operations for the years ended December 31, 2001 and
2000. This discussion should be read in conjunction with the consolidated
financial statements and related notes on pages 38 through 70.
Net income amounted to $35.3 million, or $1.12 diluted net income per
share for the year ended December 31, 2001, compared to $24.8 million or $0.79
diluted net income per share for the year ended December 31, 2000, representing
an increase of $10.5 million. The increase in net income was primarily due to
restructuring charges and merger-related expense of $16.3 million pre-tax
($12.3 million, or $0.39 per diluted share after-tax) in 2000, primarily
associated with the Carolina First merger, which occurred during the three
months ended June 30, 2000. The increase in net income due to the restructuring
charges and merger-related expenses was offset in 2001 by (i) a $2.4 million
decrease in net interest income resulting from a compression of the net
interest margin and decreasing loan demand during 2001 and (ii) increased
expenses resulting primarily from an increase in occupancy and equipment
expense resulting from the move into the new First Charter Center. Net income
in 2001 and 2000 was also impacted certain other items, which are set fort in
TABLE TWO. These other items are considered nonrecurring in nature by
management and therefore should be considered in year over year analysis of
results of operations.
Net income for the fourth quarter 2001 was $8.2 million, or $0.26 per
diluted share, compared to $9.1 million, or $0.29 per diluted share in the
fourth quarter 2000. The decrease in net income was primarily attributable to a
$5.3 million increase in noninterest expense partially offset by a $3.4 million
increase in noninterest income. The increase in noninterest expense was due to
an increase in occupancy and equipment expense associated with the move into
the First Charter Center, expenses related to the implementation of a new
computer operating system and increased professional service costs. The
increase in noninterest income was due to the active management of our
securities portfolio, service charge income on deposit accounts, mortgage loan
fees, trading gains, and the continued growth of First Charter Insurance
Services. Net income was also impacted by the other items described in TABLE
FIVE. These other items are considered nonrecurring in nature by management and
therefore should be considered in year over year analysis of results of
operations.
14
TABLE ONE
SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
(Dollars in thousands, -----------------------------------------------------------------------------------
except per share amounts) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT
Interest income $ 215,276 $ 216,143 $ 194,271 $ 188,561 $ 168,367
Interest expense 109,912 108,314 90,299 92,694 82,400
- -------------------------------------------------------------------------------------------------------------------------------
Net interest income 105,364 107,829 103,972 95,867 85,967
Provision for loan losses 4,465 7,615 5,005 3,741 3,681
Noninterest income 38,773 30,666 28,795 23,912 21,845
Noninterest expense 87,579 92,727 75,991 86,888 63,984
- -------------------------------------------------------------------------------------------------------------------------------
Income before income taxes 52,093 38,153 51,771 29,150 40,147
Income taxes 16,768 13,312 16,480 12,859 14,255
- -------------------------------------------------------------------------------------------------------------------------------
Net income $ 35,325 $ 24,841 $ 35,291 $ 16,291 $ 25,892
===============================================================================================================================
PER COMMON SHARE
Basic net income $ 1.12 $ 0.79 $ 1.12 $ 0.51 $ 0.84
Diluted net income 1.12 0.79 1.11 0.50 0.83
Cash dividends declared(1) 0.72 0.70 0.68 0.61 0.53
Period-end book value 10.06 9.79 9.33 9.57 9.29
Average shares outstanding - basic 31,480,109 31,435,342 31,504,746 31,782,843 30,712,930
Average shares outstanding - diluted 31,660,985 31,580,328 31,772,060 32,423,533 31,411,944
RATIOS
Return on average shareholders' equity 11.03% 8.29% 12.08% 5.30% 8.80%
Return on average assets 1.14 0.90 1.37 0.67 1.26
Net interest margin 3.74 4.26 4.43 4.29 4.35
Average loans to average deposits 95.43 110.52 104.60 113.42 97.03
Average equity to average assets 10.31 10.84 11.31 12.56 14.31
Efficiency ratio(2) 60.97 64.09 56.85 73.04 61.80
Dividend payout 64.29 88.61 61.26 122.00 63.86
SELECTED PERIOD END BALANCES
Securities available for sale $ 1,077,365 $ 441,031 $ 486,905 $ 483,292 $ 438,244
Securities held to maturity -- -- 36,082 33,307 36,709
Loans, net 1,929,052 2,128,960 1,942,830 1,876,353 1,644,416
Allowance for loan losses 25,843 28,447 25,002 22,278 21,100
Total assets 3,332,737 2,932,199 2,679,728 2,594,940 2,289,458
Total deposits 2,162,945 1,998,234 1,816,491 1,775,638 1,604,312
Borrowings 808,512 570,024 542,021 481,019 361,002
Total liabilities 3,023,396 2,622,912 2,389,460 2,288,034 1,990,596
Total shareholders' equity 309,341 309,287 290,268 306,175 298,638
SELECTED AVERAGE BALANCES
Loans, net 1,990,406 2,074,971 1,878,509 1,783,271 1,517,358
Earning assets 2,881,295 2,576,853 2,418,011 2,302,896 2,027,624
Total assets 3,104,952 2,763,920 2,583,803 2,448,384 2,055,598
Total deposits 2,085,669 1,877,426 1,795,921 1,572,262 1,563,773
Borrowings 652,298 556,859 447,633 443,344 329,987
Total shareholders' equity 320,215 299,745 292,183 307,460 294,247
===============================================================================================================================
The table above sets forth certain selected financial data concerning First
Charter Corporation (the "Corporation") for the five years ended December 31,
2001. All financial data has been adjusted to reflect the acquisition of HFNC
Financial Corp. in 1998, the acquisition of Business Insurers of Guilford
County in 2000, and the acquisition of Carolina First BancShares, Inc. in 2000,
each of which was accounted for as a pooling of interest.
