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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (d) OF 
THE SECURITIES EXCHANGE ACT OF 1934 þANNUAL
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2004
 OR o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
 Commission File Number 0-15829 FIRST CHARTER CORPORATION
   North Carolina(State or Other Jurisdiction of
Incorporation or Organization)
    
    56-1355866(I.R.S. Employer
Identification No.)10200 David Taylor Drive, Charlotte, NC
(Address of Principal Executive Offices)
    
    28262-2373
(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 registeredN/A
    
    N/A
 Securities registered pursuant to Section 12(g) of the Act:Title of Each Class 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 þ No o 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. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2).
Yes þ No o The aggregate market value of the voting stock held by non-affiliates of the registrant as of
June 30, 2004 was $591,648,562. As of March 4, 2005 the Registrant had outstanding 30,188,721 shares of Common Stock, no par
value. Documents Incorporated by Reference PART III: Definitive Proxy Statement to be filed with the Securities and Exchange Commission
in connection with the solicitation of proxies for the Companys 2005 Annual Meeting of
Shareholders to be held on April 27, 2005. (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 or incorporated by reference as part of this report.)




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FIRST CHARTER CORPORATION

AND SUBSIDIARIES FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 TABLE OF CONTENTS PagePART IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    10Item 3.
    
    Legal Proceedings
    
    
    10Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    10Item 4A.
    
    Executive Officers of the Registrant
    
    
    10PART IIItem 5.
    
    Market For
Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    1212Item 6.
    
    Selected Financial Data
    
    
    13Item 7.
    
    Managements
Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    48Item 8.
    
    Financial Statements and Supplementary Data
    
    
    49Item 9.
    
    Changes in and
Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    88Item 9A.
    
    Controls and Procedures
    
    
    88Item 9B.
    
    Other Information
    
    
    88PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    88Item 11.
    
    Executive Compensation
    
    
    89Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters
    
    
    89Item 13.
    
    Certain Relationships and Related Transactions
    
    
    89Item 14.
    
    Principal Accountant Fees and Services
    
    
    89PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    90
 2




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Part I 
 Item 1.Business General First Charter Corporation (hereinafter referred to as either the Registrant or the
Corporation) is a bank holding company established as a North Carolina Corporation in 1983 and is
registered under the Bank Holding Company Act of 1956, as amended (the BHCA). Its principal asset
is the stock of its subsidiary, First Charter Bank (FCB or the Bank). 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 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 was a North Carolina corporation and operated
through its subsidiary banks and 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
converted from a national bank to First Charter Bank, a North Carolina state bank. The conversion
was completed after a cost-benefit analysis of supervisory regulatory charges and did not represent
any disagreement with the Corporations or the Banks former regulators. The Bank continues to
operate its financial center network franchise under the First Charter brand name. FCB is a full service bank, which now operates 53 financial centers, seven insurance offices
and one mortgage origination office in addition to its main office, as well as 110 ATMs (automated
teller machines). These facilities are located in Ashe, Alleghany, Avery, Buncombe, Cabarrus,
Catawba, Cleveland, Guilford, Iredell, Jackson, Lincoln, McDowell, Mecklenburg, Rowan, Rutherford,
Swain, Transylvania and Union counties of North Carolina. FCB, through First Charter of Virginia
Realty Investments, Inc., also operates an additional mortgage origination office in Virginia. The Corporations primary market area is located within North Carolina and predominately
centers around the Metro region of Charlotte, North Carolina, including Mecklenburg County and its
surrounding counties. Charlotte is the twenty-sixth largest city in the United States and has a
diverse economic base. As of December 31, 2004, the unemployment rate for the Charlotte Metro
region and the state of North Carolina was 5.2 percent. Primary business sectors in the Charlotte
Metro region include banking and finance, insurance, manufacturing, health care, transportation,
retail, telecommunications, government services and education. Thus, the Corporation believes that
it is not dependent on any one or a few types of commerce due to the economic diversity in the
region. Through its financial centers, the Bank provides a wide range of banking products, including
interest-bearing and noninterest-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, Inc., 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 two other subsidiaries: First Charter Insurance Services, Inc. and First Charter
Leasing and Investments, 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 Leasing and Investments, Inc. is a North Carolina
corporation engaged in commercial equipment leasing and the 3




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management of investment securities. It also acts as the holding company for First Charter of
Virginia Realty Investments, Inc., a Virginia corporation. First Charter of Virginia Realty
Investments, Inc. is engaged in the mortgage origination business and also acts as the holding
company for First Charter Realty Investments, Inc., a Delaware real estate investment trust. First
Charter Realty Investments, Inc. is the holding company for FCB Real Estate, Inc., a North Carolina
real estate investment trust, and First Charter Real Estate Holdings, LLC, a North Carolina limited
liability company, which owns and maintains the real estate property and assets of the Corporation.
FCB Real Estate, Inc. primarily invests in commercial and 1-4 family residential real estate
loans. The Bank also has a majority ownership in Lincoln Center at Mallard Creek, LLC, a North
Carolina limited liability company. Lincoln Center is a three-story office building occupied in
part by a branch of FCB. At December 31, 2004, the Registrant and its subsidiaries had 1,014 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 its financial results. 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 these laws, banking activities in North Carolina are highly competitive. FCBs service delivery facilities are located in Ashe, Alleghany, Avery, Buncombe, Cabarrus,
Catawba, Cleveland, Guilford, Iredell, Jackson, Lincoln, McDowell, Mecklenburg, Rowan, Rutherford,
Swain, Transylvania and Union counties of North Carolina. These counties 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 Corporation is subject to the supervision
of and regular inspection by, the Board of Governors of the Federal Reserve System (the Federal
Reserve). FCB is a North Carolina state bank 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 Commissioner
of Banks of the State of North Carolina (the NC Commissioner) under the direction and supervision
of the North Carolina 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 4




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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. Gramm-Leach-Bliley Financial Modernization Act of 1999. The Gramm-Leach-Bliley Financial
Modernization Act of 1999 (the GLB Act) eliminated certain legal barriers separating the conduct
of various types of financial service businesses, such as commercial banking, investment banking
and insurance in addition to substantially revamping the regulatory scheme within which the
Corporation operates. Under the GLB Act, bank holding companies meeting management, capital and
Community Reinvestment Act standards, and that have elected to become a financial holding company,
may 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. The Corporation has not elected to become a
financial holding company. The GLB Act 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. In addition, the GLB Act also modifies current law related to financial privacy and community
reinvestment. The privacy provisions generally prohibit financial institutions from disclosing
nonpublic personal financial information to nonaffiliated third parties unless the customer has the
opportunity to opt out of the sharing of the customers nonpublic information with unaffiliated
third parties. Restrictions on Bank Holding Companies. The Federal Reserve is authorized to adopt regulations
affecting various aspects of bank holding companies. Under the BHCA, the Corporations activities,
and those of companies which it controls or in which it holds more than five percent of the voting
stock, are limited to banking or managing or controlling banks or furnishing services to or
performing services for its subsidiaries, or any other activity which the Federal Reserve
determines to be so closely related to banking or managing or controlling banks as to be a proper
incident thereto. In making such determinations, the Federal Reserve is required to consider
whether the performance of such activities by a bank holding company or its subsidiaries reasonably
can 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. The BHCA, as amended by the GLB Act, generally limits the activities of a bank
holding company (unless the bank holding company has elected to become a financial holding company)
to activities that are closely related to banking and a proper incident thereto. 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 five 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 five
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 NC Commissioner. 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 Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the Interstate Banking and Branching Act), a bank holding
company may acquire banks in states other than its home state, without regard to the permissibility
of those acquisitions 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, after the proposed acquisition, controls no more than 10 percent of
the total amount of 5




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deposits of insured depository institutions in the United States and no more than 30 percent
or such lesser or greater amount set by state law of such deposits in that state. The Interstate Banking and Branching Act also authorized banks to merge across state lines,
thereby creating interstate branches. Under this legislation, each state had the opportunity either
to opt out of this provision, thereby prohibiting interstate branching in such states, or to opt
in. The State of North Carolina elected to opt in to such legislation. 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. Consumer Protection. In connection with its lending and leasing activities, FCB and its
subsidiaries are subject to a number of federal and state laws designed to protect borrowers and
promote lending to various sectors of the economy and population. These laws include the Equal
Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage
Disclosure Act, and the Real Estate Settlement Procedures Act, as well as state law counterparts. Title V of the GLB Act, along with other provisions of federal law, currently contain
extensive consumer privacy protection provisions. Under these provisions, a financial institution
must provide to its customers, at the inception of the customer relationship, and annually
thereafter, the financial institutions policies and procedures for collecting, disclosing, and
protecting nonpublic personal financial information. These provisions also provide that, except
for certain limited exceptions, a financial institution may not provide that nonpublic personal
information to nonaffiliated third parties unless the financial institution discloses to the
customer that the information may be provided and the customer is given the opportunity to opt out
of that disclosure. Federal law makes it a criminal offense, except in limited circumstances, to
obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive
means. The Community Reinvestment Act of 1977 requires FCBs primary federal regulatory agency, in
this case, the FDIC, to assess FCBs record in meeting the credit needs of the communities served by
FCB, including low- and moderate-income neighborhoods and persons. Financial institutions are
assigned one of four ratings: Outstanding, Satisfactory, Needs to Improve, or Substantial
Noncompliance. At December 31, 2004 FCBs rating was Satisfactory. This assessment is reviewed
by any bank that applies to merge or consolidate with or acquire the assets or assume the
liabilities of an insured depository institution, or to open or relocate a branch office. The USA PATRIOT Act.After the September 11, 2001 terrorist attacks in New York and
Washington, D.C., the United States government acted in several ways to tighten control on
activities perceived to be connected to money laundering and terrorist funding. A series of orders
were issued which identify terrorists and terrorist organizations and require the blocking of
property and assets of, as well as prohibiting all transactions or dealings with, such terrorists,
terrorist organizations and those that assist or sponsor them. The USA Patriot Act substantially
broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the
United States, imposed new compliance and due diligence obligations, created new crimes and
penalties, compelled the production of documents located both inside and outside the United States,
including those of foreign institutions that have a correspondent relationship in the United
States, and clarified the safe harbor from civil liability to customers. In addition, the United
States Treasury Department issued regulations in cooperation with the federal banking agencies, the
Securities and Exchange Commission, the Commodity Futures Trading Commission and the Department of
Justice to require customer identification and verification, expand the money-laundering program
requirement to the major financial services sectors, including insurance and unregistered
investment companies, such as hedge funds, and facilitate and permit the sharing of information
between law enforcement and financial institutions, as well as among financial institutions
themselves. The United States Treasury Department also has created the Treasury USA PATRIOT Act
Task Force to work with other financial regulators, the regulated community, law enforcement and
consumers to continually improve the regulations. Sarbanes-Oxley Act of 2002.On July 30, 2002, the Sarbanes-Oxley Act was enacted which
addressed corporate governance and securities reporting requirements. Among its requirements are 6




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changes in auditing and accounting, executive compensation, certifications by Chief Executive
Officers and Chief Financial Officers of certain securities filings, expanded reporting of
information in current reports filed with the Securities and Exchange Commission, more detailed
reporting information in securities disclosure documents and more timely filings of corporate
information. The Nasdaq National Market has also issued its corporate governance rules that are
intended to allow shareholders to more easily and efficiently monitor the performance and
activities of companies and their executive officers and directors. 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 with which both the Corporation and the Bank must comply. The risk-based guidelines
define a three-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. Tier 2 Capital includes, among
other items, cumulative perpetual preferred stock, long-term preferred stock, hybrid capital
instruments, qualifying subordinated debt, and the allowance for credit losses up to 1.25 percent
of risk-weighted assets. Tier 3 capital includes subordinated debt that is unsecured, fully paid,
has an original maturity of at least two years, is not redeemable before maturity without prior
approval of the Federal Reserve and includes a lock-in clause precluding payment of either interest
or principal if the payment would cause the issuing banks risk-based capital ratio to fall or
remain below the required minimum. The sum of Tier 1 and Tier 2 Capital less investments in
unconsolidated subsidiaries is equal to qualifying total capital. Risk-based capital ratios are
calculated by dividing Tier 1 and Total Capital by risk-weighted assets. 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, 2004, the Corporation and the Bank were in
compliance with the risk-based capital requirements. The Corporations Tier 1 and Total Capital
Ratios at December 31, 2004 were 10.08 percent and 10.99 percent, respectively. The Corporation did
not have any subordinated debt that qualified as Tier 3 Capital at December 31, 2004. The leverage ratio is calculated by dividing Tier 1 Capital by adjusted total assets. The
Corporations leverage ratio at December 31, 2004 was 6.76 percent. The Corporation meets its
leverage ratio requirement. 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 7




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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 (1) a Tier 1
Capital ratio of at least 6.00 percent, (2) a Total Capital ratio of at least 10.00 percent, (3) a
Leverage ratio of at least 5.00 percent and (4) 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 as of December
31, 2004. See Note Twentyof 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 in the amendment) 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 Corporation is a legal entity separate and distinct from its subsidiaries.
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 net profits for the current year
combined with the undivided profits for the last two years, less dividends already paid. See Note
Twentyof 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 FDIC. As mandated by FDICIA, the FDIC has adopted
regulations for a risk-based insurance assessment 8




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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 for BIF members currently can range from no assessment to
an assessment of 27 basis points per $100 of insured deposits, with the exact assessment determined
by a banks capital and other regulatory factors. 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. 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. Regulatory Recommendations.Management is not presently aware of any current recommendations
to the Corporation or to the Bank by regulatory authorities, which, if they were to be implemented,
would have a material effect on the Corporations liquidity, capital resources, or operations. During the third quarter of 2003, the Bank entered into a written agreement (the Written
Agreement) with the Federal Reserve Bank of Richmond (the Federal Reserve Bank) and the Office
of the North Carolina Commissioner of Banks (the Banking Commissioner), the Banks primary
federal and state regulatory agencies. The Written Agreement required the Bank to take appropriate
actions to improve its programs and procedures for complying with the Currency and Foreign
Transactions Reporting Act and the anti-money laundering provisions of Regulation H of the Board of
Governors of the Federal Reserve System. The Bank subsequently took substantial actions, and
adopted and implemented a number of policies and procedures, to address the concerns of the
regulatory agencies. As a result of these actions, the Federal Reserve Bank, in concurrence with
the Banking Commissioner, terminated the Written Agreement effective July 2, 2004. Other Considerations There are particular risks and uncertainties that are applicable to an investment in the
Corporations common stock. Specifically, there are risks and uncertainties that bear on the
Corporations future financial results that may cause its future earnings and financial condition
to be less than its 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 the Corporations
business. 9




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Available Information The Corporations Internet address is www.FirstCharter.com. The Corporation makes available,
free of charge, on or through its website, its annual report on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to
Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934, and beneficial ownership reports
on Forms 3, 4 and 5 as soon as reasonably practicable after electronically filing such material
with, or furnishing it to, the Securities Exchange Commission. 
 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 as well as the operations, mortgage loan and data processing departments of FCB. In addition to its main office, FCB has 53 financial centers, seven insurance offices and 110
ATMs located in 18 counties throughout North Carolina. As of December 31, 2004, the Corporation and
its subsidiaries owned 35 financial center locations, leased 18 financial center locations and
leased seven insurance offices. The Corporation also leases a facility in Reston, Virginia for the
origination of real estate loans. These operations also serve 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, the Corporation leases a facility in Winston-Salem, North
Carolina for the operations of its third party benefits administrator. 
 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 shareholders during the quarter ended December
31, 2004. 
 Item 4A.Executive Officers of the Registrant The following table sets forth certain information about each of the current executive
officers of the registrant, including his name, age, positions and offices held with the Registrant
and the Bank, 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. Mr. Bratton is
scheduled to retire from the Registrant, effective March 31, 2005. No executive officer has a
family relationship as close as first cousin with any other executive officer or director. Year PositionName
    
    Age
    
    Office and Position
    
    HeldLawrence M. Kimbrough
    
    
    64
    
    
    President and Chief Executive Officer
of the Registrant
    
    1986 - PresentPresident and Chief Executive Officer
of FCB
    
    1986 - 2004
 10




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##### 



Year PositionName
    
    Age
    
    Office and Position
    
    HeldRobert O. Bratton
    
    
    56
    
    
    Executive Vice President, Chief
Financial Officer and Treasurer of the
Registrant and Executive Vice
President of FCB
    
    1983 - PresentCharles A. Caswell
    
    
    42
    
    
    Executive Vice President of the
Registrant and Executive Vice
President of FCB
    
    2005 - PresentExecutive Vice President and Chief
Financial Officer of Integra
Bank Corporation
    
    2002 - 2005Chief Financial Officer of RBC
Centura Banks, Inc.
    
    2001 - 2002Treasurer of RBC Centura Banks, Inc.
    
    1997 - 2001Robert E. James, Jr.
    
    
    54
    
    
    President and Chief Executive Officer
of FCB
    
    2004 - PresentExecutive Vice President of the
Registrant
    
    1999 - PresentExecutive Vice President of FCB
    
    1999 - 2004Stephen M. Rownd
    
    
    45
    
    
    Executive Vice President
of the Registrant and Executive
Vice President of FCB
    
    2001 - PresentChief Risk Officer of FCB
    
    2004 - PresentChief Credit Officer of FCB
    
    2001 - 2004Director of Risk Management,
SunTrust Banks, Inc.
    
    1999 - 2001
 11




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##### 



PART II 
 Item 5.Market For Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities Market Information, Holders and Dividends 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
    
    
    Low2003
    
    
    first
    
    
    19.40
    
    
    
    17.25second
    
    
    19.56
    
    
    
    16.69third
    
    
    20.40
    
    
    
    17.04fourth
    
    
    21.20
    
    
    
    19.272004
    
    
    first
    
    
    21.68
    
    
    
    19.52second
    
    
    21.89
    
    
    
    20.05third
    
    
    24.50
    
    
    
    20.86fourth
    
    
    28.11
    
    
    
    25.00
 As of March 4, 2005, there were 7,517 record holders of the Corporations Common Stock.
During 2003 and 2004, 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
    
    Dividend2003
    
    
    first
    
    
    0.185second
    
    
    0.185third
    
    
    0.185fourth
    
    
    0.1852004
    
    
    first
    
    
    0.185second
    
    
    0.185third
    
    
    0.190fourth
    
    
    0.190
 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
Management. Recent Sales of Unregistered Securities On December 1, 2004, the Corporation, through First Charter Bank, its primary banking
subsidiary, acquired substantially all of the assets of Smith & Associates Insurance Services,
Inc., a property and casualty insurance agency (the Agency), pursuant to an Asset Purchase
Agreement, dated as of the same date (the Purchase Agreement). No underwriters were used in
connection with this transaction. In connection with this transaction, the Corporation issued an
aggregate of 27,726 shares of the Corporations common stock valued at $750,000 to the Agency. The
issuance of the shares in connection with this transaction was exempt from the registration
requirements of the Securities Act of 1933, as amended, in accordance with Section 4(2) thereof, as
a transaction by an issuer not involving a public offering. The Purchase Agreement also
contemplates additional, subsequent issuances of the Corporations common stock based upon the
future performance of the Agency. The Corporation expects the value of future issuances, if earned,
to total approximately $750,000. 12




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##### 



Issuer Purchases of Equity Securities The following table summarizes the Corporations repurchases of its common stock during the
quarter ended December 31, 2004. Total Number of
    
    
    Maximum Number ofShares Purchased as
    
    
    Shares that May YetPart of Publicly
    
    
    Be Purchased UnderTotal Number of
    
    
    Average Price Paid
    
    
    Announced Plans or
    
    
    the Plans orPeriod
    
    Shares Purchased
    
    
    per Share
    
    
    Programs (1)
    
    
    ProgramsOctober 1,
2004-October 31,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,625,400November 1,
2004-November 30,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,625,400December 1,
2004-December 31,
2004
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,625,400Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,625,400
  
 Item 6.Selected Financial Data See Table Onein Item 7 for Selected Financial Data. 
 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. 13




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##### 



Factors that May Affect Future Results 
 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
results in connection with the implementation of the Corporations business plan and strategic
initiatives 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 Corporation does business, are less favorable than expected; (5) risks inherent in making
loans, including repayment risks and risks associated with collateral values, are greater than
expected; (6) changes in the interest rate environment reduce interest margins and affect funding
sources; (7) changes in market rates and prices may adversely affect the value of financial
products; (8) legislation or regulatory requirements or changes thereto adversely affect the
businesses in which the Corporation is engaged; (9) regulatory compliance cost increases are
greater than expected; and (10) the passage of future tax legislation, or any negative regulatory,
administrative or judicial position, may adversely impact the Corporation. 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 53
financial centers and seven insurance offices located in 18 counties throughout the piedmont and
western half of North Carolina. The Corporation also maintains operations in Reston, Virginia for
the origination of real estate loans. These operations also serve as a holding company for certain
subsidiaries that own real estate and real estate-related assets, including first and second
residential mortgage loans. The Corporations primary market area is located within North Carolina and predominately
centers around the Metro region of Charlotte, North Carolina, including Mecklenburg County and its
surrounding counties. Charlotte is the twenty-sixth largest city in the United States and has a
diverse economic base. Primary business sectors in the Charlotte Metro region include banking and
finance, insurance, manufacturing, health care, transportation, retail, telecommunications,
government services and education. The Corporation believes that it is not dependent on any one or
a few types of commerce due to the regions diverse economic base. Since the North Carolina
economy has historically relied on the manufacturing and transportation sectors, it has been
significantly impacted by global competition and rising energy prices. As a result, the North
Carolina economy is transitioning to a more service-oriented economy. Recently, the education,
healthcare, information technology, finance and business services industries have shown the most
growth. The unemployment rate for the Charlotte Metro region was 5.2 percent in December 2004
compared to 6.2 percent in December 2003. This decrease is the result of structural changes taking
place in the economy of the region. The service industry is now the major employer in the Charlotte
Metro region, followed by wholesale and retail trade. The Corporations operations are divided into five primary lines of business: community
banking, mortgage, brokerage, insurance, and financial management. Community banking provides a
variety of depository accounts including interest-bearing and noninterest-bearing checking
accounts, certificates of deposit and money market accounts. In addition, community banking offers
numerous loan products including commercial, consumer, real estate and home equity loans. The
community bank also maintains 110 ATMs and enables customers to access their accounts on-line. The
mortgage business provides both fixed-rate and variable-rate mortgage products and loan servicing
pursuant to a third party arrangement. First Charter Brokerage Services offers full service and
discount brokerage services, 14




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##### 



annuity sales and financial planning services pursuant to a third party arrangement with UVEST
Investment Services. First Charter Insurance Services, Inc. is a North Carolina corporation formed
to meet the insurance needs of businesses and individuals throughout the Charlotte Metro region.
Financial management provides comprehensive financial planning, funds management, investments and
record keeping services for many national companies. The Corporation derives interest income through traditional banking activities such as
generating loans and earning interest on securities. Additional sources of income are derived from
fees on deposit accounts and from the Corporations various lines of business including mortgage,
brokerage, insurance and financial management. Also, as a part of the Corporations management of
its securities portfolio, income is recognized on the sale of bond and equity securities. Increasing the net interest income is critical to the Corporations strategy of earnings
growth in a rising rate environment. There are three primary components to achieve this goal:
maintain an asset-sensitive balance sheet, improve the net interest margin and increase earning
assets. The first component involves the Corporation maintaining an asset-sensitive balance sheet
under a broad range of interest rate scenarios. This has been accomplished by managing the level of
fixed-rate loans and focusing on variable-rate lending. A balance sheet is considered
asset-sensitive when its assets (loans and securities) reprice faster or to a greater extent than
liabilities (deposits and borrowings). An asset-sensitive balance sheet will produce more net
interest income when interest rates rise and less net interest income when interest rates decline. The second component toward achieving an increase in net interest income is improving the net
interest margin. Enhancing the net interest margin is divided into two parts, improving asset
yields and reducing funding costs. The yields in the Corporations loan portfolio should increase
as the Corporations floating rate and variable rate loans reprice upward with the increase in
interest rates. In addition, rising interest rates will increase the effective yields on
mortgage-backed securities by decreasing the amortization of premiums due to slowing prepayment
speeds. The Corporation continues its focus on reducing funding costs by growing deposit balances and
shifting funding sources from higher-cost retail certificates of deposit to lower-cost,
transaction-based accounts. The Corporations Checking Account Marketing Program (CHAMP)
continues to attract new customers and deposits. In addition, during the first quarter of 2004 the
Corporation introduced a new money market account called Performance Plus. These programs are
designed to develop new customer relationships, shift the Corporations funding mix towards
lower-cost funding sources and generate additional fee income opportunities. The asset-sensitive nature of the Corporations balance sheet should improve the net interest
margin resulting in more interest income. However, competitive pricing pressure on both sides of
the balance sheet may mitigate the asset-sensitive nature of the Corporations balance sheet
resulting in a relatively flat margin. In addition, a flattening of the yield curve may result in
additional pressure on the net interest margin. Thus the increase in net interest income may come
from the final component, an increase in earning assets and in particular loans. Loan growth is a major focus of the Corporation. The lending environment continues to be
highly competitive. However, the loan portfolio has shown steady growth during 2004 in home
equity, mortgage, commercial real estate, and consumer loans. Management believes the Corporation
is positioned for future loan growth due to an improving market for commercial loans, an increased
number of commercial lenders and an increased focus on small business loans. Maintaining sound asset quality is another major focus for the Corporation. As a result of
this focus and the initiatives taken in 2003 and in the first quarter of 2004, the Corporations
asset quality ratios have improved significantly and remain strong. During the second quarter of
2003, the Corporation sold $60.9 million in nonaccruing and accruing higher risk loans (the 2003
Loan Sale) to improve the asset quality of the loan portfolio by containing the financial risk of
these loans. Additionally, the Corporation sold its $11.7 million credit card portfolio in the
first quarter of 2003. Similarly, in the first quarter of 2004, $6.4 million in 15




---



##### 



nonaccruing and accruing higher risk mortgage loans were sold. These activities have had a positive
impact on earnings by reducing the credit risk profile of the Corporation and eliminating
significant future collection costs. Nevertheless, the business of lending to commercial and
consumer customers carries with it significant credit risk, which must be continually managed.
Management monitors asset quality and credit risk on an ongoing basis. The Corporation is also focused on retaining existing customers and attracting new customers.
The Corporations primary methods of competition are to provide exceptional customer service and to
proactively market its products. The Corporation uses a quarterly independent survey of customers
to review its level of customer service. During the fourth quarter of 2004, 83 percent of the
customers surveyed reported that they were very satisfied with the service at First Charter,
compared to the industry average of 58 percent. The Corporations main strategy for obtaining new
customers is CHAMP, a disciplined, proactive approach to attracting new accounts and customers. Its
success has provided the Corporation with opportunities to develop new customer relationships, to
generate additional fee income and to shift its funding mix towards lower-cost funding sources. To
meet the convenience needs of existing and potential customers, the Corporation has recently
replaced five existing branches, opened one new branch, introduced extended hours in select
branches and its call center and added bilingual personnel. The Corporation will continue to update
existing branches and expand into new areas as both market and economic conditions warrant. Another focus for the Corporation is growing fee income through other lines of business. These
sources of income provide stability to the Corporations earnings with minimal credit risk and less
exposure to interest rate risk than its community banks traditional lines of business. In
addressing this area of focus, the Corporation, through a subsidiary of FCB, acquired an insurance
agency during each of the third and fourth quarters of 2003 and the fourth quarter of 2004. These
acquisitions expanded the reach of the Corporations insurance services with businesses and
individuals throughout the Charlotte Metro region. In addition, the Corporation, through a
subsidiary of FCB, acquired a third party benefits administrator during the third quarter of 2003.
This acquisition added new customers, expanded the Corporations product line and improved its
technology platform. Also, during 2003 and early 2004, First Charter Brokerage Services, Inc.
increased its number of licensed sales associates. As a result of these actions and the continued
success of CHAMP, income from service charges, financial management services, brokerage services
and insurance services increased in 2004. The Corporation continuously reviews other opportunities
for new products, new services and expansion as conditions warrant. The Corporation competes against other banks, savings and loan associations, savings banks,
credit unions, finance companies and major retail stores that offer competing financial services.
Several larger competitors have greater resources, broader geographic coverage and higher lending
limits than the Corporation. However, the Corporation has the fourth largest deposit market share
in the Charlotte Metro region, which allows the Corporation to compete against both larger and
smaller financial institutions. Performance Overview Net income amounted to $42.4 million, or $1.40 per diluted share, for the year ended December
31, 2004, an increase from net income of $14.1 million, or $0.47 per diluted share, for the year
ended December 31, 2003. The return on average common shareholders equity was 14 percent in 2004
compared to 5 percent in 2003. Earnings for 2003 were impacted by a higher provision for loan
losses primarily attributable to the 2003 Loan Sale and by $19.1 million of costs associated with
the refinancing of fixed-term advances. The Corporation experienced strong core business fundamentals in the areas of deposits and
customer satisfaction during 2004 that is expected to continue to provide strong momentum for 2005.
As previously discussed, customer satisfaction scores were 83 percent very satisfied for the
fourth quarter of 2004. The continued success of CHAMP resulted in 38,607 new checking accounts
being opened, an average of 728 new checking accounts per branch. This is well above the industry
average of 245 new checking accounts per branch per year. In addition, during 2004, core
households, which are households with a checking account, increased 10 percent to 101,249 primarily
due to the success of CHAMP. 16




---



##### 



Financial Summary For the year ended December 31, 2004, net interest income increased $15.2 million, or 14
percent, to $123.0 million from the year ended December 31, 2003 due to the strong loan growth, a
decrease in prepayment speeds in the securities-available-for-sale portfolio, the refinancing of
fixed-term advances in 2003 and certain asset-liability management transactions entered into during
2004. For the year ended December 31, 2004, noninterest income decreased $3.0 million, or 5 percent,
to $60.9 million primarily due to lower gains on the sale of securities, lower trading gains and a
gain recognized on the sale of the credit card portfolio during 2003, which did not recur in 2004.
However, the Corporations primary noninterest income lines of business continued to generate
strong revenue growth compared to 2003, with financial management income up 58 percent, insurance
services income up 20 percent and service charges up 15 percent. Noninterest expense decreased $15.8 million, or 12 percent, to $111.0 million primarily due to
$19.1 million of prepayment costs associated with refinancing $131.0 million in fixed-term advances
in 2003 which did not recur in 2004. In addition, professional service fees decreased $2.0 million.
These decreases were partially offset by a $3.7 million increase in salaries and employee benefits
due to additional personnel, including the acquisition of a third party benefits administrator and
three insurance agencies, increased incentive compensation and employee benefit accruals resulting
from an increase in 2004 earnings. Income tax expense increased $18.7 million to $22.0 million due to an increase in taxable
income relative to nontaxable adjustments and an increase in accrued taxes resulting from a
proposed tax assessment received in the third quarter of 2004. The Corporation is appealing this
assessment. Fourth Quarter 2004 Results Net income amounted to $11.6 million, or $0.38 per diluted share, for the three months ended
December 31, 2004, compared to a net loss of $0.5 million, or $0.02 per diluted share for the same
period in 2003. Net income for the three months ended December 31, 2003 were impacted by $11.7
million of costs associated with the refinancing of fixed-term advances. Net interest income increased $2.8 million to $31.8 million compared to the fourth quarter of
2003. The increase was due to a $5.5 million increase in interest income primarily resulting from
strong loan growth and an increase in interest rates. The increase in interest income was partially
offset by a $2.7 million increase in interest expense due to an increase in interest rates and
higher levels of deposits and other borrowings. The effect of the increase in rates was partially
mitigated by the refinancing of $81 million of fixed-term advances in the fourth quarter of 2003
and by certain asset-liability management transactions entered into during 2004. During the fourth quarter of 2004, noninterest income increased $1.8 million to $15.3 million,
compared to the fourth quarter of 2003. The increase was primarily due to the following: a $1.1
million increase in service charges; an $0.8 million increase in other noninterest income due to
growth in ATM, debit card and other miscellaneous fees and a $0.7 million increase in insurance
service income primarily due to increases in contingency income. These increases were partially
offset by a $0.2 million decrease in brokerage income, and a $0.2 million decrease in gains on sale
of securities. Noninterest expense decreased $13.7 million to $27.7 million, compared to the fourth quarter
of 2003. The decrease was primarily due to $11.7 million of prepayment costs associated with
refinancing $81 million in fixed term advances in 2003 that did not recur in 2004. In addition,
professional service fees decreased $1.2 million and salaries and employee benefits decreased $1.0
million primarily due to lower medical and dental expenses and decreased commission-based
compensation. Total income tax expense for the fourth quarter of 2004 was $6.1 million compared to an income
tax benefit of $2.0 million for the fourth quarter of 2003. 17




---



##### 



Table OneSelected Financial Data
 Years ended December 31,(Dollars in thousands, except per share amounts)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Income statementInterest income
    
    $
    187,303
    
    
    $
    178,292
    
    
    $
    196,388
    
    
    $
    215,276
    
    
    $
    216,143Interest expense
    
    
    64,293
    
    
    
    70,490
    
    
    
    83,227
    
    
    
    109,912
    
    
    
    108,314Net interest income
    
    
    123,010
    
    
    
    107,802
    
    
    
    113,161
    
    
    
    105,364
    
    
    
    107,829Provision for loan losses
    
    
    8,425
    
    
    
    27,518
    
    
    
    8,270
    
    
    
    4,465
    
    
    
    7,615Noninterest income
    
    
    60,896
    
    
    
    63,933
    
    
    
    47,410
    
    
    
    38,773
    
    
    
    30,666Noninterest expense
    
    
    111,017
    
    
    
    126,785
    
    
    
    97,551
    
    
    
    87,579
    
    
    
    92,727Income before income taxes
    
    
    64,464
    
    
    
    17,432
    
    
    
    54,750
    
    
    
    52,093
    
    
    
    38,153Income taxes
    
    
    22,022
    
    
    
    3,286
    
    
    
    14,947
    
    
    
    16,768
    
    
    
    13,312Net income
    
    $
    42,442
    
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    35,325
    
    
    $
    24,841Per common shareBasic net income
    
    $
    1.42
    
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.12
    
    
    $
    0.79Diluted net income
    
    
    1.40
    
    
    
    0.47
    
    
    
    1.30
    
    
    
    1.12
    
    
    
    0.79Cash dividends declared (1)
    
    
    0.75
    
    
    
    0.74
    
    
    
    0.73
    
    
    
    0.72
    
    
    
    0.70Period-end book value
    
    
    10.47
    
    
    
    10.08
    
    
    
    10.80
    
    
    
    10.06
    
    
    
    9.79Average shares outstanding - basic
    
    
    29,859,683
    
    
    
    29,789,969
    
    
    
    30,520,125
    
    
    
    31,480,109
    
    
    
    31,435,342Average shares outstanding - diluted
    
    
    30,277,063
    
    
    
    30,007,435
    
    
    
    30,702,107
    
    
    
    31,660,985
    
    
    
    31,580,328RatiosReturn on average shareholders equity (2)
    
    
    14.05
    %
    
    
    4.50
    %
    
    
    12.52
    %
    
    
    11.03
    %
    
    
    8.29
    %Return on average assets
    
    
    0.98
    
    
    
    0.35
    
    
    
    1.13
    
    
    
    1.14
    
    
    
    0.90Net interest margin
    
    
    3.13
    
    
    
    3.00
    
    
    
    3.52
    
    
    
    3.72
    
    
    
    4.26Average loans to average deposits
    
    
    92.86
    
    
    
    86.60
    
    
    
    94.30
    
    
    
    95.43
    
    
    
    110.52Average equity to average assets (2)
    
    
    6.99
    
    
    
    7.85
    
    
    
    9.02
    
    
    
    10.31
    
    
    
    10.84Efficiency ratio (3)
    
    
    60.55
    
    
    
    77.45
    
    
    
    64.29
    
    
    
    60.97
    
    
    
    64.09Dividend payout
    
    
    53.50
    
    
    
    156.96
    
    
    
    56.31
    
    
    
    64.29
    
    
    
    88.61Selected period end balancesSecurities available for sale
    
    $
    1,652,732
    
    
    $
    1,601,900
    
    
    $
    1,129,212
    
    
    $
    1,076,324
    
    
    $
    441,031Loans held for sale
    
    
    5,326
    
    
    
    5,137
    
    
    
    158,404
    
    
    
    7,334
    
    
    
    5,063Loans, net
    
    
    2,412,529
    
    
    
    2,227,030
    
    
    
    2,045,266
    
    
    
    1,921,718
    
    
    
    2,123,897Allowance for loan losses
    
    
    26,872
    
    
    
    25,607
    
    
    
    27,204
    
    
    
    25,843
    
    
    
    28,447Total assets
    
    
    4,431,605
    
    
    
    4,206,693
    
    
    
    3,745,949
    
    
    
    3,332,737
    
    
    
    2,932,199Total deposits
    
    
    2,609,846
    
    
    
    2,427,897
    
    
    
    2,322,647
    
    
    
    2,162,945
    
    
    
    1,998,234Borrowings
    
    
    1,449,736
    
    
    
    1,432,200
    
    
    
    1,042,440
    
    
    
    808,512
    
    
    
    570,024Total liabilities
    
    
    4,116,918
    
    
    
    3,907,254
    
    
    
    3,421,263
    
    
    
    3,023,396
    
    
    
    2,622,912Total shareholders equity
    
    
    314,687
    
    
    
    299,439
    
    
    
    324,686
    
    
    
    309,341
    
    
    