(1) First Charter Corporation historical cash dividends declared.
(2) Noninterest expense divided by the sum of taxable equivalent net
interest income plus noninterest income less gain on sale of
securities.
15
The following table presents a schedule of other items included in net
income for the years ended December 31, 2001, 2000, 1999, 1998 and 1997:
TABLE TWO
OTHER ITEMS
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
SCHEDULE OF OTHER ITEMS INCLUDED IN EARNINGS
Other items
Noninterest income
(Loss) gain 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 (144) (1,601) (66) -- --
Equity method (loss) income (442) 4,580 138 -- --
Gain on sale of property 416 2,788 1,752 -- --
Noninterest expense
Charitable trust -- (1,000) -- -- --
Restructuring charges and merger-related -- (16,250) -- (20,262) (3,400)
- ---------------------------------------------------------------------------------------------------------------------------
Total other items $(170) $(15,495) $ 3,581 $(17,915) $(3,400)
- ---------------------------------------------------------------------------------------------------------------------------
Other items, net of tax $(116) $(11,770) $ 2,328 $(13,615) $(2,584)
===========================================================================================================================
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, 2001, net interest income amounted to $105.4
million, a decrease of approximately 2.3 percent from net interest income of
$107.8 million in 2000. The decrease was the result of the declining interest
rate environment resulting from the slowing economy which has had a negative
impact on the net interest margin as variable rate assets reprice faster than
variable rate liabilities. Reduced loan demand, several large loan payoffs and
our increased selectivity in seeking new opportunities in this economic
environment have also had a negative impact on the net interest margin.
Average interest earning assets increased approximately $304.4 million
to $2.88 billion for the year ended December 31, 2001, compared to $2.58
billion for the same 2000 period. This increase is primarily due to a $229.0
million increase in the Corporation's average securities available for sale
portfolio for the year ended December 31, 2001, excluding the impact of the
securitization of $167.0 million of mortgage loans during the first quarter of
2001. The increase in average securities available for sale was primarily due
to net purchases of approximately $469.3 million in securities available for
sale during the year ended December 31, 2001. Average interest earning assets
also increased due to the purchase of four financial centers in November 2000,
as well as growth in the Corporation's average loan portfolio, which increased
$68.2 million for the year ended December 31, 2001, excluding the impact of the
securitization of $167.0 million of mortgage loans during the first quarter of
2001. The decrease in average yield on interest earning assets to 7.54 percent
in 2001, compared to 8.46 percent in 2000, resulted principally from the
decrease in the average prime rate during 2001 to 6.93 percent, from 9.23
percent in 2000. The decrease in the average prime rate is attributable to the
Federal Reserve's 475 basis point decrease in the Fed Funds rate during 2001.
The average yield earned on loans was 8.01 percent in 2001, compared to 8.89
percent in 2000.
In addition to the increase in average interest earning assets, the
Corporation experienced an increase in average interest-bearing liabilities of
$295.8 million to $2.49 billion during 2001 due to the use of Federal Home Loan
Bank ("FHLB") advances to fund securities purchases and increases in deposits.
The average rate paid on interest bearing liabilities decreased to 4.42 percent
in 2001, compared to 4.94 percent in 2000, primarily due to a decline in the
average rate of borrowings. The average rate paid on
16
interest-bearing deposits was 4.27 percent in 2001, down from 4.61 percent in
2000. Similarly, the rate paid on other borrowed funds decreased to 4.85
percent in 2001, compared to 5.94 percent in 2000.
The net interest margin (tax adjusted net interest income divided by
average interest-earning assets) decreased 54 basis points to 3.72 percent in
2001, compared to 4.26 percent in 2000. The decrease reflects the impact of the
declining interest rate environment in 2001, which had a negative impact on the
net interest margin as assets repriced faster than liabilities. The addition of
lower yielding securities, higher levels of borrowings and competitive forces
related to loan and deposit pricing also had a negative impact on the net
interest margin. See "Asset-Liability Management and Interest Rate Sensitivity"
for additional discussion on the Corporation's management of rate sensitive
assets and liabilities.