    309,287Selected average balancesLoans, net
    
    
    2,363,107
    
    
    
    2,152,748
    
    
    
    2,122,890
    
    
    
    1,990,406
    
    
    
    2,074,971Earning assets
    
    
    4,004,678
    
    
    
    3,662,460
    
    
    
    3,261,844
    
    
    
    2,881,295
    
    
    
    2,576,853Total assets (2)
    
    
    4,322,727
    
    
    
    4,009,511
    
    
    
    3,525,090
    
    
    
    3,104,952
    
    
    
    2,763,920Total deposits
    
    
    2,544,865
    
    
    
    2,485,711
    
    
    
    2,251,256
    
    
    
    2,085,669
    
    
    
    1,877,426Borrowings
    
    
    1,428,124
    
    
    
    1,159,889
    
    
    
    906,263
    
    
    
    652,298
    
    
    
    556,859Total shareholders equity (2)
    
    
    302,101
    
    
    
    314,562
    
    
    
    317,952
    
    
    
    320,215
    
    
    
    299,745
  (1)
    
    First Charter Corporation historical cash dividends declared.(2)
    
    Amounts and ratios in the 2003 and 2002 periods have been adjusted to correct a calculation error with respect to average balances.(3)
    
    Noninterest expense divided by the sum of taxable equivalent net interest income plus noninterest income less gain on sale of securities. 18




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##### 



Critical Accounting Estimates and Policies 
 The Corporations significant accounting policies are described in Note Oneof the
consolidated financial statements and are essential in understanding managements discussion and
analysis of financial condition and results of operations. Some of the Corporations accounting
policies require significant judgment to estimate values of either assets or liabilities. In
addition, certain accounting principles require significant judgment in applying the complex
accounting principles to complicated transactions to determine the most appropriate treatment. The following is a summary of the more judgmental estimates and complex accounting principles.
In many cases, there are numerous alternative judgments that could be used in the process of
estimating values of assets or liabilities. Where alternatives exist, the Corporation has used the
factors that we believe represent the most reasonable value in developing the inputs for the
valuation. Actual performance that differs from the Corporations estimates of the key variables
could impact net income. Allowance for Loan Losses The Corporation considers its policy regarding the allowance for loan losses to be one of its
most critical accounting policies, as it requires managements most subjective and complex
judgments. The allowance for loan losses is maintained at a level the Corporation believes is
adequate to absorb probable losses inherent in the loan portfolio as of the date of the
consolidated financial statements. The Corporation has developed appropriate policies and
procedures for assessing the adequacy of the allowance for loan losses that reflect its careful
evaluation of credit risk considering all information available to us. The determination of the level of the allowance and, correspondingly, the provision for loan
losses, rests upon various judgments and assumptions, including: (i) general economic conditions,
(ii) loan portfolio composition, (iii) prior loan loss experience, (iv) managements evaluation of
credit risk related to both individual borrowers and pools of loans and (v) observations derived
from the Corporations ongoing internal audit and examination processes and those of its
regulators. Depending on changes in circumstances, future assessments of credit risk may yield
materially different results, which may require an increase or decrease in the allowance for loan
losses. The Corporation employs a variety of statistical modeling and estimation tools in developing
the appropriate allowance. The following provides a description of each of the components involved
in the allowance for loan losses, the techniques the Corporation used and the estimates and
judgments inherent to each component. The first component of the allowance for loan losses, the valuation allowance for impaired and
certain classified loans, is computed based on documented reviews performed by the Corporations
Credit Risk Management. The reviews are completed for impaired commercial relationships greater
than $150,000 and classified relationships greater than $250,000. Credit Risk Management typically
estimates these valuation allowances by considering the fair value of the underlying collateral for
each impaired loan using current appraisals or estimates of values. The results of these estimates
are updated quarterly or periodically as circumstances change. Changes in the dollar amount of
impaired loans or in the estimates of the fair value of the underlying collateral can impact the
valuation allowance on impaired loans and, therefore, the overall allowance for loan losses. The second component of the allowance for loan losses, the portion attributable to all other
loans without specific reserve amounts, is determined by applying historical loss rates to the
outstanding balance of loans. The portfolio is segmented into two major categories: commercial
loans and consumer loans, which include mortgage, general consumer, consumer real estate, home
equity and consumer unsecured loans. Commercial loans are segmented further by risk grade, so that
separate loss factors are applied to each pool of commercial loans. The historical loss factors
applied to the commercial segments are determined using a migration analysis tool that computes
current loss estimates by credit grade using a trailing loss history database. Since the migration
analysis is based on trailing data, the percentage loss estimates can change based on actual
losses. Changes in commercial loan credit grades or in the mix of 19




---



##### 



the portfolio can also impact this component of the allowance for loan losses from period to
period. Consumer loans are segmented further by collateral types in order to apply separate loss
factors to each pool of consumer loans. The historical loss factors applied to the consumer
segments are a twelve-month rolling average of losses. Since the loss factors are based on
historical data, the percentage loss estimates can change based on actual losses. The third component of the allowance for loan losses is intended to capture the various risk
elements of the loan portfolio which may not be sufficiently captured in the historical loss rates.
These factors currently include intrinsic risk, operational risk and concentration risk. Intrinsic
risk relates to the impact of current economic conditions on the Corporations borrower base, the
effects of which may not be realized by the Corporation in the form of charge-offs for several
periods. The Corporation monitors and documents various local, regional and national economic data,
and makes subjective estimates of the impact of changes in economic conditions on the allowance for
loan losses. Operational risk includes factors such as the likelihood of loss on a loan due to
procedural error. Historically, the Corporation has made additional loss estimates for certain
types of loans that were either acquired from other institutions in mergers or were underwritten
using policies that are no longer in effect at the Corporation. These identified loans are
considered to have higher risk of loss than currently reflected in historical loss rates of the
Corporation, so additional estimates of loss are made by management. Concentration risk includes
the risk of loss due to extensions of credit to a particular industry, loan type or borrower that
may be troubled. The Corporation monitors its portfolio for any excessive concentrations of loans
during each period, and if any excessive concentrations are noted, additional estimates of loss
would be made. Changes in the allowance for loan losses for these subjective factors can arise from
changes in the balance and types of outstanding loans, as well as changes in the underlying
conditions which drive a change in the percentage used. As more fully discussed below, the
Corporation continually monitors the portfolio in an effort to identify any other factors which may
have an impact on loss estimates within the portfolio. All estimates of the loan portfolio risk, including the adequacy of the allowance for loan
losses, are subject to general and local economic conditions, among other factors, which are
unpredictable and beyond the Corporations control. Since a significant portion of the loan
portfolio is comprised of real estate loans and loans to area businesses, the Corporation is
subject to continued risk that the real estate market and economic conditions in general could
continue to change and therefore result in additional losses and require increases in the provision
for loan losses. If management had made different assumptions about probable loan losses, the
Corporations financial position and results of operations could have differed materially. For
additional discussion concerning the Corporations allowance for loan losses and related matters,
see Allowance for Loan Losses. Tax Contingencies In accounting for tax contingencies, the Corporation assesses the relative merits and
risks of the appropriate tax treatment of transactions taking into account statutory, judicial and
regulatory guidance in the context of the Corporations tax position. For those matters where it is
probable that the Corporation will have to pay additional taxes, interest or penalties and a loss
or range of loss can be reasonably estimated, the Corporation has recorded reserves in the
consolidated financial statements. Changes to the Corporations tax contingency estimate occur periodically due to implementation
of new tax planning strategies, resolution with taxing authorities of issues with previously taken
tax positions and newly enacted statutory, judicial and regulatory guidance. These changes, which
are often driven by the Corporations judgments, affect current taxes payable and can be material
to the Corporations operating results for any particular period. Derivative Instruments The Corporation enters into interest rate swap agreements as business conditions warrant.
These interest rate swap agreements provide an exchange of interest payments computed on notional
amounts that will offset any undesirable change in fair value resulting from market rate changes on
designated hedged items. A swap agreement is a contract between two parties to exchange cash flows
based on 20




---



##### 



specified underlying notional amounts, assets and/or indices. The interest rate swap
agreements utilized by the Corporation qualify for hedge accounting as fair value hedges. The fair value of the interest rate swaps is determined by a third party at inception and is
valued subsequently on a quarterly basis. The valuation is determined using a discounted cash flow
model and a volatility index. The Corporation performs a quarterly assessment based on the third
party valuations to assess whether the derivative used in its hedging transaction has been highly
effective in offsetting changes in the fair value of the hedged item. The effectiveness assessment
is conducted using the cumulative dollar offset method. The Corporation accounts for these interest rate swaps as a hedge of the fair value of the
designated Federal Home Loan Bank (FHLB) advances. Currently, three of the Corporations seven
interest rate swaps meet the criteria for the short-cut accounting method. According to the
provisions of Statement of Financial Accounting Standards No. 133 (SFAS No. 133), the short cut
method assumes that the change in the fair value of the derivative hedging instrument and the
hedged debt obligation is one hundred percent correlated, which results in no ineffectiveness and
no income statement effect. For interest rate swaps that do not meet the criteria for the short-cut
accounting method, the Corporation records on a quarterly basis, in noninterest income, the net
change in the fair value of the interest rate swap and the designated FHLB advances, attributed to
changes in interest rates, provided the criteria for hedge accounting continue to be met. In the
event the criteria for hedge accounting are not met in a future period, the Corporation will cease
recording the change in fair value of the FHLB advances and will amortize into earnings the then
carrying value of the interest rate swap over the life of the hedged item. The derivative hedging
instruments are recorded at fair value in other assets or other liabilities. The Corporation formally documents at inception all relationships between hedging instruments
and hedged items, as well as its risk management objectives and strategies for undertaking various
hedge transactions as required by Statement of Financial Accounting Standards No. 133. This
documentation includes analysis at inception and is ongoing relative to the effectiveness of the
hedging relationship. If the Corporations initial judgments were inappropriate, hedge accounting
would be reversed and only the change in fair value of the derivative would be recognized through
the income statement. The Corporation will discontinue hedge accounting when it is determined that
a derivative is not expected to be or has ceased to be highly effective as a hedge, and will
reflect changes in fair value through the income statement. See Asset-Liability Management and
Interest Rate Riskfor further details regarding these interest rate swap agreements. Earnings Performance
 Net Interest Income and Margin Net interest income, the difference between total interest income and total interest expense,
is the Corporations principal source of earnings. An analysis of the Corporations net interest
income on a taxable-equivalent basis and average balance sheets for the last three years is
presented in Table Two. Net interest income on a taxable-equivalent basis (FTE) is a non-GAAP
(Generally Accepted Accounting Principles) performance measure used by management in operating the
business which management believes provides investors with a more accurate picture of the interest
margin for comparative purposes. The changes in net interest income (on a taxable-equivalent basis)
from year to year are analyzed in Table Three. The discussion below is based on net interest income
computed under accounting principles generally accepted in the United States of America. For the year ended December 31, 2004, net interest income amounted to $123.0 million, an
increase of approximately 14 percent from net interest income of $107.8 million in 2003. This
increase was primarily due to a $9.0 million or 5 percent increase in interest income due mainly to
strong loan growth, increases in the securities-available-for-sale portfolio and a decrease in
prepayment speeds in the securities-available-for-sale portfolio. In addition, net interest income
was impacted by a $6.2 million or 9 percent decrease in interest expense compared to 2003. This
decrease was primarily due to the following: a shift in funding sources from higher-cost retail CDs
to lower-cost transaction based accounts; the 21




---



##### 



repricing of retail CDs at lower rates in 2003 and 2004; the refinancing of $131.0 million of
fixed-term advances in 2003 and certain asset-liability management transactions entered into during
2004. These decreases were partially offset by an increase in interest rates. The net interest margin (tax-adjusted net interest income divided by average interest-earning
assets) increased 13 basis points to 3.13 percent in 2004, compared to 3.00 percent in 2003 due to
the asset-sensitive nature of the balance sheet. The effective yield on earning assets during 2004
was negatively impacted by earning assets that repriced at lower interest rates during 2003 and the
first half of 2004. Rates paid on interest-bearing liabilities decreased 36 basis points primarily
due to the previously mentioned deposit-mix shift, refinancings and the Corporations Asset
Liability Management (ALM) transactions. This was partially offset by the 125 basis point
increase in the Fed Funds rate. The primary objective of the Corporation in interest rate risk
management is to maximize the net interest margin across a broad range of interest rate scenarios,
while maintaining an appropriate interest rate risk profile. Average interest earning assets increased $342.2 million to $4.0 billion for the year ended
December 31, 2004 compared to $3.7 billion for the same 2003 period. These increases were primarily
due to growth in the Corporations average loans and loans held for sale portfolio, which increased
$210.4 million during 2004, compared to the same 2003 period. These increases were mainly due to
growth in the home equity, mortgage, consumer and commercial real estate loan categories. The
increases in average loans and loans held for sale were partially offset by mortgage loan
securitizations of $40.7 million and the sale of $6.4 million of nonaccruing and accruing higher
risk mortgage loans in 2004. Average interest earning assets were also impacted by increases in the
Corporations securities-available-for-sale portfolio of $158.4 million during 2004, compared to
2003. In addition to the increase in average interest earning assets, the Corporation experienced an
increase in average interest-bearing liabilities. Average other borrowings increased $268.2 million
for the year ended December 31, 2004, compared to the same 2003 period and were used to fund loan
growth and securities purchases. In addition, average deposits increased $59.2 million from the
year ended December 31, 2003. While certificates of deposits declined on average $41.6 million for
the year ended December 31, 2004, noninterest-bearing and other core deposit categories increased
$100.8 million, primarily due to the continued success of CHAMP. 22




---



##### 



The following table includes for the years ended December 31, 2004, 2003 and 2002 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 interest margin. Average balances were calculated based on daily balances. Table TwoAverage Balances and Net Interest Income Analysis2004
    
    
    2003
    
    
    2002Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    Average
    
    
    
    
    
    
    Interest
    
    
    AverageAverage
    
    
    Income/
    
    
    Yield/Rate
    
    
    Average
    
    
    Income/
    
    
    Yield/Rate
    
    
    Average
    
    
    Income/
    
    
    Yield/Rate(Dollars in thousands)
    
    Balance
    
    
    Expense
    
    
    Paid
    
    
    Balance
    
    
    Expense
    
    
    Paid
    
    
    Balance
    
    
    Expense
    
    
    PaidInterest earning assets:Loans and loans held
for sale (1) (2) (3)
    
    $
    2,363,107
    
    
    $
    124,496
    
    
    
    5.27
    %
    
    $
    2,152,748
    
    
    $
    119,375
    
    
    
    5.55
    %
    
    $
    2,122,890
    
    
    $
    135,745
    
    
    
    6.39
    %Securities  taxable
    
    
    1,538,133
    
    
    
    60,127
    
    
    
    3.91
    
    
    
    1,393,277
    
    
    
    55,596
    
    
    
    3.99
    
    
    
    1,044,915
    
    
    
    57,300
    
    
    
    5.48Securities  nontaxable
    
    
    84,969
    
    
    
    4,289
    
    
    
    5.05
    
    
    
    71,427
    
    
    
    5,077
    
    
    
    7.11
    
    
    
    81,579
    
    
    
    5,868
    
    
    
    7.19Federal funds sold
    
    
    1,566
    
    
    
    19
    
    
    
    1.22
    
    
    
    2,074
    
    
    
    20
    
    
    
    0.99
    
    
    
    1,249
    
    
    
    20
    
    
    
    1.57Interest bearing bank deposits
    
    
    16,903
    
    
    
    200
    
    
    
    1.18
    
    
    
    42,934
    
    
    
    465
    
    
    
    1.08
    
    
    
    11,209
    
    
    
    169
    
    
    
    1.51Total earning assets(4)
    
    
    4,004,678
    
    
    
    189,131
    
    
    
    4.72
    
    
    
    3,662,460
    
    
    
    180,533
    
    
    
    4.93
    
    
    
    3,261,842
    
    
    
    199,102
    
    
    
    6.10Cash and due from banks
    
    
    89,103
    
    
    
    
    
    
    
    
    
    
    
    90,941
    
    
    
    
    
    
    
    
    
    
    
    83,401Other assets(5)
    
    
    228,946
    
    
    
    
    
    
    
    
    
    
    
    256,110
    
    
    
    
    
    
    
    
    
    
    
    179,847Total assets(5)
    
    $
    4,322,727
    
    
    
    
    
    
    
    
    
    
    $
    4,009,511
    
    
    
    
    
    
    
    
    
    
    $
    3,525,090Interest bearing liabilities:Demand deposits
    
    
    848,597
    
    
    
    6,643
    
    
    
    0.78
    
    
    
    778,600
    
    
    
    6,997
    
    
    
    0.90
    
    
    
    576,111
    
    
    
    5,385
    
    
    
    0.93Savings deposits
    
    
    122,339
    
    
    
    321
    
    
    
    0.26
    
    
    
    118,459
    
    
    
    520
    
    
    
    0.44
    
    
    
    120,899
    
    
    
    1,287
    
    
    
    1.06Other time deposits
    
    
    1,211,891
    
    
    
    28,386
    
    
    
    2.34
    
    
    
    1,253,538
    
    
    
    34,027
    
    
    
    2.71
    
    
    
    1,279,879
    
    
    
    44,285
    
    
    
    3.46Other borrowings
    
    
    1,428,124
    
    
    
    28,943
    
    
    
    1.99
    
    
    
    1,159,889
    
    
    
    28,946
    
    
    
    2.50
    
    
    
    906,263
    
    
    
    32,270
    
    
    
    3.56Total interest bearing liabilities
    
    
    3,610,951
    
    
    
    64,293
    
    
    
    1.77
    
    
    
    3,310,486
    
    
    
    70,490
    
    
    
    2.13
    
    
    
    2,883,152
    
    
    
    83,227
    
    
    
    2.89Noninterest bearing sources:Noninterest bearing deposits
    
    
    362,038
    
    
    
    
    
    
    
    
    
    
    
    335,114
    
    
    
    
    
    
    
    
    
    
    
    274,368Other liabilities(5)
    
    
    47,637
    
    
    
    
    
    
    
    
    
    
    
    49,349
    
    
    
    
    
    
    
    
    
    
    
    49,618Shareholders equity(5)
    
    
    302,101
    
    
    
    
    
    
    
    
    
    
    
    314,562
    
    
    
    
    
    
    
    
    
    
    
    317,952Total liabilities and
shareholders equity(5)
    
    $
    4,322,727
    
    
    
    
    
    
    
    
    
    
    $
    4,009,511
    
    
    
    
    
    
    
    
    
    
    $
    3,525,090Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.95
    
    
    
    
    
    
    
    
    
    
    
    2.80
    
    
    
    
    
    
    
    
    
    
    
    3.21Impact of noninterest
bearing sources
    
    
    
    
    
    
    
    
    
    
    0.18
    
    
    
    
    
    
    
    
    
    
    
    0.20
    
    
    
    
    
    
    
    
    
    
    
    0.34Net interest income/
yield on earning assets
    
    
    
    
    
    $
    124,838
    
    
    
    3.13
    %
    
    
    
    
    
    $
    110,043
    
    
    
    3.00
    %
    
    
    
    
    
    $
    115,875
    
    
    
    3.55
    %
   (1) The preceding analysis takes into consideration the principal amount of nonaccruing loans and only income actually collected and recognized
on such loans.
 (2) Average loan balances are shown net of unearned income. (3) Includes amortization of deferred loan fees of approximately $2,616, $2,576, and $2,187, for 2004, 2003 and 2002, 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 2004, 2003 and 2002. The adjustments made
to convert to a taxable-equivalent basis were $1,828, $2,241, and $2,714 for 2004,
2003 and 2002, respectively. (5) Amounts in 2003 and 2002 periods have been adjusted to correct a calculation error with respect to average balances. 23




---



##### 



The following table presents the changes in net interest income between the years ended
December 31, 2004 and December 31, 2003 and between the years ended December 31, 2003 and December
31, 2002. Table ThreeVolume and Rate Variance AnalysisDec. 31, 2004 versus Dec. 31, 2003 versus Dec. 31, 2002Increase (Decrease) in Net Interest IncomeDue to Change in Rate and Volume(1)2004
    
    
    
    
    
    
    
    
    
    
    2003
    
    
    
    
    
    
    
    
    
    
    2002Income/
    
    
    
    
    
    
    
    
    
    
    Income/
    
    
    
    
    
    
    
    
    
    
    Income/(Dollars in thousands)
    
    Expense
    
    
    Rate
    
    
    Volume
    
    
    Expense
    
    
    Rate
    
    
    Volume
    
    
    ExpenseInterest income:Loans and loans held for sale(2)
    
    $
    124,496
    
    
    $
    (6,253
    )
    
    $
    11,374
    
    
    $
    119,375
    
    
    $
    (18,152
    )
    
    $
    1,782
    
    
    $
    135,745Securities  taxable
    
    
    60,127
    
    
    
    (1,191
    )
    
    
    5,722
    
    
    
    55,596
    
    
    
    (18,207
    )
    
    
    16,503
    
    
    
    57,300Securities  nontaxable(2)
    
    
    4,289
    
    
    
    (1,611
    )
    
    
    823
    
    
    
    5,077
    
    
    
    (65
    )
    
    
    (726
    )
    
    
    5,868Federal funds sold
    
    
    19
    
    
    
    5
    
    
    
    (6
    )
    
    
    20
    
    
    
    (10
    )
    
    
    10
    
    
    
    20Interest bearing bank deposits
    
    
    200
    
    
    
    30
    
    
    
    (295
    )
    
    
    465
    
    
    
    (115
    )
    
    
    411
    
    
    
    169Total interest income
    
    $
    189,131
    
    
    $
    (9,020
    )
    
    $
    17,618
    
    
    $
    180,533
    
    
    $
    (36,549
    )
    
    $
    17,980
    
    
    $
    199,102Interest expense:Demand deposits
    
    $
    6,643
    
    
    $
    (943
    )
    
    $
    589
    
    
    $
    6,997
    
    
    $
    (244
    )
    
    $
    1,856
    
    
    $
    5,385Savings deposits
    
    
    321
    
    
    
    (213
    )
    
    
    14
    
    
    
    520
    
    
    
    (749
    )
    
    
    (18
    )
    
    
    1,287Other time deposits
    
    
    28,386
    
    
    
    (4,589
    )
    
    
    (1,052
    )
    
    
    34,027
    
    
    
    (9,444
    )
    
    
    (814
    )
    
    
    44,285Other borrowings
    
    
    28,943
    
    
    
    (6,068
    )
    
    
    6,065
    
    
    
    28,946
    
    
    
    (11,004
    )
    
    
    7,680
    
    
    
    32,270Total interest expense
    
    
    64,293
    
    
    
    (11,813
    )
    
    
    5,616
    
    
    
    70,490
    
    
    
    (21,441
    )
    
    
    8,704
    
    
    
    83,227Net interest income
    
    $
    124,838
    
    
    $
    2,793
    
    
    $
    12,002
    
    
    $
    110,043
    
    
    $
    (15,108
    )
    
    $
    9,276
    
    
    $
    115,875
   (1) The changes for each category of income and expense are divided between the portion of change attributable to the variance in rate or volume for
that category. The amount of change that cannot be separated is allocated to each variance proportionately.
 (2) Income on nontaxable securities and loans are stated on a taxable-equivalent basis. Refer toTable Twofor further details. Noninterest Income The major components of noninterest income are derived from service charges on deposit
accounts as well as other banking products and services from the Corporations various lines of
business including brokerage, mortgage, insurance and financial management. In addition, the
Corporation realizes gains from the sale of bond and equity securities and income from its
investment in Bank Owned Life Insurance (BOLI). Noninterest income decreased $3.0 million, or 5 percent, to $60.9 million compared to the same
period in 2003. A number of factors contributed to the decrease. Gains on the sale of securities
totaling $2.4 million were recognized in 2004, compared to gains of $10.3 million in 2003,
representing a decrease of $7.9 million. In 2003, additional gains of $2.3 million from the sale of
the First Charter credit card portfolio and $1.8 million of trading gains were recognized. In
addition, 2004 mortgage loan fees decreased $1.2 million as origination volume declined and the
bank retained a larger portion of mortgage loans. These decreases in noninterest income were
partially offset by the following: a $3.4 million increase in service charges primarily due to
growth in checking accounts; a $2.1 million increase in financial management income primarily due
to the acquisition of a third party benefits administrator in the third quarter of 2003; and a $2.9
million increase in other noninterest income due to growth in ATM and debit card fees, property
sale gains of $0.8 million and a gain of $0.3 million recognized on the sale of deposits and loans.
In addition, insurance services income increased $1.9 million. The increase in insurance services
income was partially due to a full year impact of the successful integration of two insurance
agencies acquired in 2003 and a partial year impact for the acquisition of one insurance agency
acquired in the fourth quarter of 2004. In addition, insurance services income was impacted by a
$0.8 million increase in contingency income, as the Corporation was able to guarantee a higher
amount of contingency income compared to 2003. Contingency income is subject to fluctuations based
on events beyond the Corporations control. 24




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##### 



The following table compares noninterest income for the years ended December 31, 2004 and
2003. Table FourNoninterest IncomeYears Ended December 31
    
    
    Increase/(Decrease)(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    Amount
    
    
    PercentService charges on deposit accounts
    
    $
    25,564
    
    
    $
    22,143
    
    
    $
    3,421
    
    
    
    15.4
    %Financial management income
    
    
    5,848
    
    
    
    3,705
    
    
    
    2,143
    
    
    
    57.8Gain on sale of securities
    
    
    2,383
    
    
    
    10,287
    
    
    
    (7,904
    )
    
    
    (76.8
    )Gain on sale of credit card loan portfolio
    
    
    
    
    
    
    2,262
    
    
    
    (2,262
    )
    
    
    N/ALoss from equity method investments
    
    
    (349
    )
    
    
    (285
    )
    
    
    (64
    )
    
    
    (22.5
    )Mortgage services income
    
    
    1,748
    
    
    
    2,912
    
    
    
    (1,164
    )
    
    
    (40.0
    )Brokerage services income
    
    
    3,112
    
    
    
    3,016
    
    
    
    96
    
    
    
    3.2Insurance services income
    
    
    11,269
    
    
    
    9,408
    
    
    
    1,861
    
    
    
    19.8Trading gains
    
    
    163
    
    
    
    1,801
    
    
    
    (1,638
    )
    
    
    (90.9
    )Bank owned life insurance
    
    
    3,413
    
    
    
    3,888
    
    
    
    (475
    )
    
    
    N/AOther
    
    
    7,745
    
    
    
    4,796
    
    
    
    2,949
    
    
    
    61.5Total noninterest income
    
    $
    60,896
    
    
    $
    63,933
    
    
    $
    (3,037
    )
    
    
    (4.8
    )%
 Noninterest Expense Noninterest expense is primarily comprised of operating expenses for the Corporation. The
major components are salaries and employee benefits, occupancy and equipment, professional fees and
other operating expenses. Noninterest expense decreased $15.8 million, or 12 percent, to $111.0 million compared to the
same period in 2003. The decrease was due to $19.1 million of prepayment costs associated with
refinancing $131.0 million in fixed-term advances in 2003 that did not recur in 2004. In addition,
professional service fees decreased $2.0 million. These decreases were partially offset by a $3.7
million increase in salaries and employee benefits due to additional personnel, including the
acquisition of a third party benefits administrator and three insurance agencies, increased
incentive compensation and employee benefit accruals resulting from an increase in 2004 earnings.
The decrease in noninterest expense was also offset by a $1.2 million increase in data processing
expense primarily related to the implementation of a new deposit platform and a conversion of the
Corporations ATMs to a new network during 2004 and a $0.7 million increase in occupancy and
equipment due to higher lease and depreciation expense from branch expansion. The efficiency ratio, noninterest expense divided by the sum of taxable equivalent net
interest income plus noninterest income less gain on the sale of securities, decreased to 60.55
percent for the year ended December 31, 2004 compared to 77.45 percent for the year-ended December
31, 2003. A significant portion of the decrease in the efficiency ratio relates to the costs
associated with the prepayment of Federal Home Loan Bank advances. Gains on sale of securities of
$2.4 million and $10.3 million are excluded from this calculation for the years ended December 31,
2004 and 2003, respectively. 25




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##### 



The following table compares noninterest expense for the years ended December 31, 2004 and
2003. Table FiveNoninterest ExpenseYears Ended December 31
    
    
    Increase/(Decrease)(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    Amount
    
    
    PercentSalaries and employee benefits
    
    $
    58,493
    
    
    $
    54,752
    
    
    $
    3,741
    
    
    
    6.8
    %Occupancy and equipment
    
    
    17,226
    
    
    
    16,504
    
    
    
    722
    
    
    
    4.4Data processing
    
    
    4,034
    
    
    
    2,816
    
    
    
    1,218
    
    
    
    43.3Marketing
    
    
    4,351
    
    
    
    4,435
    
    
    
    (84
    )
    
    
    (1.9
    )Postage and supplies
    
    
    4,959
    
    
    
    4,521
    
    
    
    438
    
    
    
    9.7Professional services
    
    
    9,574
    
    
    
    11,582
    
    
    
    (2,008
    )
    
    
    (17.3
    )Telephone
    
    
    1,998
    
    
    
    2,267
    
    
    
    (269
    )
    
    
    (11.9
    )Amortization of intangibles
    
    
    461
    
    
    
    441
    
    
    
    20
    
    
    
    4.5Prepayment cost on borrowings
    
    
    
    
    
    
    19,089
    
    
    
    (19,089
    )
    
    
    N/AOther
    
    
    9,921
    
    
    
    10,378
    
    
    
    (457
    )
    
    
    (4.4
    )Total noninterest expense
    
    $
    111,017
    
    
    $
    126,785
    
    
    $
    (15,768
    )
    
    
    (12.4
    )%
 Income Tax Expense The income tax expense for the year ended December 31, 2004 amounted to $22.0 million for an
effective tax rate of 34.2 percent, compared to $3.3 million for an effective tax rate of 18.9
percent for the year ended December 31, 2004. The increase in the effective tax rate for 2004 was
due to an increase in taxable income relative to nontaxable adjustments and an increase in accrued
taxes resulting from a proposed tax assessment received in the third quarter of 2004. The
Corporation is appealing this assessment. For further discussion, see Note Fourteenof the
consolidated financial statements. 26




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##### 



The following table provides certain selected quarterly financial data: Table SixSelected Quarterly Financial Data(Dollars in thousands, except
    
    2004 Quarters
    
    
    2003 Quartersper share amounts)
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    First
    
    
    Fourth
    
    
    Third
    
    
    Second
    
    
    FirstIncome statementTotal interest income
    
    $
    50,085
    
    
    $
    47,082
    
    
    $
    44,906
    
    
    $
    45,230
    
    
    $
    44,550
    
    
    $
    43,233
    
    
    $
    45,141
    
    
    $
    45,368Total interest expense
    
    
    18,275
    
    
    
    16,287
    
    
    
    14,874
    
    
    
    14,857
    
    
    
    15,570
    
    
    
    17,033
    
    
    
    19,102
    
    
    
    18,785Net interest income
    
    
    31,810
    
    
    
    30,795
    
    
    
    30,032
    
    
    
    30,373
    
    
    
    28,980
    
    
    
    26,200
    
    
    
    26,039
    
    
    
    26,583Provision for loan losses
    
    
    1,825
    
    
    
    1,600
    
    
    
    2,000
    
    
    
    3,000
    
    
    
    3,575
    
    
    
    2,400
    
    
    
    19,492
    
    
    
    2,051Total noninterest income
    
    
    15,302
    
    
    
    16,039
    
    
    
    14,890
    
    
    
    14,665
    
    
    
    13,479
    
    
    
    14,700
    
    
    
    20,215
    
    
    
    15,539Total noninterest expense
    
    
    27,677
    
    
    
    27,347
    
    
    
    27,685
    
    
    
    28,308
    
    
    
    41,365
    
    
    
    26,399
    
    
    
    32,988
    
    
    
    26,033Net income (loss) before
income taxes
    
    
    17,610
    
    
    
    17,887
    
    
    
    15,237
    
    
    
    13,730
    
    
    
    (2,481
    )
    
    
    12,101
    
    
    
    (6,226
    )
    
    
    14,038Income tax expense (benefit)
    
    
    6,051
    
    
    
    6,499
    
    
    
    4,982
    
    
    
    4,490
    
    
    
    (1,991
    )
    
    
    3,207
    
    
    
    (2,022
    )
    
    
    4,092Net income (loss)
    
    $
    11,559
    
    
    $
    11,388
    
    
    $
    10,255
    
    
    $
    9,240
    
    
    $
    (490
    )
    
    $
    8,894
    
    
    $
    (4,204
    )
    
    $
    9,946Per share data:Basic income (loss)
    
    $
    0.39
    
    
    $
    0.38
    
    
    $
    0.34
    
    
    $
    0.31
    
    
    $
    (0.02
    )
    
    $
    0.30
    
    
    $
    (0.14
    )
    
    $
    0.33Diluted income (loss)
    
    
    0.38
    
    
    
    0.38
    
    
    
    0.34
    
    
    
    0.31
    
    
    
    (0.02
    )
    
    
    0.30
    
    
    
    (0.14
    )
    
    
    0.33Cash dividends declared
    
    
    0.190
    
    
    
    0.190
    
    
    
    0.185
    
    
    
    0.185
    
    
    
    0.185
    
    
    
    0.185
    
    
    
    0.185
    
    
    
    0.185Period-end book value
    
    
    10.47
    
    
    
    10.35
    
    
    
    9.53
    
    
    
    10.38
    
    
    
    10.08
    
    
    
    10.20
    
    
    
    10.55
    
    
    
    10.87Average shares
outstanding - basic
    
    
    29,973,996
    
    
    
    29,810,917
    
    
    
    29,763,619
    
    
    
    29,738,553
    
    
    
    29,685,088
    
    
    
    29,672,137
    
    
    
    29,801,059
    
    
    
    30,006,417Average shares
outstanding - diluted
    
    
    30,605,826
    
    
    
    30,231,191
    
    
    
    30,067,462
    
    
    
    30,029,056
    
    
    
    29,685,088
    
    
    
    29,904,440
    
    
    
    29,801,059
    
    
    
    30,188,853RatiosReturn on average
shareholders equity(1) (2)
    
    
    14.73
    %
    
    
    15.28
    %
    
    
    13.90
    %
    
    
    12.20
    %
    
    
    (0.64
    )%
    
    
    11.64
    %
    
    
    (5.18
    )%
    
    
    12.39
    %Return on average assets(1) (2)
    
    
    1.04
    
    
    
    1.04
    
    
    
    0.96
    
    
    
    0.88
    
    
    
    (0.05
    )
    
    
    0.87
    
    
    
    (0.42
    )
    
    
    1.06Net interest margin(1)
    
    
    3.14
    
    
    
    3.09
    
    
    
    3.06
    
    
    
    3.19
    
    
    
    3.10
    
    
    
    2.86
    
    
    
    2.92
    
    
    
    3.15Average loans to
average deposits
    
    
    93.52
    
    
    
    92.53
    
    
    
    91.82
    
    
    
    93.31
    
    
    
    87.66
    
    
    
    83.76
    
    
    
    86.51
    
    
    
    88.77Average equity to
average assets(2)
    
    
    7.10
    
    
    
    7.00
    
    
    
    6.54
    
    
    
    7.27
    
    
    
    7.12
    
    
    
    7.39
    
    
    
    7.87
    
    
    
    8.17Efficiency ratio(3)
    
    
    58.57
    
    
    
    59.47
    
    
    
    61.66
    
    
    
    62.60
    
    
    
    97.41
    
    
    
    64.14
    
    
    
    85.65
    
    
    
    62.66Selected period end
balancesSecurities available for sale
    
    $
    1,652,732
    
    
    $
    1,630,655
    
    
    $
    1,604,585
    
    
    $
    1,622,967
    
    
    $
    1,601,900
    
    
    $
    1,603,262
    
    
    $
    1,518,918
    
    
    $
    1,453,827Loans held for sale
    
    
    5,326
    
    
    
    5,468
    
    
    
    26,768
    
    
    
    17,969
    
    
    
    5,137
    
    
    
    14,784
    
    
    
    45,311
    
    
    
    69,894Loans, net
    
    
    2,412,529
    
    
    
    2,398,116
    
    
    
    2,321,986
    
    
    
    2,254,130
    
    
    
    2,227,030
    
    
    
    2,085,338
    
    
    
    2,040,815
    
    
    
    2,050,943Allowance for loan losses
    
    
    26,872
    
    
    
    26,859
    
    
    
    26,052
    
    
    
    25,736
    
    
    
    25,607
    
    
    
    23,953
    
    
    
    23,644
    
    
    
    26,495Total assets
    
    
    4,431,605
    
    
    
    4,409,044
    
    
    
    4,339,213
    
    
    
    4,247,861
    
    
    
    4,206,693
    
    
    
    4,087,967
    
    
    
    3,988,534
    
    
    
    3,991,267Total deposits
    
    
    2,609,846
    
    
    
    2,557,062
    
    
    
    2,594,765
    
    
    
    2,507,442
    
    
    
    2,427,897
    
    
    
    2,481,582
    
    
    
    2,558,549
    
    
    
    2,492,929Borrowings
    
    
    1,449,736
    
    
    
    1,482,340
    
    
    
    1,410,481
    
    
    
    1,377,374
    
    
    
    1,432,200
    
    
    
    1,261,412
    
    
    
    1,076,595
    
    
    
    1,116,223Total liabilities
    
    
    4,116,918
    
    
    
    4,100,393
    
    
    
    4,055,432
    
    
    
    3,939,124
    
    
    