The following table includes for the years ended December 31, 2001,
2000 and 1999 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
2001 2000 1999
-------------------------------- -------------------------------- --------------------------------
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) $1,990,406 $159,430 8.01% $2,074,971 $184,388 8.89% $1,878,509 $162,726 8.66%
Securities - taxable 788,928 51,647 6.55 400,306 27,274 6.81 423,894 26,053 6.15
Securities - nontaxable 88,448 5,629 6.36 93,226 5,885 6.31 101,184 6,488 6.41
Federal funds sold 1,971 75 6.78 3,997 250 6.26 9,105 501 5.50
Interest bearing bank deposits 11,542 399 3.46 4,353 224 5.15 5,319 314 5.90
- -----------------------------------------------------------------------------------------------------------------------------------
Total earning assets(4) 2,881,295 217,180 7.54 2,576,853 218,021 8.46 2,418,011 196,082 8.11
===================================================================================================================================
Cash and due from banks 67,600 67,836 65,602
Other assets 156,057 119,231 100,190
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $3,104,952 $2,763,920 $2,583,803
===================================================================================================================================
INTEREST BEARING
LIABILITIES:
Demand deposits $ 515,531 $ 10,129 1.96% $ 485,230 $ 12,454 2.57% $ 472,212 $ 12,100 2.56%
Savings deposits 115,787 2,004 1.73 149,812 3,765 2.51 192,744 5,945 3.08
Other time deposits 1,203,000 66,119 5.50 998,866 59,044 5.91 908,479 48,055 5.29
Other borrowings 652,298 31,660 4.85 556,859 33,051 5.94 447,633 24,199 5.41
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST BEARING
LIABILITIES 2,486,616 109,912 4.42 2,190,767 108,314 4.94 2,021,068 90,299 4.47
===================================================================================================================================
Noninterest bearing sources:
Noninterest bearing deposits 251,352 243,517 222,486
Other liabilities 46,769 29,891 48,066
Shareholders' equity 320,215 299,745 292,183
- -----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $3,104,952 $2,763,920 $2,583,803
===================================================================================================================================
Net interest spread 3.12 3.52 3.64
Impact of noninterest
bearing sources 0.60 0.74 0.73
- -----------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME/
YIELD ON EARNINGS ASSETS $107,268 3.72% $109,707 4.26% $105,783 4.37%
===================================================================================================================================
(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 $3,807,
$3,501 and $3,875, for 2001, 2000 and 1999, respectively.
(4) Yields on nontaxable securities and loans are stated on a
taxable-equivalent basis, assuming a Federal tax rate of 35 percent,
applicable state taxes and TEFRA disallowances for 2001, 2000 and
1999. The adjustments made to convert to a taxable-equivalent basis
were $1,904, $1,878 and $1,811 for 2001, 2000 and 1999, respectively.
17
TABLE FOUR
VOLUME AND RATE VARIANCE ANALYSIS
FROM DEC. 31, 2000 TO DEC. 31, 2001 From Dec. 31, 1999 to Dec. 31, 2000
INCREASE (DECREASE) IN NET INTEREST INCOME Increase (Decrease) in Net Interest Income
DUE TO CHANGE IN(1) Due to Change in(1)
---------------------------------------------- ---------------------------------------------
2000 2001 1999 2000
INCOME/ INCOME/ Income/ Income/
(Dollars in thousands) EXPENSE RATE VOLUME EXPENSE Expense Rate Volume Expense
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST INCOME:
Loans $184,388 $(17,814) $ (7,144) $159,430 $162,726 $ 4,424 $ 17,238 $184,388
Securities - taxable 27,274 (1,587) 25,960 51,647 26,053 2,750 (1,529) 27,274
Securities - nontaxable 5,885 47 (303) 5,629 6,488 (97) (506) 5,885
Federal funds sold 250 (73) (102) 75 501 49 (300) 250
Interest bearing bank deposits 224 (134) 309 399 314 (37) (53) 224
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST INCOME $218,021 $(19,561) $ 18,720 $217,180 $196,082 $ 7,089 $ 14,850 $218,021
=================================================================================================================================
INTEREST EXPENSE:
Demand deposits $ 12,454 $ (3,012) $ 687 $ 10,129 $ 12,100 $ 20 $ 334 $ 12,454
Savings deposits 3,765 (1,039) (722) 2,004 5,945 (978) (1,202) 3,765
Other time deposits 59,044 (4,568) 11,643 66,119 48,055 5,927 5,062 59,044
Other borrowings 33,051 (6,539) 5,148 31,660 24,199 2,658 6,194 33,051
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL INTEREST EXPENSE 108,314 (15,158) 16,756 109,912 90,299 7,627 10,388 108,314
- ---------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME $109,707 $ (4,403) $ 1,964 $107,268 $105,783 $ (538) $ 4,462 $109,707
=================================================================================================================================
(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 2001 amounted to $4.5 million
compared to the provision for loan losses of $7.6 million in 2000. The decrease
in the provision for loan losses was due to lower loan volume in 2001 and a
significant increase in nonaccrual loans in 2000, which did not recur in 2001.
Partially offsetting these factors in 2001 was the effect of higher net
charge-offs. As adjusted to remove the effects of the February 2001 loan
securitization and the sale of $45.3 million in lower-yielding loans in May
2000, gross loans increased $9.7 million during the year ended December 31,
2001 as compared to an increase of $234.9 million during the year ended
December 31, 2000. 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 2001 were $6.7 million or 0.33 percent of average
loans compared to $4.1 million or 0.20 percent of average loans in 2000. The
year-to-date increase in net loan charge-offs was attributable to $2.5 million
of charge-offs associated with two large commercial relationships which were
written down during the fourth quarter of 2001. These charge-offs are not
considered to be necessarily indicative of an overall deterioration in the
quality of the remaining portfolio. Without these two charge-offs, the ratio of
net charge-offs to average loans would have been 0.21 percent of average loans
for 2001 versus 0.20 percent for 2000. The provision for loan losses was less
than the amount of net charge-offs for 2001 because the commercial loans noted
above had been identified as impaired during 2000 and specific reserves were
allocated at that time.
18
NONINTEREST INCOME
Noninterest income increased $8.1 million to $38.8 million for the
year ended December 31, 2001, compared to $30.7 million for the same period in
2000. This increase was driven primarily by a 23.8 percent increase in service
charge income on deposit accounts for the year ended December 31, 2001 compared
to the same 2000 period, which was due to the implementation of revenue
enhancing projects as well as re-pricing opportunities resulting from the
acquisition of Carolina First. In addition, the declining rate environment has
increased mortgage origination volume. This has resulted in additional loan
sales to the secondary market and correspondingly greater fee income. Active
management of our securities portfolio resulted in the recognition of $2.4
million in gains on security sales during 2001, compared to losses of $4.3
million during 2000. Of the $4.3 million loss in 2000, $3.9 million was
attributed to a restructuring of the Corporation's bond portfolio as a result
of rising interest rates at the time of the sales. Continued growth of First
Charter Insurance Services, higher brokerage revenue and trading gains also
increased noninterest income.
Premiums earned on written covered call options on fixed income
securities accounts for a majority of our trading gains. At December 31, 2001,
the Corporation did not have any written covered call options outstanding. It
is generally the Corporation's policy to structure these option contracts so
that there are none outstanding at the end of a reporting period.
See NOTE SIXTEEN of the consolidated financial statements for a
discussion of certain related party transactions which impacted deposit service
charges in the fourth quarter of 2001.
Noninterest income was also impacted in both periods by income and
losses from equity method investees. During 2001 the Corporation recorded
losses on equity method investees of $0.4 million, compared to gains of $4.6
million in 2000. The Corporation's equity method investments represent
investments in venture capital limited partnerships which invest in early stage
companies. The Corporation's recognition of earnings or losses from equity
method investees represents the Corporation's share of the limited
partnership's earnings on a quarterly basis.
These limited partnerships record their investments in investee
companies on a fair value basis, with changes in the underlying fair values
being reflected as an adjustment to their earnings in the period such changes
are determined. The earnings of these limited partnerships, and therefore the
amount recorded on an equity-method basis by the Corporation, are impacted
significantly by changes in the underlying value of the companies in which
these partnerships invest. All of the companies in which these limited
partnerships invest are privately held, and their market values are not readily
available. Estimations of these values are made quarterly by the management of
the limited partnerships. The assumptions in the valuation of these investments
by the limited partnerships include the viability of the investee's business
model, the ability of the company to obtain alternative financing, the
company's ability to generate revenues in future periods, and other subjective
factors.
The limited partnerships provide their quarterly financial information
on a quarter lag basis, so the Corporation has a policy of recording their
share of these earnings or losses also on a quarter lag basis. During the first
quarter of 2002, the Corporation was notified by the management of one of the
limited partnerships that they were in the process of revaluing one of their
investments and that they expected that the value would decrease for the
limited partnership's fourth quarter 2001 valuation. As a result, the
Corporation expects to record losses on equity method investments in the first
quarter of 2002. Based on preliminary estimates by the management of the
limited partnership, the Corporation believes its share of the loss on this
equity method investment could be between $3.0 million and $4.0 million. These
losses would represent elimination of a portion of previously recorded
unrealized gains on this investee company, and would not represent a loss of
the original principal invested in this company. Nevertheless, given the
inherent risks associated with this type of investment in the current economic
environment, there can be no guarantee that there will not be additional losses
on these equity method investments in future periods.
19
NONINTEREST EXPENSE
Noninterest expense decreased $5.1 million to $87.6 million for the
year ended December 31, 2001 from $92.7 million in the comparable 2000 period.