    3,907,254
    
    
    
    3,785,704
    
    
    
    3,674,618
    
    
    
    3,665,196Total shareholders equity
    
    

    314,687
    
    
    
    308,651
    
    
    
    283,781
    
    
    
    308,737
    
    
    
    299,439
    
    
    
    302,263
    
    
    
    313,916
    
    
    
    326,071Selected average
balancesLoans and loans held for sale
    
    
    2,444,827
    
    
    
    2,393,362
    
    
    
    2,339,435
    
    
    
    2,273,575
    
    
    
    2,188,643
    
    
    
    2,130,236
    
    
    
    2,179,291
    
    
    
    2,112,226Earning assets
    
    
    4,101,708
    
    
    
    4,035,259
    
    
    
    3,995,390
    
    
    
    3,884,954
    
    
    
    3,792,383
    
    
    
    3,730,688
    
    
    
    3,648,447
    
    
    
    3,474,071Total assets(2)
    
    
    4,426,604
    
    
    
    4,343,207
    
    
    
    4,316,360
    
    
    
    4,210,401
    
    
    
    4,158,189
    
    
    
    4,062,106
    
    
    
    3,981,461
    
    
    
    3,804,763Total deposits
    
    
    2,614,161
    
    
    
    2,586,524
    
    
    
    2,547,909
    
    
    
    2,436,673
    
    
    
    2,496,810
    
    
    
    2,543,301
    
    
    
    2,519,240
    
    
    
    2,379,454Borrowings
    
    
    1,320,665
    
    
    
    1,180,770
    
    
    
    1,084,288
    
    
    
    1,050,637
    
    
    
    1,320,665
    
    
    
    1,180,770
    
    
    
    1,084,288
    
    
    
    1,050,637Total shareholders equity(2)
    
    
    312,122
    
    
    
    296,539
    
    
    
    296,699
    
    
    
    303,722
    
    
    
    304,097
    
    
    
    303,186
    
    
    
    325,728
    
    
    
    325,619
   (1) Annualized
 (2) Amounts and ratios in prior periods have been adjusted to correct a calculation error with respect to average balances. (3) Noninterest
expense divided by the sum of taxable equivalent net interest income
plus noninterest income less gain on sale of securities. Business Segments The Corporations operations are divided into six operating segments: commercial banking,
brokerage, insurance, mortgage, leasing and investments, and financial management. These segments
are identified based on the Corporations organizational structure, and the review by the
Corporations chief operating decision makers of the separate results of operations of each of
these operating segments. For purposes of segment reporting, the Corporation has only one
reportable segment, FCB, the Corporations primary banking subsidiary. FCB provides businesses and
individuals with commercial loans, retail loans, and deposit banking services. Brokerage,
insurance, mortgage, leasing and investments, and financial management are reported as Other
Operating Segments. Of these segments, the results of operations of FCB constitute a substantial
majority of the consolidated net income, revenues 27




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##### 



and assets of the Corporation, as set forth in Note Twoof the consolidated financial
statements. Included in Other are revenue, expenses and assets of the parent company and
eliminating intercompany transactions. The following table for First Charters reportable business segment compares total income for
the years ended December 31, 2004, 2003 and 2002: Table SevenBusiness Segment Net Income (Loss)Years Ended December 31(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002FCB
    
    $
    42,092
    
    
    $
    15,033
    
    
    $
    43,974Other Operating Segments
    
    
    137
    
    
    
    (437
    )
    
    
    (891
    )Other
    
    
    213
    
    
    
    (450
    )
    
    
    (3,280
    )Total consolidated
    
    $
    42,442
    
    
    $
    14,146
    
    
    $
    39,803
 FCBs net income was $42.1 million for the year ended December 31, 2004 compared to $15.0
million for the same year-ago period. The increase was primarily due to the following: (i) a $19.1
million decrease in the provision for loan losses primarily attributable to the 2003 Loan Sale,
(ii) an $18.2 million decrease in noninterest expense due to $19.1 million of prepayment costs
associated with refinancing $131.0 million in fixed-term advances in the 2003, (iii) an $8.8
million increase in interest income due mainly to strong loan growth, increases in the
securities-available-for-sale portfolio and a decrease in prepayment speeds in the
securities-available-for-sale portfolio, and (iv) a $6.4 million decrease in interest expense due
to the previously mentioned deposit-mix shift, refinancings and ALM transactions. These items were
partially offset by (i) an $ 18.3 million increase in income tax expense due to an increase in
taxable income relative to nontaxable adjustments and an increase in accrued taxes resulting from a
proposed tax assessment received in the third quarter of 2004 and (ii) a $7.0 million decrease in
noninterest income primarily resulting from a decrease in gains on the sale of securities, the
recognition of the gain on the sale of the credit card portfolio in the first quarter of 2003 and
lower trading gains. Other Operating Segments reported net income of $0.1 million for the year ended December 31,
2004 compared to a net loss of $0.4 million for the same year-ago period. Noninterest income
increased $2.8 million due to the following: increases in insurance services revenues resulting
from an increase in contingency income and the successful integration of two insurance agencies
acquired in 2003 and one insurance agency acquired in the fourth quarter of 2004 and financial
management income primarily due to the acquisition of a third party benefits administrator in 2003,
partially offset by decreased mortgage services income. The increase in noninterest income was
partially offset by increased noninterest expense of $2.3 million resulting from an increase in
salaries and employee benefits due to additional personnel, including the acquisition of a third
party benefits administrator and three insurance agencies. Other reported net income of $0.2 million for the year ended December 31, 2004 compared to a
net loss of $0.5 million for the same year-ago period. The increase was primarily attributable to
higher noninterest income of $1.2 million resulting from gains on the sale of equity securities
during 2004, which was partially offset by increased income tax expense.  Balance Sheet Analysis
 Securities-Available-for-Sale The securities portfolio, all of which is classified as available-for-sale, is a component of
the Corporations ALM strategy. The decision to purchase or sell securities is based upon liquidity
needs, changes in interest rates, changes in prepayment risk, and other factors.
Securities-available-for-sale are accounted for at fair value, with unrealized gains and losses
recorded net of tax as a component of other comprehensive income in shareholders equity. 28




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##### 



The fair value of the securities portfolio is determined by a third party. The valuation is
determined as of a date within close proximity to the end of the reporting period based on
available quoted market prices or quoted market prices for similar securities if a quoted market
price is not available. At December 31, 2004, securities-available-for-sale were $1.65 billion or 37 percent of total
assets, compared to $1.60 billion or 38 percent of total assets at December 31, 2003. The increase
in the securities-available-for-sale portfolio was primarily due to the purchase of agency
securities funded by the proceeds from the sale of $40.7 million of primarily fixed-rate mortgage
loans that were moved to securities-available-for-sale (securitized) during 2004. The
securities-available-for-sale portfolio also was impacted by an increase in the pre-tax unrealized
net losses in the portfolio due to a rise in short- and intermediate-term interest rates. Pre-tax
unrealized net losses on securities-available-for-sale were $8.0 million at December 31, 2004
compared to pre-tax unrealized net gains of $10.1 million at December 31, 2003. Proceeds from the sale of securities-available-for-sale were $139.3 million and $1.0 billion
for the years ended December 31, 2004 and 2003, respectively. Gross gains of $7.2 million and gross
losses of $15.2 million were realized in 2004, compared to gross gains of $19.2 million and gross
losses of $9.1 million realized in 2003. The weighted average life of the portfolio was 3.84 years
at December 31, 2004 compared to 3.66 years at December 31, 2004. With market indicators predicting a continued rise in interest rates, the unrealized net
losses in the securities-available-for-sale portfolio could increase. However, it is anticipated
that the effective yields in the portfolio would increase as the amortization of premiums decreases
due to slowing prepayment speeds. To mitigate the risk of rising interest rates on the
securities-available-for-sale portfolio, the Corporation has maintained a shortened average life in
the portfolio over the past two years. This will allow the Corporation to reinvest the cash flows
of the portfolio into higher rate securities or fund loan growth in a rising interest rate
environment. Management is evaluating the purchase of up to $300 million of whole ARM-mortgage
loans in the seconday market during 2005, which will be funded by the sales and cash flows from the
securities-available-for-sale portfolio. This will reduce the size of the
securities-available-for-sale portfolio, and will result in an investment in earning assets with
similar average lives and higher yields. The following table shows, as of December 31, 2004, 2003, and 2002, 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, which are primarily
comprised of Federal Reserve and Federal Home Loan Bank stock. Table EightInvestment PortfolioDecember 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Securities Available for SaleUS government obligations
    
    $
    54,374
    
    
    $
    60,273
    
    
    $
    65,777US government agency obligations
    
    
    691,970
    
    
    
    635,267
    
    
    
    408,362Mortgage-backed securities
    
    
    726,381
    
    
    
    771,157
    
    
    
    529,694State, county, and municipal obligations
    
    
    115,380
    
    
    
    73,087
    
    
    
    82,964Equity securities
    
    
    64,627
    
    
    
    62,116
    
    
    
    42,415Total
    
    $
    1,652,732
    
    
    $
    1,601,900
    
    
    $
    1,129,212
 Loans Held for Sale Loans held for sale consist primarily of 15- and 30-year residential mortgage loans which the
Corporation intends to sell as whole loans or securitize. Loans held for sale increased to $5.3
million at December 31, 2004 as compared to $5.1 million at December 31, 2003. During 2004, $40.7
million of residential mortgage loans were securitized and subsequently sold. 29




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Loan Portfolio The Corporations loan portfolio at December 31, 2004 consisted of six major categories:
Commercial Non Real Estate, Commercial Real Estate, Construction, Mortgage, Consumer, and Home
Equity. Within these six segments the Corporation targets customers in its geographic area, works
within most business segments and focuses on a relationship-based business model. Pricing is driven
by quality, loan size, the Corporations relationship with the customer and by competition. The
Corporation is primarily a secured lender in all these loan categories. The Corporations loans are
generally five years or less in duration with the exception of home equity lines and residential
mortgages, for which the terms range from 15 to 30 years. In addition, the Corporation has a
program in which it buys and sells portions of loans (primarily originated in the Southeastern
region of the United States), both participations and syndications, from key strategic partner
financial institutions with which the Corporation has established relationships. Current balances
of loans purchased and sold through the strategic partners program were $239.8 million and $19.9
million, respectively, at December 31, 2004. This portfolio includes commercial real estate,
commercial non real estate and construction loans. This program enables the Corporation to
diversify both its geographic and its total exposure risk. Commercial Non Real Estate The Corporations commercial non real estate lending program is generally targeted to serve
small-to-middle market businesses with sales of $50 million or less in the Corporations geographic
area. Commercial lending includes commercial, financial, agricultural and industrial loans. Pricing
on commercial non real estate loans, driven largely by the Corporations relationship with the
customer and by competition, is usually tied to widely recognized market indexes, such as the prime
rate, the London Interbank Offer Rate (LIBOR) or rates on U.S. Treasury securities. Commercial Real Estate Similar to commercial non real estate lending, the Corporations commercial real estate
lending program is generally targeted to serve small-to-middle market business with sales of $50
million or less in the Corporations geographic area. The real estate loans are both owner occupied
and project related. As with commercial non real estate loans, pricing on commercial real estate
loans, driven largely by the Corporations relationship with the customer and by competition, is
usually tied to widely recognized market indexes, such as the prime rate, LIBOR or rates on U.S.
Treasury securities. Construction Real estate construction loans include both commercial and residential construction/permanent
loans, which are intended to convert to permanent loans upon completion of the construction
project. Loans for commercial construction are usually to in-market developers, builders,
businesses, individuals or real estate investors for the construction of commercial structures
primarily in the Corporations market area. From time to time, the Corporation purchases
construction loans in other market areas through a correspondent relationship. At December 31,
2004, loans purchased through this relationship represented 24 percent of the total construction
loan portfolio. Construction loans purchased are typically serviced by third parties. Loans are
made for purposes including, but not limited to, the construction of industrial facilities,
apartments, shopping centers, office buildings, homes and warehouses. The properties may be
constructed for sale, lease or owner-occupancy. Mortgage The Corporation originates 1-4 family residential mortgage loans throughout the Corporations
footprint and in Reston, Virginia, which is a loan origination office. The Corporation offers a
full line of products, including conventional, conforming, and jumbo fixed rate and adjustable rate
mortgages which are originated and securitized or sold into the secondary market; however, from
time to time a portion of this production is retained and serviced through a third party
arrangement. Consumer The Corporation offers a wide variety of consumer loan products. Various types of secured and
unsecured loans are marketed to qualifying existing customers and to other creditworthy candidates
in the Corporations market area. Unsecured loans, including revolving credits (e.g. checking
account overdraft 30




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##### 



protection and personal lines of credit) are provided and various installment loan products such as
vehicle loans are offered. All consumer lending is centrally decisioned and documented. Home Equity Home Equity loans and lines are secured by first and second deeds of trust on the borrowers
residential real estate. As with all consumer lending, home equity loans are centrally decisioned
and documented to ensure the underwriting conforms to the corporate lending policy. Gross loans increased $186.9 million, or 8 percent, to $2.44 billion at December 31, 2004
compared to $2.25 billion at December 31, 2003. The growth in loans was primarily due to (i) a
$74.1 million increase in home equity loans partially due to the Corporations direct mailing
campaign, (ii) a $66.9 million increase in primarily adjustable rate mortgage loans, (iii) a $52.1
million increase in commercial real estate loans and (iv) a $19.7 million increase in consumer
loans. These increases were partially offset by a $26.0 million decrease in construction loans. In
addition, $6.4 million of nonaccruing and accruing higher risk residential mortgage loans were sold
to investors during the first quarter of 2004 and $40.7 million of primarily fixed-rate mortgage
loans originated in 2004 were classified as held for sale, securitized and subsequently sold. The mix of variable-rate, adjustable-rate and fixed-rate loans is incorporated in the
Corporations ALM strategy. As of December 31, 2004, of the $2.44 billion loan portfolio,
approximately $1.57 billion was tied to variable interest rates, most of which reprice within one
day of any interest rate change; approximately $0.6 billion was tied to fixed interest rates with
scheduled maturities and $0.3 billion was tied to adjustable interest rates, which are ARM loans
and reprice on a fixed schedule. The table below summarizes loans in the classifications indicated as of December 31, 2004,
2003, 2002, 2001, and 2000. Table NineLoan Portfolio CompositionDecember 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Commercial real estate
    
    $
    776,474
    
    
    $
    724,340
    
    
    $
    798,664
    
    
    $
    631,814
    
    
    $
    723,644Commercial non real estate
    
    
    212,031
    
    
    
    212,010
    
    
    
    223,178
    
    
    
    222,497
    
    
    
    297,728Construction
    
    
    332,264
    
    
    
    358,217
    
    
    
    215,859
    
    
    
    321,716
    
    
    
    246,136Mortgage
    
    
    347,606
    
    
    
    280,748
    
    
    
    237,085
    
    
    
    289,953
    
    
    
    496,892Consumer
    
    
    304,151
    
    
    
    284,448
    
    
    
    280,201
    
    
    
    253,603
    
    
    
    209,131Home equity
    
    
    467,166
    
    
    
    393,041
    
    
    
    317,730
    
    
    
    228,169
    
    
    
    179,028Total loans
    
    
    2,439,692
    
    
    
    2,252,804
    
    
    
    2,072,717
    
    
    
    1,947,752
    
    
    
    2,152,559Less  allowance for loan
losses
    
    
    (26,872
    )
    
    
    (25,607
    )
    
    
    (27,204
    )
    
    
    (25,843
    )
    
    
    (28,447
    )Unearned income
    
    
    (291
    )
    
    
    (167
    )
    
    
    (247
    )
    
    
    (191
    )
    
    
    (215
    )Loans, net
    
    $
    2,412,529
    
    
    $
    2,227,030
    
    
    $
    2,045,266
    
    
    $
    1,921,718
    
    
    $
    2,123,897
 Deposits The Corporations CHAMP continues to attract new customers and deposits. During 2004, 38,607
new checking accounts were opened. This program is designed to develop new customer relationships,
shift the Corporations funding mix towards lower-cost funding sources and generate additional fee
income opportunities. Total deposits increased $181.9 million, or 7 percent, to $2.61 billion at December 31, 2004
compared to $2.43 billion at December 31, 2003. The increase in deposits was due to a $95.3 million
increase in CDs resulting primarily from a promotional campaign launched in November. In addition,
low-cost interest checking, savings and noninterest-bearing deposits increased $78.9 million and
money market accounts increased $7.8 million. Table Twoprovides information on the average deposit
balances for the years ended December 31, 2004, 2003 and 2002, respectively. 31




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Other Borrowings Other borrowings consist of Federal Funds purchased, securities sold under agreement to
repurchase, FHLB borrowings and other miscellaneous borrowings. Federal funds purchased represent
unsecured overnight borrowings from other financial institutions by the Bank. Securities sold under
agreements to repurchase represent short-term borrowings by the Bank with maturities less than one
year collateralized by a portion of the Corporations securities investment portfolio of the United
States government or its agencies. These borrowings are an important source of funding to the
Corporation. Access to alternate short-term funding sources allows the Corporation to meet funding
needs without relying on increasing deposits on a short-term basis. FHLB borrowings are
collateralized by securities from the Corporations investment portfolio and a blanket lien on
certain qualifying commercial and single family loans held in the Corporations loan portfolio.
FHLB borrowings are an alternative to other funding sources with similar maturities. Other
borrowings increased slightly during the year, to $1.45 billion at December 31, 2004, from $1.43
billion at December 31, 2003. Deposit growth was the primary funding source for the growth in
earning assets. The following is a schedule of other borrowings which consists of the following categories:
securities sold under repurchase agreements, federal funds purchased and FHLB borrowings for the
years ended December 31, 2004, 2003 and 2002. Table TenOther BorrowingsDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002(Dollars in thousands)
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateFederal funds purchased and securities
sold under agreements to repurchase:Balance as of
    
    $
    250,314
    
    
    
    1.84
    %
    
    $
    319,018
    
    
    
    1.03
    %
    
    $
    326,745
    
    
    
    1.21
    %Average balance
    
    
    245,394
    
    
    
    1.21
    
    
    
    214,499
    
    
    
    1.06
    
    
    
    151,572
    
    
    
    1.62Maximum outstanding at any month-end
    
    
    257,818
    
    
    
    
    
    
    
    319,018
    
    
    
    
    
    
    
    326,745FHLB borrowings:Balance as of
    
    
    1,127,738
    
    
    
    2.92
    
    
    
    1,063,106
    
    
    
    2.09
    
    
    
    682,330
    
    
    
    3.60Average balance
    
    
    1,135,630
    
    
    
    2.22
    
    
    
    906,627
    
    
    
    2.88
    
    
    
    726,016
    
    
    
    4.01Maximum outstanding at any month-end
    
    
    1,194,095
    
    
    
    
    
    
    
    1,063,106
    
    
    
    
    
    
    