The decrease was attributable to the restructuring charges and merger-related
expenses of $16.3 million during the quarter ended June 30, 2000, primarily
associated with the acquisition of Carolina First. This decrease was partially
offset during 2001 by the additional operating costs associated with the four
financial centers acquired during the fourth quarter of 2000, an increase in
occupancy and equipment expense as a result of the move into the new First
Charter Center and investments in people and technology to position the
Corporation for growth.
INCOME TAX EXPENSE
Total income tax expense amounted to $16.8 million for the year ended
December 31, 2001 and $13.3 million for the same comparable 2000 period. The
increase in the income tax expense was attributable to an increase in taxable
income. The increase 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 a decrease in the effective tax rate
to 32.2 percent in 2001 from 34.9 percent in 2000.
In the normal course of business, the Corporation evaluates and
implements tax-planning strategies. As a result of these strategies, management
anticipates our effective tax rate to decrease to approximately 27 percent to
28 percent in 2002.
20
TABLE FIVE
SELECTED QUARTERLY FINANCIAL DATA
2001 QUARTERS
(Dollars in thousands, except ----------------------------------------------------------------
per share amounts) FOURTH THIRD SECOND FIRST
- ---------------------------------------------------------------------------------------------------
INCOME STATEMENT
Total interest income $ 51,166 $ 54,649 $ 55,391 $ 54,070
Total interest expense 24,352 27,826 29,043 28,691
- ---------------------------------------------------------------------------------------------------
Net interest income 26,814 26,823 26,348 25,379
Provision for loan losses 1,200 1,325 1,190 750
Total noninterest income 11,183 10,356 8,814 8,420
Total noninterest expense 24,766 21,892 20,878 20,043
- ---------------------------------------------------------------------------------------------------
Net income (loss) before
income taxes 12,031 13,962 13,094 13,006
Income taxes 3,881 4,502 4,223 4,162
- ---------------------------------------------------------------------------------------------------
Net income (loss) $ 8,150 $ 9,460 $ 8,871 $ 8,844
===================================================================================================
PER SHARE DATA:
Basic income (loss) $ 0.26 $ 0.30 $ 0.28 $ 0.28
Diluted income (loss) 0.26 0.30 0.28 0.28
Cash dividends declared(1) 0.18 0.18 0.18 0.18
Period-end book value 10.06 10.49 10.22 10.06
Average shares
outstanding - basic 31,197,190 31,545,721 31,719,241 31,696,764
Average shares
outstanding - diluted 31,364,373 31,314,550 31,906,705 31,833,564
RATIOS
Return on average
shareholders' equity(2) 9.88% 11.72% 11.12% 11.46%
Return on average assets(2) 1.00 1.18 1.15 1.24
Net interest margin(2) 3.62 3.68 3.73 3.90
Average loans to
average deposits 91.15 92.38 95.50 103.56
Average equity to
average assets 10.08 10.06 10.33 10.85
Efficiency ratio(3) 66.16 59.45 59.05 58.90
SELECTED PERIOD END
BALANCES
Securities available for sale $ 1,077,365 $ 1,134,374 $ 939,993 $ 876,421
Securities held to maturity -- -- -- --
Loans, net 1,929,052 1,958,949 1,941,616 1,958,436
Allowance for loan losses 25,843 28,221 28,049 28,049
Total assets 3,332,737 3,348,870 3,138,989 3,081,263
Total deposits 2,162,945 2,163,799 2,119,027 2,012,087
Borrowings 808,512 806,141 643,483 696,134
Total liabilities 3,023,396 3,021,297 2,814,885 2,762,284
Total shareholders' equity 309,341 327,573 324,104 318,979
- -----------------------------------------------------------------------------------------------------
SELECTED AVERAGE
BALANCES
Loans, net 1,977,638 1,973,373 1,968,304 2,043,217
Earning assets 3,005,225 2,957,440 2,881,629 2,676,436
Total assets 3,246,863 3,184,788 3,098,598 2,884,703
Total deposits 2,169,743 2,136,217 2,060,997 1,973,002
Borrowings 46,070 45,832 47,385 47,823
Total shareholders' equity 327,410 320,242 319,968 313,081
- ---------------------------------------------------------------------------------------------------
SCHEDULE OF OTHER ITEMS
INCLUDED IN EARNINGS
Noninterest income
(Loss) gain on sale of loans $- $- $ -- $ --
Fixed income portfolio
restructuring loss -- -- -- --
Equity investment write down -- -- -- (144)
Equity method (loss) income (524) 73 (102) 111
Gain on sale of properties 287 129 -- --
Noninterest expense
Charitable trust -- -- -- --
Merger and
restructuring charges -- -- -- --
- ---------------------------------------------------------------------------------------------------
Total other items (237) 202 (102) (33)
- ---------------------------------------------------------------------------------------------------
Other items, net of tax $ (161) $ 137 $ (69) $ (22)
===================================================================================================
2000 Quarters
(Dollars in thousands, except ------------------------------------------------------------------
per share amounts) Fourth Third Second First
- -----------------------------------------------------------------------------------------------------
INCOME STATEMENT
Total interest income $ 56,524 $ 54,739 $ 53,242 $ 51,638