    833,340Other borrowings:Balance as of
    
    
    71,684
    
    
    
    1.67
    
    
    
    50,076
    
    
    
    1.46
    
    
    
    33,365
    
    
    
    1.89Average balance
    
    
    47,100
    
    
    
    1.73
    
    
    
    38,763
    
    
    
    1.55
    
    
    
    28,675
    
    
    
    2.39Maximum outstanding at any month-end
    
    
    71,864
    
    
    
    
    
    
    
    50,076
    
    
    
    
    
    
    
    40,604Total:Balance as of
    
    $
    1,449,736
    
    
    
    2.68
    %
    
    $
    1,432,200
    
    
    
    1.83
    %
    
    $
    1,042,440
    
    
    
    2.99
    %Average balance
    
    
    1,428,124
    
    
    
    1.99
    
    
    
    1,159,889
    
    
    
    2.50
    
    
    
    906,263
    
    
    
    3.56Maximum outstanding at any month-end
    
    
    1,523,777
    
    
    
    
    
    
    
    1,432,200
    
    
    
    
    
    
    
    1,200,689
  Credit Risk Management
 The Corporations credit risk policy and procedures are centralized for every loan type.
In addition, all mortgage, consumer and home equity loans are centrally decisioned. All loans flow
through an independent closing unit to ensure proper documentation. Finally, all known collection
or problem loans are centrally managed by experienced workout personnel. To monitor the
effectiveness of policies and procedures, Management maintains a set of asset quality standards for
past due, nonaccrual and watch list loans and monitors the trends of these standards over time.
These standards are approved by the Board of Directors and reviewed quarterly with the Board of
Directors for compliance. 32




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##### 



Loan Administration and Underwriting The Banks Chief Risk Officer is responsible for the continuous assessment of the Banks risk
profile as well as making any necessary adjustments to policies and procedures. Commercial loan
relationships less than $750,000 may be approved by experienced commercial loan officers, within
their loan authority. Commercial and commercial real estate loans are approved by signature
authority requiring at least two experienced officers for relationships greater than $750,000. The
exceptions to this would include City Executives (senior loan officers) who are authorized to
approve relationships up to $1.0 million and the Banks Strategic Partners Division, whose manager
has $1.5 million of loan authority for such relationships. An independent Risk Manager is involved
in the approval of commercial and commercial real estate relationships that exceed $1.0 million and
Strategic Partner relationships that exceed $1.5 million. All relationships greater than $2.0
million receive a comprehensive annual review by either the senior credit analysts or lending
officers of the Bank, which is then reviewed by the independent Risk Managers and/or the final
approval officer with the appropriate signature authority. Commitments over $5.0 million are
further reviewed by senior lending officers of the Bank, the Chief Risk Officer and the Lending
Oversight Committee comprised of executive and senior management. In addition, commitments over
$10.0 million are reviewed by the Board of Directors Loan Committee. These oversight committees
provide policy, process, product and specific relationship direction to the lending personnel. The
Corporation has a general target lending limit of $10.0 million per relationship; however, at times
some loan relationships may exceed that limit. As of December 31, 2004, the Corporation had 9
relationships with exposure greater than the $10.0 million lending limit. At December 31, 2004, the
total loan balance of these relationships was $109.9 million, all of which were current, with
unfunded commitments totaling $37.1 million. The Corporations loan portfolio consists of loans made for a variety of commercial and
consumer purposes. Because commercial loans are made based to a great extent on the Corporations
assessment of a borrowers income, cash flow, character and ability to repay, such loans are viewed
as involving a higher degree of credit risk than is the case with residential mortgage loans or
consumer loans. To manage this risk, the Corporations commercial loan portfolio is managed under a
defined process which includes underwriting standards and risk assessment, procedures for loan
approvals, loan grading, ongoing identification and management of credit deterioration and
portfolio reviews to assess loss exposure and to ascertain compliance with the Corporations credit
policies and procedures. In general, consumer loans (including mortgage and home equity) are deemed less risky than
commercial loans. Commercial loans (including commercial real estate, commercial non real estate
and construction loans) are generally larger in size and more complex than consumer loans.
Commercial real estate loans are deemed less risky than commercial non real estate and construction
loans, as the collateral value of real estate generally maintains its value better than non real
estate or construction collateral. Consumer loans, being smaller in size and more geographically
diverse across the Corporations entire primary market area, provide risk diversity across the
portfolio. Because mortgage loans are secured by first liens on the consumers residential real
estate, they are the Corporations least risky loan type. Home equity loans are deemed less risky
than unsecured consumer loans as home equity loans and lines are secured by first or second deeds
of trust on the borrowers residential real estate. A centralized decisioning process is in place
to control the risk of the consumer, home equity and mortgage loan portfolio. This process is
detailed in the underwriting guidelines, which cover each retail loan product type from
underwriting, servicing, compliance issues and closing procedures. The Corporations primary market area includes the state of North Carolina but predominately
centers around the metro region of Charlotte. At December 31, 2004, 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 metro region. An economic downturn in the Corporations
primary market area could adversely affect its business. 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. 33




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##### 



Derivatives Credit risk associated with derivatives is measured as the net replacement cost should the
counter-parties with contracts in a gain position to the Corporation completely fail to perform
under the terms of those contracts assuming no recoveries of underlying collateral. In managing
derivative credit risk, both the current exposure, which is the replacement cost of contracts on
the measurement date, as well as an estimate of the potential change in value of contracts over
their remaining lives are considered. In managing credit risk associated with its derivative
activities, the Corporation deals primarily with commercial banks, broker-dealers and corporations.
To minimize credit risk, the Corporation enters into legally enforceable master netting agreements,
which reduce risk by permitting the closeout and netting of transactions with the same
counter-party upon the occurrence of certain events. In addition, the Corporation reduces risk by
obtaining collateral based on individual assessments of the counter-parties to these agreements.
The determination of the need for and levels of collateral will vary depending on the credit risk
rating of the counter-party. During 2004, the Corporation entered into a series of interest rate
swap agreements to provide an exchange of interest payments computed on notional amounts that will
offset any undesirable change in fair value resulting from market rate changes on designated hedged
items. See Asset-Liability Management and Interest Rate Riskfor further details regarding these
interest rate swap agreements. Nonperforming Assets Nonperforming assets are comprised of nonaccrual loans and other real estate owned (OREO).
The nonaccrual status is determined after a loan is 90 days past due as to principal or interest,
unless in managements opinion collection of both principal and interest is assured by way of
collateralization, guarantees or other security and the loan is in the process of collection. OREO
represents real estate acquired through foreclosure or deed in lieu thereof and is generally
carried at the lower of cost or fair value, less estimated costs to sell. Nonaccrual loans at December 31, 2004 decreased to $14.0 million compared to $14.9 million at
December 31, 2003. The decrease includes the sale of $2.1 million of nonaccrual mortgage loans
during the first quarter of 2004. OREO decreased to $3.8 million at December 31, 2004 from $6.8
million at December 31, 2003. As a result of the Corporations continued focus on asset quality, the initiatives taken
in 2003 and in 2004 and generally improving economic conditions, asset quality remains strong. The
table below summarizes the Corporations nonperforming assets and loans 90 days or more past due
and still accruing interest as of the dates indicated. Table ElevenNonperforming and Problem AssetsDecember 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Nonaccrual loans
    
    $
    13,970
    
    
    $
    14,910
    
    
    $
    26,467
    
    
    $
    23,824
    
    
    $
    26,587Other real estate
    
    
    3,844
    
    
    
    6,836
    
    
    
    10,278
    
    
    
    8,049
    
    
    
    2,989Total nonperforming assets
    
    
    17,814
    
    
    
    21,746
    
    
    
    36,745
    
    
    
    31,873
    
    
    
    29,576Loans 90 days or more past due and
still accruing interest
    
    
    
    
    
    
    21
    
    
    
    
    
    
    
    152
    
    
    
    430Total nonperforming assets and loans 90 days or
more past due and still accruing interest
    
    $
    17,814
    
    
    $
    21,767
    
    
    $
    36,745
    
    
    $
    32,025
    
    
    $
    30,006Nonperforming assets as a percentage of:Total assets
    
    
    0.40
    %
    
    
    0.52
    %
    
    
    0.98
    %
    
    
    0.96
    %
    
    
    1.01
    %Loans and other real estate
    
    
    0.73
    %
    
    
    0.96
    %
    
    
    1.76
    %
    
    
    1.63
    %
    
    
    1.37
    %Ratio of allowance for loan losses to
nonperforming loans
    
    
    1.92
    x
    
    
    1.72
    x
    
    
    1.03
    x
    
    
    1.08
    x
    
    
    1.07
    x
 Nonaccrual loans at December 31, 2004 were not concentrated in any one industry and primarily
consisted of several large credits secured by real estate. Management anticipates that nonaccrual
loans 34




---



##### 



may increase in the near term as some customers continue to experience difficulties in this
current economic environment. Management has taken current economic conditions into consideration
when estimating the allowance for loan losses. See Allowance for Loan Lossesfor a more detailed
discussion. The determination to discontinue the accrual of interest is based on a review of each loan.
Generally, accrual of interest is discontinued on loans 90 days past due as to principal or
interest unless in managements opinion collection of both principal and interest is assured by way
of collateralization, guarantees or other security and the loan is in the process of collection.
Managements policy for any accruing loan greater than 90 days past due is to perform an analysis
of the loan, including a consideration of the financial position of the borrower and any guarantor
as well as the value of the collateral, and use this information to make an assessment as to
whether collectibility of the principal and interest appears probable. If such collectibility is
not probable, the loans are placed on nonaccrual status. Loans are returned to accrual status when
management determines, based on an evaluation of the underlying collateral together with the
borrowers payment record and financial condition, that the borrower has the ability and intent to
meet the contractual obligations of the loan agreement. Allowance for Loan Losses The Corporations allowance for loan losses consists of four components: (i) valuation
allowances computed on impaired loans in accordance with SFAS No. 114; (ii) valuation allowance for
certain classified loans; (iii) valuation allowances determined by applying historical loss rates
to those loans not specifically identified as impaired; and (iv) valuation allowances for factors
which management believes are not reflected in the historical loss rates or that otherwise need to
be considered when estimating the allowance for loan losses. These four components are estimated
quarterly by Credit Risk Management and, along with a narrative analysis, comprise the
Corporations allowance for loan losses model. The resulting components are used by management to
determine the adequacy of the allowance for loan losses. All estimates of loan portfolio risk, including the adequacy of the allowance for loan losses,
are subject to general and local economic conditions, among other factors, which are unpredictable
and beyond the Corporations control. Since a significant portion of the loan portfolio is
comprised of real estate loans and loans to area businesses, the Corporation is subject to risk in
the real estate market and changes in the economic conditions in its primary market area. Changes
in these areas can increase or decrease the provision for loan losses. During 2004, the Corporation made no changes to its estimated loss percentages for economic
factors. As a part of its quarterly assessment of the allowance for loan losses, the Corporation
reviews key local, regional and national economic information and assesses its impact on the
allowance for loan losses. Based on its review for the year ended December 31, 2004, the
Corporation noted that economic conditions are mixed; however, management concluded that the impact
on borrowers and local industries in the Corporations primary market area did not change
significantly during the period. Accordingly, the Corporation did not modify its loss estimate
percentage attributable to economic factors in its allowance for loan losses model. The Corporation continuously reviews its portfolio for any concentrations of loans to any one
borrower or industry. To analyze its concentrations, the Corporation prepares various reports
showing total loans to borrowers by industry, as well as reports showing total loans to one
borrower. At the present time, the Corporation does not believe it is overly concentrated to any
industry or specific borrower and therefore has made no allocations of allowances for loan losses
for this factor for any of the periods presented. The Corporation also monitors the amount of
operational risk that exists in the portfolio.
This would include the front-end underwriting,
documentation and closing processes associated
with the lending decision. The percent of
additional allocation for the operational
reserve has not changed in recent
periods. 35




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##### 



The table below presents certain data for the years ended December 31, 2004, 2003, 2002,
2001, and 2000, including the following: (i) the allowance for loan losses at the beginning of the
year, (ii) loans charged off and recovered (iii) loan charge-offs, net, (iv) the provision for
loan losses, (v) the allowance for loan losses at year-end, (vi) the average amount of net loans
outstanding during the quarter, (vii) the ratio of net charge-offs to average loans and (viii) the
ratio of the allowance for loan losses to loans at year-end. Table TwelveAllowance For Credit LossesYears Ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Balance, January 1
    
    $
    25,607
    
    
    $
    27,204
    
    
    $
    25,843
    
    
    $
    28,447
    
    
    $
    25,002Loan charge-offs:Commercial, financial and agricultural
    
    
    4,240
    
    
    
    5,382
    
    
    
    3,056
    
    
    
    4,280
    
    
    
    2,532Real estate - construction
    
    
    
    
    
    
    
    
    
    
    641
    
    
    
    50
    
    
    
    351Real estate - mortgage
    
    
    1,037
    
    
    
    716
    
    
    
    304
    
    
    
    564
    
    
    
    519Installment
    
    
    3,275
    
    
    
    3,382
    
    
    
    2,989
    
    
    
    2,512
    
    
    
    1,661Total loans charged-off
    
    
    8,552
    
    
    
    9,480
    
    
    
    6,990
    
    
    
    7,406
    
    
    
    5,063Recoveries of loans previously charged-off:Commercial, financial and agricultural
    
    
    894
    
    
    
    455
    
    
    
    223
    
    
    
    243
    
    
    
    623Real estate - construction
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    Real estate - mortgage
    
    
    29
    
    
    
    
    
    
    
    36
    
    
    
    169
    
    
    
    49Installment
    
    
    1,053
    
    
    
    635
    
    
    
    337
    
    
    
    285
    
    
    
    334Other
    
    
    
    
    
    
    34
    
    
    
    132
    
    
    
    57
    
    
    
    Total recoveries of loans previously charged-off
    
    
    1,976
    
    
    
    1,148
    
    
    
    728
    
    
    
    754
    
    
    
    1,006Net charge-offs
    
    
    6,576
    
    
    
    8,332
    
    
    
    6,262
    
    
    
    6,652
    
    
    
    4,057Provision for loan losses
    
    
    8,425
    
    
    
    27,518
    
    
    
    8,270
    
    
    
    4,465
    
    
    
    7,615Adjustment for loans sold, securitized or
transferred to held for sale
    
    
    (584
    )
    
    
    (20,783
    )
    
    
    (647
    )
    
    
    (417
    )
    
    
    (113
    )Balance, December 31
    
    $
    26,872
    
    
    $
    25,607
    
    
    $
    27,204
    
    
    $
    25,843
    
    
    $
    28,447Average loans
    
    $
    2,353,605
    
    
    $
    2,126,821
    
    
    $
    2,112,855
    
    
    $
    1,980,080
    
    
    $
    2,074,685Net charge-offs to average loans
    
    
    0.28
    %
    
    
    0.39
    %
    
    
    0.30
    %
    
    
    0.34
    %
    
    
    0.20
    %Allowance for loan losses to
gross loans at year-end
    
    
    1.10
    
    
    
    1.14
    
    
    
    1.31
    
    
    
    1.33
    
    
    
    1.32
 36




---



##### 



Table Thirteenpresents the categories of charge-offs and recoveries for the years ended
December 31, 2004, 2003, 2002 and 2001 and is based upon the loan categories discussed in the Loan
Portfoliosection. Due to the restatement of historical financial information for the year ended
December 31, 2000, as the result of a pooling-of-interest merger, it is not possible to provide
information for 2000 in the categories of loans used below. Table ThirteenAllowance For Credit LossesYears Ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001Balance, January 1
    
    $
    25,607
    
    
    $
    27,204
    
    
    $
    25,843
    
    
    $
    28,447Loan charge-offs:Commercial non real estate
    
    
    1,449
    
    
    
    3,484
    
    
    
    2,397
    
    
    
    2,387Commercial real estate
    
    
    2,791
    
    
    
    1,898
    
    
    
    659
    
    
    
    1,892Construction
    
    
    
    
    
    
    
    
    
    
    641
    
    
    
    50Mortgage
    
    
    29
    
    
    
    31
    
    
    
    111
    
    
    
    125Consumer
    
    
    3,275
    
    
    
    3,382
    
    
    
    2,989
    
    
    
    2,513Home equity
    
    
    1,008
    
    
    
    685
    
    
    
    193
    
    
    
    439Total loans charged-off
    
    
    8,552
    
    
    
    9,480
    
    
    
    6,990
    
    
    
    7,406Recoveries of loans previously charged-off:Commercial non real estate
    
    
    894
    
    
    
    451
    
    
    
    20
    
    
    
    227Commercial real estate
    
    
    
    
    
    
    4
    
    
    
    228
    
    
    
    181Construction
    
    
    
    
    
    
    24
    
    
    
    
    
    
    
    Mortgage
    
    
    29
    
    
    
    
    
    
    
    11
    
    
    
    Consumer
    
    
    1,053
    
    
    
    635
    
    
    
    337
    
    
    
    289Other
    
    
    
    
    
    
    34
    
    
    
    132
    
    
    
    57Total recoveries of loans previously charged-off
    
    
    1,976
    
    
    
    1,148
    
    
    
    728
    
    
    
    754Net charge-offs
    
    
    6,576
    
    
    
    8,332
    
    
    
    6,262
    
    
    
    6,652Provision for loan losses
    
    
    8,425
    
    
    
    27,518
    
    
    
    8,270
    
    
    
    4,465Adjustment for loans sold, securitized or
transferred to held for sale
    
    
    (584
    )
    
    
    (20,783
    )
    
    
    (647
    )
    
    
    (417
    )Balance, December 31
    
    $
    26,872
    
    
    $
    25,607
    
    
    $
    27,204
    
    
    $
    25,843Average loans
    
    $
    2,353,605
    
    
    $
    2,126,821
    
    
    $
    2,112,855
    
    
    $
    1,980,080Net charge-offs to average loans
    
    
    0.28
    %
    
    
    0.39
    %
    
    
    0.30
    %
    
    
    0.34
    %Allowance for loan losses to
gross loans at year-end
    
    
    1.10
    
    
    
    1.14
    
    
    
    1.31
    
    
    
    1.33
 The allowance for loan losses was $26.9 million or 1.10 percent of gross loans at December 31,
2004 compared to $25.6 million or 1.14 percent of gross loans at December 31, 2003. The allowance
for loan losses as a percentage of loans decreased due to improved asset quality trends, as well as
a change in the mix of the loan portfolio towards 1-4 family mortgages and home equity lines of
credit. This type of secured lending generally carries lower credit risk and thus requires lower
allocations in the Corporations allowance model. In addition, the allowance for loan losses was
reduced by $0.6 million due to the sale of nonaccruing and accruing higher risk mortgage loans and
by net charge-offs of $6.6 million. Net charge-offs benefited from one $0.6 million commercial loan
recovery during the second quarter of 2004 and by the recovery of $0.4 million from the sale of
previously charged-off consumer loans during the third quarter. These reductions were offset by an
additional provision expense of $8.4 million for the year ended December 31, 2004. 37