Total interest expense 29,451 28,065 26,199 24,599
- -----------------------------------------------------------------------------------------------------
Net interest income 27,073 26,674 27,043 27,039
Provision for loan losses 2,075 2,200 1,370 1,970
Total noninterest income 7,791 7,686 7,914 7,275
Total noninterest expense 19,469 17,757 35,670 19,831
- -----------------------------------------------------------------------------------------------------
Net income (loss) before
income taxes 13,320 14,403 (2,083) 12,513
Income taxes 4,223 4,464 681 3,944
- -----------------------------------------------------------------------------------------------------
Net income (loss) $ 9,097 $ 9,939 $ (2,764) $ 8,569
=====================================================================================================
PER SHARE DATA:
Basic income (loss) $ 0.29 $ 0.32 $ (0.09) $ 0.27
Diluted income (loss) 0.29 0.31 (0.09) 0.27
Cash dividends declared(1) 0.18 0.18 0.17 0.17
Period-end book value 9.79 9.49 9.19 9.52
Average shares
outstanding - basic 31,588,105 31,503,251 31,402,488 31,245,099
Average shares
outstanding - diluted 31,688,490 31,646,483 31,584,528 31,399,895
RATIOS
Return on average
shareholders' equity(2) 11.87% 13.31% (3.67)% 11.70%
Return on average assets(2) 1.28 1.43 (0.40) 1.28
Net interest margin(2) 4.17 4.19 4.30 4.39
Average loans to
average deposits 108.89 112.18 111.69 109.69
Average equity to
average assets 10.78 10.72 10.93 10.97
Efficiency ratio(3) 53.16 46.41 101.37 57.31
SELECTED PERIOD END
BALANCES
Securities available for sale $ 441,031 $ 474,077 $ 500,310 $ 476,017
Securities held to maturity -- -- -- 35,324
Loans, net 2,128,960 2,083,283 2,062,674 2,025,677
Allowance for loan losses 28,447 27,861 26,700 25,979
Total assets 2,932,199 2,787,955 2,788,426 2,754,178
Total deposits 1,998,234 1,922,440 1,870,958 1,856,180
Borrowings 570,024 519,762 584,144 567,536
Total liabilities 2,622,912 2,488,905 2,499,711 2,456,201
Total shareholders' equity 309,287 299,050 288,715 297,977
SELECTED AVERAGE
BALANCES
Loans, net 2,133,452 2,099,690 2,068,958 1,997,860
Earning assets 2,628,331 2,578,372 2,582,473 2,519,053
Total assets 2,826,068 2,771,990 2,775,567 2,687,784
Total deposits 1,959,300 1,871,704 1,852,470 1,821,291
Borrowings 522,346 563,377 589,354 552,831
Total shareholders' equity 304,770 297,122 303,546 294,442
- -----------------------------------------------------------------------------------------------------
SCHEDULE OF OTHER ITEMS
INCLUDED IN EARNINGS
Noninterest income
(Loss) gain on sale of loans $ -- $ -- $ (99) $ --
Fixed income portfolio
restructuring loss (1,059) (2,854) -- --
Equity investment write down (231) (571) (299) (500)
Equity method (loss) income 28 4,106 446 --
Gain on sale of properties 2,261 527 -- --
Noninterest expense
Charitable trust (1,000) -- -- --
Merger and
restructuring charges -- -- (16,250) --
- -----------------------------------------------------------------------------------------------------
Total other items (1) 1,208 (16,202) (500)
- -----------------------------------------------------------------------------------------------------
Other items, net of tax $ -- $ 825 $ (12,253) $ (342)
=====================================================================================================
(1) First Charter Corporation historical cash dividends declared.
(2) Annualized
(3) Noninterest expense divided by the sum of taxable equivalent net
interest income plus noninterest income less gain on sale of
securities.
21
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 38 through 70.
OVERVIEW
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 primarily attributable to the
differences in the items described below, which management considers as
nonrecurring in nature and therefore should be considered in year over year
analysis of operations. Net income for the year ended December 31, 2000
included the following 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 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.
Refer to TABLE TWO for detail of other items included in earnings.
NET INTEREST INCOME
For the year ended December 31, 2000, net interest income was $107.9
million, an increase of 3.8 percent from net interest income of $104.0 million
in 1999. The increase is attributable to an increase in average interest
earning assets of $158.8 million from $2.4 billion during 1999 to $2.6 billion
during 2000. The net interest margin (tax adjusted net interest income divided
by average interest earning assets) decreased to 4.26 percent in 2000 from 4.37
percent in 1999.
The average yield on interest-earning assets was 8.46 percent in 2000
compared to 8.11 percent in 1999. The average rate paid on interest-bearing
liabilities was 4.94 percent in 2000, compared to 4.47 percent in 1999. The
average yield earned on loans was 8.89 percent in 2000, compared to 8.66
percent in 1999. The average rate paid on interest-bearing deposits was 4.61
percent in 2000, from 4.20 percent in 1999. The increases in the average yields
and average rates for 2000 compared to 1999, resulted from the increase in the
average prime rate during 2000, from 8.02 percent in 1999 to 9.23 percent in
2000.