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##### 



The following table presents the dollar amount of the allowance for loan losses applicable to
major loan categories and the percentage of the loans in each category to total loans as of
December 31, 2004, 2003, 2002, 2001 and 2000. Table FourteenAllocation of the Allowance for Loan Losses(1)December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000Loan/
    
    
    
    
    
    
    Loan/
    
    
    
    
    
    
    Loan/
    
    
    
    
    
    
    Loan/
    
    
    
    
    
    
    Loan/(Dollars in thousands)
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total LoansCommercial real estate
    
    $
    11,317
    
    
    
    32
    %
    
    $
    12,011
    
    
    
    32
    %
    
    $
    12,166
    
    
    
    39
    %
    
    $
    9,532
    
    
    
    32
    %
    
    $
    11,637
    
    
    
    34
    %Commercial non real estate
    
    
    4,496
    
    
    
    9
    
    
    
    4,368
    
    
    
    9
    
    
    
    4,529
    
    
    
    11
    
    
    
    4,779
    
    
    
    11
    
    
    
    7,372
    
    
    
    14Construction
    
    
    4,842
    
    
    
    14
    
    
    
    3,584
    
    
    
    16
    
    
    
    3,384
    
    
    
    10
    
    
    
    4,608
    
    
    
    17
    
    
    
    3,749
    
    
    
    11Mortgage
    
    
    980
    
    
    
    14
    
    
    
    812
    
    
    
    13
    
    
    
    845
    
    
    
    11
    
    
    
    1,420
    
    
    
    15
    
    
    
    2,049
    
    
    
    23Consumer
    
    
    3,845
    
    
    
    12
    
    
    
    3,569
    
    
    
    13
    
    
    
    4,560
    
    
    
    14
    
    
    
    4,124
    
    
    
    13
    
    
    
    2,661
    
    
    
    10Home equity
    
    
    1,392
    
    
    
    19
    
    
    
    1,263
    
    
    
    17
    
    
    
    1,720
    
    
    
    15
    
    
    
    1,380
    
    
    
    12
    
    
    
    979
    
    
    
    8Total
    
    $
    26,872
    
    
    
    100
    %
    
    $
    25,607
    
    
    
    100
    %
    
    $
    27,204
    
    
    
    100
    %
    
    $
    25,843
    
    
    
    100
    %
    
    $
    28,447
    
    
    
    100
    %
   (1)
    
    The allowance amounts assigned to each category of loans represent the historical loss experience of the loans adjusted for current
economic events or conditions. Total commercial loan allocations of allowance for loan losses increased approximately
$0.7 million in 2004. Commercial allowance allocations were affected by commercial loan growth,
which was partially offset by lower historical loss factors as asset quality trends improved. As
the asset quality in the commercial loan portfolio improves, the historical loss factors continue
to decrease. Management anticipates these historical loss factors will trend lower over time, as
the allowance model will be impacted by lower historical losses. Allocations of allowance for loan
losses for consumer loans increased approximately $0.4 million in 2004 over 2003 due to consumer
loan growth and higher historical loss factors for unsecured consumer loans. Mortgage loans
allocation of allowance for loan losses increased approximately $0.2 million in 2004 over 2003
primarily due to mortgage loan growth, partially offset by the sale of nonaccruing and accruing
higher risk mortgage loans. Management considers the allowance for loan losses adequate to cover inherent losses in the
Banks loan portfolio as of the date of the financial statements. Management believes it has
established the allowance in consideration of the current economic environment. While management
uses the best information available to make evaluations, future adjustments to the allowance may be
necessary based on changes in economic and other conditions. Additionally, various regulatory
agencies, as an integral part of their examination process, periodically review the Banks
allowances for loan losses. Such agencies may require the recognition of adjustments to the allowances based on their judgments of
information available to them at the time of their examinations. Provision for Loan Losses The provision for loan losses is the amount charged to earnings which is necessary to maintain
an adequate and appropriate allowance for loan losses. Accordingly, the factors which influence
changes in the allowance for loan losses have a direct effect on the provision for loan losses. The
allowance for loan losses changes from period to period as a result of a number of factors, the
most significant of which for the Corporation include the following: (i) changes in the mix of
types of loans; (ii) current charge-offs and recoveries of loans; (iii) changes in impaired loan
valuation allowances; (iv) changes in valuations in certain performing loans which have specific
allocations; (v) changes in credit grades within the portfolio, which arise from a deterioration or
an improvement in the performance of the borrower; (vi) changes in historical loss percentages; and
(vii) changes in the amounts of loans outstanding, which are used to estimate current probable loan
losses. In addition, the Corporation considers other, more subjective factors which impact the
credit quality of the portfolio as a whole and estimates allocations of allowance for loan losses
for these factors, as well. These factors include loan concentrations, economic conditions and
operational risks. Changes in these components of the allowance can arise from fluctuations in the
underlying percentages used as related loss estimates for these factors, as well as variations in
the portfolio balances to which they are applied. The net change in all of these components of the
allowance for loan losses results in the provision for loan losses. For a more detailed discussion
of the Corporations process for estimating the allowance for loan losses, see Allowance for Loan
Losses. 38




---



##### 



The provision for loan losses for the year ended December 31, 2004 amounted to $8.4 million
compared to $27.5 million a year ago. The decrease in the provision for loan losses was primarily
attributable to the 2003 Loan Sale and improved asset quality trends. In addition, certain
residential rental property loans totaling $12.9 million identified in the third quarter of 2003
resulted in the Corporation increasing the provision for loan losses by approximately $2.4 million
during that period. The provision for loan losses was also impacted by a decrease in net charge-offs of $1.8
million for the year ended December 31, 2004, compared to the same year-ago period. Net charge-offs
for the year ended December 31, 2004 amounted to $6.6 million, or 0.28 percent of average loans,
compared to $8.3 million, or 0.39 percent of average loans for the same 2003 period. Net
charge-offs benefited from a $0.6 million commercial loan recovery during the second quarter of
2004 and a third quarter 2004 recovery of $0.4 million from the sale of previously charged-off
loans. Market Risk Management
 Asset-Liability Management and Interest Rate Risk The primary objective of the Corporations asset-liability management strategy is to enhance
earnings through balance sheet growth while reducing or minimizing the risk caused by interest rate
changes. One method used to manage interest rate sensitivity is to measure, over various time
periods, the interest rate sensitivity positions, or gaps; however, this method addresses only the
magnitude of timing differences and does not address earnings or market value. Management uses an
earnings simulation model to assess the amount of earnings at risk due to changes in interest
rates. Management believes this method more accurately measures interest rate risk. This model is
updated monthly and is based on a range of interest rate shock scenarios. Under the Corporations
policy, the limit for interest rate risk is 10 percent of net interest income when considering an
increase or decrease in interest rates of 300 basis points over a twelve-month period. Assuming a
300 basis point pro-rata increase in interest rates over a twelve-month period, the Corporations
sensitivity to interest rate risk would positively impact net interest income by approximately 4.5
percent of net interest income at December 31, 2004. Assuming a 200 basis point pro-rata decrease
in interest rates over a twelve-month period, the Corporations sensitivity to interest rate risk
would negatively impact net interest income by approximately 1.7 percent of net interest income at
December 31, 2004. Although the Corporations policy for interest shock scenarios is an increase or
decrease of 300 basis points, in the current low interest rate environment rate it believes a 200
basis point decline in rates is more appropriate. Both of the rate shock scenarios are within
Managements acceptable range. The Corporation also completes instantaneous parallel interest rate
shocks. Assuming a 300 basis point increase in interest rates on January 1, 2005, the Corporations sensitivity to interest
rate risk would positively impact net interest income by approximately 0.3 percent of net interest
income at December 31, 2004. Assuming a 200 basis point decrease in interest rates at January 1,
2005, the Corporations sensitivity to interest rate risk would negatively impact net interest
income by approximately 4.6 percent of net interest income at December 31, 2004. During 2004, the Corporation entered into a series of interest rate swap agreements. The
interest rate swaps resulted in the Corporation receiving interest at an average fixed-rate of 5.16
percent and paying interest at an average variable-rate of 3.33 percent, which is based off LIBOR,
for an average period of 5.9 years with a notional amount of $222 million. As a result of swapping $222 million of fixed-rate debt payments for variable-rate
payments, the Corporations balance sheet would become liability sensitive. Therefore, as part of
the Corporations ALM strategy of preserving the asset-sensitive nature of the Corporations
balance sheet, the Corporation replaced $255 million of existing FHLB floating rate overnight
borrowings with fixed-rate FHLB advances with maturities of one to three years. Interest rate swaps assist the Corporations ALM process. The Corporations interest rate risk
management strategy includes the use of interest rate contracts to minimize significant unplanned
fluctuations in earnings that are caused by interest rate volatility. The Corporations goal is to
manage interest rate sensitivity so that movements in interest rates do not have significant
adverse effects on net interest income. As a result of interest rate fluctuations, hedged
fixed-rate liabilities appreciate or 39




---



##### 



depreciate in market value. Gains or losses on the derivative
instruments that are linked to the hedged fixed-rate liabilities are expected to substantially
offset this unrealized appreciation or depreciation. Interest rate contracts, which are non-leveraged interest rate swaps, allow the Corporation to
effectively manage its interest rate risk position. Non-leveraged interest rate swaps involve the
exchange of fixed-rate and variable-rate interest payments based on the contractual underlying
notional amount. Exposure to loss on these contracts will increase or decrease over their
respective lives as interest rates fluctuate. Refer to Notes One and Sevenof the consolidated financial statements for a discussion of the
Corporations use of written over-the-counter covered call options. Table Fifteensummarizes the expected maturities and weighted average effective yields and
rates associated with certain of the Corporations significant non-trading financial instruments.
Cash and cash equivalents, federal funds sold and interest-bearing bank deposits are excluded from
Table Fifteenas their respective carrying values approximate fair values. These financial
instruments generally expose the Corporation to insignificant market risk as they have either no
stated maturities or an average maturity of less than 30 days and interest rates that approximate
market rates. However, these financial instruments could expose the Corporation to interest rate
risk by requiring more or less reliance on alternative funding sources, such as long-term debt. For
further information on the fair value of financial instruments, see Note Nineteenof the
consolidated financial statements. The mortgage-backed securities are shown at their weighted
average expected life, obtained from an outside evaluation of the average remaining life of each
security based on historic prepayment speeds of the underlying mortgages at December 31, 2004.
These expected maturities, weighted average effective yields and fair values will change if
interest rates change. Demand deposits, money market accounts and certain savings deposits are
presented in the earliest maturity window because they have no stated maturity. 40




---



##### 



Table FifteenMarket RiskDecember 31, 2004Expected Maturity(Dollars in thousands)
    

Total
    
    

1
Year
    
    

2 Years
    
    

3 Years
    
    

4 Years
    
    

5 Years
    
    

ThereafterAssetsDebt securitiesFixed rateBook value
    
    $
    1,463,817
    
    
    $
    309,389
    
    
    $
    253,708
    
    
    $
    327,300
    
    
    $
    375,940
    
    
    $
    121,164
    
    
    $
    76,316Weighted average effective yield
    
    
    3.80
    %Fair value
    
    $
    1,458,148Variable rateBook value
    
    $
    132,345
    
    
    
    27,170
    
    
    
    27,276
    
    
    
    27,414
    
    
    
    27,587
    
    
    
    22,898
    
    
    
    Weighted average effective yield
    
    
    3.90
    %Fair value
    
    $
    129,957Loans and loans held for saleFixed rateBook value
    
    $
    592,843
    
    
    
    136,533
    
    
    
    105,700
    
    
    
    92,593
    
    
    
    71,748
    
    
    
    57,034
    
    
    
    129,235Weighted average effective yield
    
    
    6.50
    %Fair value
    
    $
    605,831Variable rateBook value
    
    $
    1,825,012
    
    
    
    636,345
    
    
    
    269,002
    
    
    
    190,693
    
    
    
    121,805
    
    
    
    74,649
    
    
    
    532,518Weighted average effective yield
    
    
    6.95
    %Fair value
    
    $
    1,922,140LiabilitiesDepositsFixed rateBook value
    
    $
    1,285,447
    
    
    
    1,011,481
    
    
    
    153,228
    
    
    
    109,075
    
    
    
    8,726
    
    
    
    2,937
    
    
    
    Weighted average effective yield
    
    
    2.52
    %Fair value
    
    $
    1,286,271Variable rateBook value
    
    $
    946,606
    
    
    
    238,569
    
    
    
    237,638
    
    
    
    235,722
    
    
    
    109,825
    
    
    
    58,885
    
    
    
    65,967Weighted average effective yield
    
    
    0.51
    %Fair value
    
    $
    913,117Other borrowingsFixed rateBook value
    
    $
    873,737
    
    
    
    290,045
    
    
    
    325,055
    
    
    
    135,058
    
    
    
    61
    
    
    
    51,064
    
    
    
    72,454Weighted average effective yield
    
    
    3.41
    %Fair value
    
    $
    894,827Variable rateBook value
    
    $
    575,999
    
    
    
    575,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average effective yield
    
    
    2.00
    %Fair value
    
    $
    575,995
 41




---



##### 



Table Sixteenpresents the contractual maturity distribution and interest sensitivity of
selected loan categories at December 31, 2004. This table excludes non-accrual loans. Table SixteenMaturity and Sensitivity to Changes in Interest RatesDecember 31, 2004CommercialCommercial
    
    
    Non Real(Dollars in thousands)
    
    Real Estate
    
    
    Estate
    
    
    Construction
    
    
    TotalFixed rate:1 year or less
    
    $
    33,299
    
    
    $
    4,232
    
    
    $
    32,620
    
    
    $
    70,1511-5 years
    
    
    110,534
    
    
    
    38,059
    
    
    
    1,525
    
    
    
    150,118After 5 years
    
    
    32,943
    
    
    
    43,548
    
    
    
    1,540
    
    
    
    78,031Total fixed rate
    
    
    176,776
    
    
    
    85,839
    
    
    
    35,685
    
    
    
    298,300Variable rate:1 year or less
    
    
    103,086
    
    
    
    59,667
    
    
    
    209,134
    
    
    
    371,8871-5 years
    
    
    433,973
    
    
    
    58,948
    
    
    
    67,717
    
    
    
    560,638After 5 years
    
    
    55,049
    
    
    
    5,108
    
    
    
    19,634
    
    
    
    79,791Total variable rate
    
    
    592,108
    
    
    
    123,723
    
    
    
    296,485
    
    
    
    1,012,316Total selected loans
    
    $
    768,884
    
    
    $
    209,562
    
    
    $
    332,170
    
    
    $
    1,310,616
 Off-Balance Sheet Risk The Corporation is party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit. These instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the amount recognized in
the consolidated financial statements. Commitments to extend credit are agreements to lend to a
customer so long as there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates and may require collateral from the borrower if deemed
necessary by the Corporation. Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third party up to a stipulated amount
and with specified terms and conditions. Standby letters of credit are recorded as a liability by
the Corporation at the fair value of the obligation undertaken in issuing the guarantee.
Commitments to extend credit are not recorded as an asset or liability by the Corporation until the
instrument is exercised. Refer to Note Seventeenof the consolidated financial statements for
further discussion of commitments. The Corporation does not have any special purpose entities or
off-balance sheet financing arrangements. The following table presents aggregated information about commitments of the Corporation
which could impact future periods. Table SeventeenCommitmentsAs of December 31, 2004Amount
of Commitment Expiration Per PeriodLess than
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total Amounts(Dollars in thousands)
    
    1 year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    Over 5 Years
    
    
    CommittedLines of Credit
    
    $
    29,005
    
    
    $
    3,568
    
    
    $
    2,453
    
    
    $
    335,625
    
    
    $
    370,651Standby Letters of Credit
    
    
    7,815
    
    
    
    1,266
    
    
    
    
    
    
    
    
    
    
    
    9,081Loan Commitments
    
    
    368,917
    
    
    
    68,766
    
    
    
    15,860
    
    
    
    19,448
    
    
    
    472,991Total Commitments
    
    $
    405,737
    
    
    $
    73,600
    
    
    $
    18,313
    
    
    $
    355,073
    
    
    $
    852,723
 42




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##### 



Liquidity Risk Liquidity is the ability to maintain cash flows adequate to fund operations and meet
obligations and other commitments on a timely and cost-effective basis. Liquidity is provided by
the ability to attract retail deposits, by current earnings, and by a strong capital base that
enables the Corporation to use alternative funding sources that complement normal sources.
Managements asset-liability policy is to maximize net interest income while continuing to provide
adequate liquidity to meet continuing loan demand and deposit withdrawal requirements and to
service normal operating expenses. The Corporations primary source of funding is proceeds from customer deposits, other
borrowings, loan repayments, and securities-available-for-sale. Cash flows from operations are a
significant component of liquidity risk management and include both deposit maturities and
scheduled cash flows from loan and investment maturities payments. Cash flows from operating
activities increased in 2004 mainly due to net income, an increase in other liabilities and a
decrease in other assets, partially offset by greater funding needs for originations of mortgage
loans held for sale than proceeds received from the sale of such loans. Cash flows used in
investing activities declined in 2004 as the purchases of securities-available-for-sale and loan
originations exceeded the sale and maturities of securities-available-for-sale. Cash flows from
financing activities increased mainly due to an increase in deposits and other borrowings to fund
the increase in securities-available-for-sale and loans, partially offset by dividends paid. If additional funding sources are needed, the Bank has access to federal fund lines at
correspondent banks and borrowings from the Federal Reserve discount window. In addition to these
sources, as described above, the Bank is a member of the FHLB, which provides access to FHLB
lending sources. At December 31, 2004, the Bank had an available line of credit with the FHLB
totaling $1.33 billion with $1.13 billion outstanding. At December 31, 2004, the Bank also had
federal funds back-up lines of credit totaling $85.0 million with $20.0 million outstanding. At
December 31, 2004, the Corporation had a line of credit with Wells Fargo Bank totaling $25.0
million with $12.0 million outstanding and commercial paper outstandings of $59.7 million. Another source of liquidity is the securities-available-for-sale portfolio. See
Securities-available-for-salefor further discussion. Management believes the Banks sources of
liquidity are adequate to meet loan demand, operating needs and deposit withdrawal requirements. The Corporation has existing contractual obligations that will require payments in future
periods. The following table presents aggregated information about such payments to be made in
future periods. The Corporation anticipates refinancing, during 2005, any contractual obligations
that are due in less than one year. Table EighteenContractual ObligationsAs of December 31, 2004Payments Due by PeriodLess than(Dollars in thousands)
    
    1 year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    Over 5 Years
    
    
    TotalOther
borrowings - Long-term debt
    
    $
    685,999
    
    
    $
    433,930
    
    
    $
    149,963
    
    
    $
    179,844
    
    
    $
    1,449,736Operating lease obligations
    
    
    1,986
    
    
    