PROVISION FOR LOAN LOSSES
The provision for loan losses for 2000 was $7.6 million compared to
$5.0 million in 1999. The increase in the provision was due to: (i) loan
growth, primarily in the commercial portfolio; (ii) increases in net
charge-offs due to the effect of higher interest rates and slower economic
growth on some customers within the portfolio; and (iii) increases in
nonperforming assets.
22
NONINTEREST INCOME
Noninterest income was $30.6 million in 2000 compared to $28.8 million
in 1999, for an increase of 6.3 percent. The increase was primarily due to
increases in service charge income resulting from applying FCB's service charge
rates to Carolina First deposit accounts subsequent to the merger, as well as
continued growth of First Charter Insurance Services. Noninterest income was
also impacted by the other items described in TABLE TWO on page 16.
NONINTEREST EXPENSE
Noninterest expense was $92.7 million in 2000 compared to $76.0
million in 1999. The increase was primarily attributable to restructuring
charges and merger-related expenses of $16.3 million, which occurred during
2000 as well as investments in people and technology to position First Charter
to better serve our existing and future clients. Noninterest expense was also
impacted by the other items described in TABLE TWO on page 16.
INCOME TAX EXPENSE
Total income tax expense for 2000 was $13.3 million versus $16.5
million in 1999. The decrease is attributable to a decrease in taxable income.
The decrease in tax expense, however, was not proportionate with the decrease
in income because portions of the restructuring charges and merger-related
expense 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.
23
FINANCIAL CONDITION
SUMMARY
Total assets at December 31, 2001 and 2000 were $3.33 billion and
$2.93 billion, respectively. Gross loans at December 31, 2001 and 2000 were
$1.96 billion and $2.16 billion, respectively. This decrease from prior periods
was due to the securitization of $167.0 million of mortgage loans in February
2001. These loans were securitized because of a change in interest rates and
the resulting impact of that condition on the Corporation's interest rate risk.
The securitized mortgage loans are now classified as mortgage backed securities
in our available for sale portfolio. Total deposits increased $164.7 million,
or 8.2 percent, to $2.16 billion at December 31, 2001 and other borrowings
increased $238.5 million, or 41.8 percent, to $808.5 million at December 31,
2001. The increase in other borrowings was primarily due to increases in
Federal Home Loan Bank advances principally used to fund security purchases.
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,
2001. 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, 2001, securities available for sale were $1.08 billion
or 32.3 percent of total assets, compared to $441.0 million, or 15.0 percent of
total assets, at December 31, 2000. The increase in securities available for
sale was due to the securitization of $167.0 million of mortgage loans in
February 2001, as well as the net purchase of $469.3 million in securities
available for sale made to raise the level of our interest earning assets. The
carrying value of these securities was approximately $9.6 million above their
amortized cost at December 31, 2001 and $3.3 million above their amortized cost
at December 31, 2000. The tax equivalent average yield on the securities
available for sale portfolio was 6.53 percent for 2001 and 6.72 percent for
2000. The weighted-average life of the portfolio was 4.77 years at December 31,
2001 and 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 FIVE of the consolidated financial statements for further details on
securities.
The following table shows, as of December 31, 2001, 2000, and 1999, 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) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------
SECURITIES AVAILABLE FOR SALE
US government obligations $ -- $ -- $ 21,532
US government agency obligations 288,253 158,228 285,080
Mortgage-backed securities 655,690 153,276 56,970
State, county, and municipal obligations 87,548 94,024 88,450
Equity securities 45,874 35,503 34,873
- ------------------------------------------------------------------------------------------------------
TOTAL $1,077,365 $441,031 $486,905
======================================================================================================
SECURITIES HELD TO MATURITY
US government obligations $ -- $ -- $ 1,996
US government agency obligations -- -- 7,831
Mortgage-backed securities -- -- 17,668
State, county, and municipal obligations -- -- 8,587
- ------------------------------------------------------------------------------------------------------
TOTAL $ -- $ -- $ 36,082
======================================================================================================
24
LOAN PORTFOLIO
Gross loans totaled $1.96 billion and $2.16 billion at December 31,
2001 and 2000, respectively. This decrease from prior periods was due primarily
to the securitization of $167.0 million of mortgage loans in February 2001 as
well as the effects of the slowing economy on dampened loan growth. These
mortgage loans were securitized because of a change in interest rates and the
resulting impact of that condition on the Corporation's interest rate risk. The
securitized mortgage loans are now classified as mortgage backed securities in
our available for sale portfolio. Due to changes 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.
The loan portfolio at December 31, 2001 was composed of 10.9 percent
commercial, financial, and agricultural loans, 17.3 percent real estate
construction loans, 65.3 percent real estate mortgage loans, and 6.5 percent
installment loans. This compares to a composition of 10.0 percent commercial,
financial and agricultural, 15.4 percent real estate construction, 69.5 percent
real estate mortgage, and 5.1 percent installment at December 31, 2000.
Approximately $14.5 million of the real estate loans at December 31, 2001 are
loans for which the principal source of repayment comes from the sale of real
estate. The remaining $1.6 billion of loans collateralized by real estate at
December 31, 2001 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 - $875.5 million, (ii) home equity loans
which are collateralized by real estate - $228.2 million, (iii) individual
residential mortgage loans - $496.5 million, and (iv) non real estate loans
which are collateralized by real estate - $25.2 million.
The Corporation's primary market area includes the state of North
Carolina, and predominately centers around the Metro region of Charlotte. At
December 31, 2001, 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, 2001, preapproved but unused lines of
credit totaled $276.1 million, loan commitments totaled $250.1 million and
standby letters of credit aggregated $18.4 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, 2001, 2000, 1999, 1998, and 1997.
TABLE SEVEN
LOAN PORTFOLIO COMPOSITION
-----------------------------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------
Commercial, financial and
agricultural $ 213,578 $ 216,515 $ 204,360 $ 161,808 $ 128,924
Real estate - construction 338,705 332,474 316,794 234,916 170,182
Real estate - mortgage 1,276,182 1,499,618 1,337,369 1,377,388 1,227,049
Installment 126,621 109,015 109,512 125,240 140,159
-----------------------------------------------------------------------------------------------------------------------
Total loans 1,955,086 2,157,622 1,968,035 1,899,352 1,666,314
-----------------------------------------------------------------------------------------------------------------------
Less - allowance for loan
losses (25,843) (28,447) (25,002) (22,278) (21,100)
Unearned income (191) (215) (203) (721) (812)
-----------------------------------------------------------------------------------------------------------------------
Loans, net $ 1,929,052 $ 2,128,960 $ 1,942,830 $ 1,876,353 $ 1,644,402
-----------------------------------------------------------------------------------------------------------------------
25
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, 2001. This table
excludes non-accrual loans.
TABLE EIGHT
MATURITY AND SENSITIVITY TO CHANGES IN INTEREST RATES
---------------------------------------------------------------------------------------------
December 31, 2001
-----------------------------------------------------
Commercial,
Financial, and Real estate -
(Dollars in thousands) Agricultural Construction Total
---------------------------------------------------------------------------------------------
Fixed rate:
1 year or less $ 65,523 $ 38,335 $ 103,858
1-5 years 7,097 58,360 65,457
After 5 years 13,726 31,419 45,145
---------------------------------------------------------------------------------------------
Total fixed rate 86,346 128,114 214,460
---------------------------------------------------------------------------------------------
Variable rate:
1 year or less 6,621 105,907 112,528
1-5 years 95,357 85,276 180,633
After 5 years 19,470 14,601 34,071
---------------------------------------------------------------------------------------------
Total variable rate 121,448 205,784 327,232
---------------------------------------------------------------------------------------------
Total selected loans $ 207,794 $ 333,898 $ 541,692
---------------------------------------------------------------------------------------------
NONPERFORMING ASSETS
Nonperforming assets, which consist of foreclosed assets, nonaccrual
loans, and restructured loans, were $31.9 million at December 31, 2001, as
compared to $29.6 million at December 31, 2000. As a percentage of total assets,
nonperforming assets have decreased to 0.96 percent at December 31, 2001
compared to 1.01 percent at December 31, 2000. The decrease in the percentage of
nonperforming assets to total assets was primarily due to the increase in
securities available for sale described in the Investment Portfolio section.
Total nonperforming assets and loans 90 days or more past due and still
accruing interest at December 31, 2001 were $32.0 million or 1.62 percent of
total loans and other real estate, compared to $30.0 million or 1.37 percent of
total loans and other real estate at December 31, 2000. Nonaccrual loans have
decreased to $23.8 million at December 31, 2001 from $26.6 million at December
31, 2000. The decrease is primarily attributable to the transfer of one large
commercial relationship from nonaccrual status to other real estate as such loan
was foreclosed on during the fourth quarter of 2001 as well as one commercial
relationship which was repaid. Other real estate increased to $8.0 million at
December 31, 2001 from $3.0 million at December 31, 2000 due to the large
commercial relationship noted above. The increase in nonaccrual loans in 2000,
and the decrease in loans 90 days or more past due and still accruing interest
in the same year, was attributable to the impact of higher interest rates and
slower economic growth on some customers during that year. Interest income that
would have been recorded on nonaccrual loans and restructured loans for the
years ended December 31, 2001, 2000 and 1999, had they performed in accordance
with their original terms, amounted to approximately $2.2 million, $2.3 million,
and $1.0 million, respectively. Interest income on all such loans included in
the results of operations for 2001, 2000 and 1999 amounted to approximately $1.0
million, $1.3 million, and $0.4 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