    2,542
    
    
    
    2,006
    
    
    
    12,546
    
    
    
    19,080Purchase obligations (1)
    
    
    2,316
    
    
    
    1,846
    
    
    
    616
    
    
    
    
    
    
    
    4,778Equity method investees funding
    
    
    2,320
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,320Deposits(2)
    
    
    2,335,530
    
    
    
    262,303
    
    
    
    11,892
    
    
    
    121
    
    
    
    2,609,846Other obligations(3)
    
    
    1,392
    
    
    
    2,911
    
    
    
    952
    
    
    
    2,162
    
    
    
    7,417Total Contractual Cash Obligations
    
    $
    3,029,543
    
    
    $
    703,532
    
    
    $
    165,429
    
    
    $
    194,673
    
    
    $
    4,093,177
   (1)
    
    Represents obligations under existing executory contracts.(2)
    
    Deposits with no stated maturity (demand, money market, and savings deposits) are presented in the less than one year category.(3)
    
    Represents obligations under employment, severance and retirement contracts. 43




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##### 



Capital Management
 The objective of effective capital management is to generate above-market returns on
equity to the Corporations shareholders while maintaining adequate regulatory capital ratios. The
Corporation uses capital to fund growth, acquire other companies, pay dividends and repurchase its
common stock. Shareholders equity at December 31, 2004 increased to $314.7 million, representing 7.10
percent of period-end assets compared to $299.4 million or 7.12 percent of period-end assets at
December 31, 2003. The increase was due mainly to net income of $42.4 million partially offset by
cash dividends of $0.75 per share, which resulted in cash dividend payments of $22.4 million for
the year ended December 31, 2004. In addition, the after-tax unrealized loss on
securities-available-for-sale at December 31, 2004 was $4.9 million compared to an after-tax
unrealized gain of $6.2 million at December 31, 2003. This decrease was due to an increase in
short- and intermediate-term interest rates. On January 23, 2002, the Corporations Board of Directors authorized the repurchase of up to
1.5 million shares of the Corporations common stock. As of December 31, 2004, the Corporation had
repurchased a total of 1.4 million shares of its common stock at an average per-share price of
$17.52 under this authorization, which has reduced shareholders equity by $24.5 million. No shares
were repurchased under this authorization during the year ended December 31, 2004. On October 24, 2003, the Corporations Board of Directors authorized the repurchase of up to
1.5 million additional shares of the Corporations common stock. At December 31, 2004, no shares
had been repurchased under this authorization. The principal asset of the Corporation is its investment in the Bank. Thus, the Corporation
derives its principal source of income through dividends from the Bank. Certain regulatory and
other requirements restrict the lending of funds by the Bank to the Corporation and the amount of
dividends which can be paid to the Corporation. In addition, certain regulatory agencies may
prohibit the payment of dividends by the Bank if they determine that such payment would constitute
an unsafe or unsound practice. See Business -Governmental Supervision and Regulation,
Business-Capital and Operational Requirementsand Note Twentyof notes to consolidated financial
statements for additional discussion of these restrictions. The Corporation and the Bank must comply with regulatory capital requirements established by
the applicable federal regulatory agencies. Under the standards of the Federal Reserve Board, the
Corporation must maintain a minimum ratio of Tier I 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 I Capital is comprised of total shareholders equity calculated in accordance
with generally accepted accounting principles less certain intangible assets and excluding
unrealized gains or losses on securities-available-for-sale. Total Capital is comprised of Tier I
Capital plus certain adjustments, the largest of which for the Corporation is the allowance for
loan losses (up to 1.25 percent of risk-weighted assets). Total Capital must consist of at least 50
percent of Tier 1 Capital. Risk-weighted assets refer to the on- and off-balance sheet exposures of
the Corporation adjusted for their related risk levels using amounts set forth in Federal Reserve
standards. In addition to the aforementioned risk-based capital requirements, the Corporation is subject
to a leverage capital requirement, requiring a minimum ratio of Tier I Capital (as defined
previously) to total adjusted average assets of 3.00 percent to 5.00 percent. The Bank also has similar regulatory capital requirements imposed by the Federal Reserve
Board. See Business-Governmental Supervision and Regulation, Business-Capital and Operational
Requirementsand Note Twentyof notes to consolidated financial statements for additional
discussion of these requirements. At December 31, 2004, the Corporation and the Bank were in compliance with all existing
capital requirements. The most recent notifications from the Corporations and the Banks various
regulators categorized the Corporation and the Bank as well capitalized under the regulatory
framework for prompt 44




---



##### 



corrective action. In the judgment of management, there have been no events or conditions
since those notifications that would change the well capitalized status of the Corporation or the
Bank. The Corporations capital requirements are summarized in the table below: Table NineteenCapital Ratios Risk-Based CapitalLeverage Capital
    
    
    Tier 1 Capital
    
    
    Total Capital(Dollars in thousands)
    
    Amount
    
    
    Percentage (1)
    
    
    Amount
    
    
    Percentage (2)
    
    
    Amount
    
    
    Percentage (2)Actual
    
    $
    297,906
    
    
    
    6.76
    %
    
    $
    297,906
    
    
    
    10.08
    %
    
    $
    324,814
    
    
    
    10.99
    %Required
    
    
    176,194
    
    
    
    4.00
    
    
    
    118,211
    
    
    
    4.00
    
    
    
    236,421
    
    
    
    8.00Excess
    
    
    121,712
    
    
    
    2.76
    
    
    
    179,695
    
    
    
    6.08
    
    
    
    88,393
    
    
    
    2.99
   (1)
    Percentage of total adjusted average assets. The Federal Reserve Board 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. 2003 VERSUS 2002  The following discussion and analysis provides a comparison or the Corporations results
of operations for 2003 and 2002. This discussion should be read in conjunction with the
consolidated financial statements and related notes on pages 52
through 87. In addition, Table One
contains financial data to supplement this discussion. Overview Net income amounted to $14.1 million, or $0.47 per diluted share, for the year ended December
31, 2003, a decrease from earnings of $39.8 million, or $1.30 per diluted share, for the year ended
December 31, 2002. The decrease was due to the costs associated with the refinancing of fixed-term
advances and a higher provision for loan losses due to the 2003 Loan Sale. Net Interest Income For the year ended December 31, 2003, net interest income amounted to $107.8 million, a
decrease of approximately 5 percent from net interest income of $113.2 million in 2002. The
decrease in net interest income was mainly due to lower interest income on earning assets resulting
from the effects of the declining interest rate environment. The reinvestment of the proceeds from
the 2003 Loan Sale and the sale of the Corporations credit card portfolio were made in lower
yielding securities. Also, during 2003, the mortgage-backed securities portfolio produced lower
effective yields due to increased amortization of premiums resulting from increased prepayment
speeds of underlying mortgages. The decrease in interest income was partially offset by a decrease
in interest expense. This decrease was due to a decline in interest rates across the yield curve, a
shift in funding sources from higher cost retail certificates of deposit to lower cost transaction
based accounts and the benefits from the refinancing of $131.0 million of fixed-term advances in
2003 and $100 million of fixed-term advances late in 2002. The net interest margin decreased 55 basis points to 3.00 percent in 2003, compared to 3.55
percent in 2002. The decrease reflected the impact of the declining interest rate environment,
which compressed the net interest margin as assets repriced faster than liabilities due to the
asset-sensitive nature of the Corporations balance sheet. In addition, reinvestment rates of
assets were lower than rates earned by assets previously on the balance sheet. 45




---



##### 



Provision for Loan Losses The provision for loan losses for the year ended December 31, 2003 amounted to $27.5 million
compared to $8.3 million a year ago. The increase in the provision for loan losses was primarily
attributable to the 2003 Loan Sale and a $2.4 million increase in the provision related to certain
residential rental property loans identified in the second quarter of 2003. Net charge-offs for the year ended December 31, 2003 amounted to $8.3 million, or 0.39 percent
of average loans compared to $6.3 million, or 0.30 percent of average loans for the same 2002
period. These increases in net charge-offs were due to higher commercial and consumer loan
charge-offs due to the impact of the 2003 weak economic environment and $1.1 million of residential
rental property loans charged-off. Noninterest Income Noninterest income increased $16.5 million, or 35 percent, to $64.2 million compared to the
same period in 2002. The increase was due to several factors. Net losses from equity method
investments amounted to $0.3 million in 2003 versus net losses of $5.8 million for 2002. The
Corporations investment in BOLI resulted in a $3.9 million increase in income as the product was
purchased late in the fourth quarter of 2002. Service charges on deposit accounts increased $3.0
million due to growth in checking accounts and increased activity. In the first quarter of 2003,
the Corporation sold its credit card portfolio for a gain of $2.3 million. Financial management
income increased $1.3 million primarily due to the purchase of a third party benefits administrator
in the third quarter of 2003. Mortgage services income increased $0.7 million, which was driven by
record refinancing volume based on record low interest rates. Brokerage revenues increased $0.7
million as customers began to return to the equities market. Insurance services income increased
$0.6 million partly due to the acquisition of two insurance agencies. Other noninterest income
increased $0.6 million due to increased ATM fees, merchant income and mortgage servicing income.
These improvements were partially offset by a $1.3 million reduction in gains on sales of
securities and a $0.3 million decrease in trading gains. Noninterest Expense Noninterest expense totaled $127.0 million at December 31, 2003, an increase of $29.3 million
compared to 2002. The variance includes a $19.1 million cost associated with prepaying $131.0
million in fixed rate advances in 2003 versus a $3.3 million cost associated with prepaying $100
million in fixed-rate advances in 2002. In addition, noninterest expense was affected by a $5.0
million increase in professional fees primarily due to the 2003 Loan Sale and other consulting
services. Noninterest expense was also impacted by a $4.7 million increase in salaries and employee
benefits due to additional personnel, including the acquisition of a third party benefits
administrator and two insurance agencies, increased medical expenses and increased commission-based
compensation due to increased revenue in the Corporations mortgage, brokerage and insurance
services areas. These increases were partially offset by lower incentive compensation and employee
benefit accruals. Other items impacting noninterest expense were a $1.9 million increase in
marketing expense primarily associated with the implementation of CHAMP and a $1.0 million increase
in other operating expense primarily due to increased mortgage servicing fees, non-credit losses
and other miscellaneous expenses. Income Tax Expense The income tax expense for the year ended December 31, 2003 amounted to $3.3 million for an
effective tax rate of 18.9 percent, compared to $14.9 million for an effective tax rate of 27.3
percent for the year ended December 31, 2002. The decrease in the income tax expense and the
effective tax rate
for 2003 was attributable to the decrease in taxable income relative to nontaxable components of
earnings. 46




---



##### 



Regulatory Recommendations  During the third quarter of 2003, the Bank entered into a written agreement (the Written
Agreement) with the Federal Reserve Bank of Richmond (the Federal Reserve Bank) and the Office
of the North Carolina Commissioner of Banks (the Banking Commissioner), the Banks primary
federal and state regulatory agencies. The Written Agreement required the Bank to take appropriate
actions to improve its programs and procedures for complying with the Currency and Foreign
Transactions Reporting Act and the anti-money laundering provisions of Regulation H of the Board of
Governors of the Federal Reserve System. The Bank subsequently took substantial actions, and
adopted and implemented a number of policies and procedures, to address the concerns of the
regulatory agencies. As a result of these actions, the Federal Reserve Bank, in concurrence with
the Banking Commissioner, terminated the Written Agreement effective July 2, 2004. Management is not presently aware of any current recommendations to the Corporation or to the
Bank by regulatory authorities which, if they were to be implemented, would have a material effect
on the Corporations liquidity, capital resources, or operations. Accounting Matters  In December 2003, the American Institute of Certified Public Accountants (AICPA) issued
Statement of Position 03-03 (SOP 03-03), which addresses the accounting for differences between
contractual cash flows and cash flows expected to be collected from an investors initial
investment in loans or debt securities acquired in a transfer if those differences are
attributable, at least in part, to credit quality. SOP 03-03 includes loans acquired in purchase
business combinations and applies to all nongovernmental entities. SOP 03-03 does not apply to
loans originated by the entity. SOP 03-03 is effective for loans acquired in fiscal years
beginning after December 15, 2004. The Corporation does not expect adoption of SOP 03-03 to have a
material effect on its consolidated financial statements. In November 2003, the Emerging Issues Task Force (EITF) issued EITF Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF
03-01). EITF 03-01 provided guidance for evaluating whether an investment is
other-than-temporarily impaired and requires certain disclosures with respect to these investments.
In September 2004, the Financial Accounting Standards Board (FASB) issued a FASB Staff Position
(FSP EITF 03-1-b) to delay the requirement to record impairment losses EITF 03-1. The guidance
also included accounting considerations subsequent to the recognition of an other-than-temporary
impairment and requirements for disclosures about unrealized losses that have not been recognized
as other-than-temporary impairments. The approved delay by FSP EITF 03-1-b will apply to all
securities within the scope of EITF 03-1 and is expected to end when new guidance is issued and
comes into effect. The Corporation will evaluate the new guidance on EITF 03-1 upon issuance. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123(r)
(SFAS No. 123(r)), Share-Based Payment, which is a revision of FASB Statement No. 123
Accounting for Stock-Based Compensation and supersedes APB Opinion No. 25 Accounting for Stock
Issued to Employees. FASB 123(r) requires companies to recognize in the income statement the
grant-date fair value of stock options and other equity-based compensation issued to employees over
the period during which an employee is required to provide service in exchange for the award, which
is usually the vesting period. FASB 123(r) sets accounting requirements for share-based
compensation to employees, including employee-stock purchase plans (ESPPs). Awards to most
nonemployee directors will be accounted for as employee awards. This Statement is effective for
public companies that do not file as small business issuers as of the beginning of interim or
annual reporting periods beginning after June 15, 2005. The Corporation will adopt FASB 123(r) on
July 1, 2005, and is currently evaluating the effect on its consolidated financial statements. In October of 2004, Congress enacted the American Jobs Creation Act of 2004 (the 2004 Act).
Under this legislation, non-qualified deferred compensation plans are subject to new rules
governing to
the 47




---



##### 



income tax treatment of contributions and distributions related to these plans. The 2004 Act
could provide less favorable overall income tax treatment for mutual fund option investments
beginning in 2005. As a result, participants in the OPT Plan and the Plan may direct the
administrative committee to invest their 2005 deferrals directly into mutual funds while the
Corporation reviews further guidance from the Internal Revenue Service with respect to the mutual
fund option investments. The Corporation does not anticipate any material effects on its
consolidated financial statements from the 2004 Act. From time to time, the FASB issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the public, to revisions by
the FASB and to final issuance by the FASB as statements of financial accounting standards.
Management considers the effect of the proposed statements on the consolidated financial statements
of the Corporation and monitors the status of changes to and proposed effective dates of exposure
drafts. 
 Item 7A.Quantitative and Qualitative Disclosures about Market Risk Certain information called for by Item 7A is set forth in Item 7 under the caption Market Risk
Managementon page 39 and is incorporated herein by reference. 48




---



##### 



Item 8.Financial Statements and Supplementary Data 
 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders
First Charter Corporation We have audited managements assessment, included in the accompanying Managements Annual
Report on Internal Control over Financial Reporting, that First Charter Corporation maintained
effective internal control over financial reporting as of December 31, 2004, based on criteria
established in Internal ControlIntegrated Frameworkissued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). First Charter Corporations management is
responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an opinion on the effectiveness of the
Companys internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinions. A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys assets that could have
a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. In our opinion, managements assessment that First Charter Corporation maintained effective
internal control over financial reporting as of December 31, 2004, is fairly stated, in all
material respects, based on criteria established in Internal ControlIntegrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
First Charter Corporation maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2004, based on criteria established in Internal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of First Charter Corporation and
subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income,
changes in shareholders equity, and cash flows for each of the years in the three-year period
ended December 31, 49




---



##### 



2004, and our report dated February 28, 2005, expressed an unqualified opinion
on those consolidated financial statements. (KPMG LLP LOGO) Charlotte, North Carolina
February 28, 2005 50




---



##### 



Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders
First Charter Corporation We have audited the accompanying consolidated balance sheets of First Charter Corporation and
subsidiaries (the Corporation) as of December 31, 2004 and 2003, and the related consolidated
statements of income, shareholders equity, and cash flows for each of the years in the three-year
period ended December 31, 2004. These consolidated financial statements are the responsibility of
the Corporations management. Our responsibility is to express an opinion on these consolidated

financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis
for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of First Charter Corporation and subsidiaries as of
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2004, in conformity with U.S. generally
accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the internal control over financial reporting
of the Corporation as of December 31, 2004, based on the criteria established in Internal
ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated February 28, 2005 expressed an unqualified opinion on
managements assessment of, and the effective operation of, internal control over financial
reporting. (KPMG LLP LOGO) Charlotte, North Carolina
February 28, 2005 51




---



##### 



First Charter Corporation and Subsidiaries
Consolidated Balance Sheets December 31
    
    
    December 31(Dollars in thousands, except share data)
    
    2004
    
    
    2003Assets:Cash and due from banks
    
    $
    90,238
    
    
    $
    88,564Federal funds sold
    
    
    1,589
    
    
    
    1,311Interest bearing bank deposits
    
    
    6,184
    
    
    
    23,631Cash and cash equivalents
    
    
    98,011
    
    
    
    113,506Securities available for sale (cost of $1,660,703 at December 31, 2004 and
$1,591,803 at December 31, 2003; carrying amount of pledged collateral
at December 31, 2004, $1,140,234)
    
    
    1,652,732
    
    
    
    1,601,900Loans held for sale
    
    
    5,326
    
    
    
    5,137Loans
    
    
    2,439,692
    
    
    
    2,252,804Less: Unearned income
    
    
    (291
    )
    
    
    (167
    )Allowance for loan losses
    
    
    (26,872
    )
    
    
    (25,607
    )Loans, net
    
    
    2,412,529
    
    
    
    2,227,030Premises and equipment, net
    
    
    97,565
    
    
    
    95,756Goodwill and other intangible assets
    
    
    23,241
    
    
    
    22,872Other assets
    
    
    142,201
    
    
    
    140,492Total assets
    
    $
    4,431,605
    
    
    $
    4,206,693Liabilities:Deposits, domestic:Noninterest bearing demand
    
    $
    377,793
    
    
    $
    326,679Interest bearing
    
    
    2,232,053
    
    
    
    2,101,218Total deposits
    
    
    2,609,846
    
    
    
    2,427,897Short-term borrowings
    
    
    685,998
    
    
    
    959,094Long-term borrowings
    
    
    763,738
    
    
    
    473,106Other liabilities
    
    
    57,336
    
    
    
    47,157Total liabilities
    
    
    4,116,918
    
    
    
    3,907,254Shareholders equity:Preferred
stock -  no par value; authorized 2,000,000 shares; no shares
issued and outstanding
    
    
    
    
    
    
    Common stock
- no par value; authorized 100,000,000 shares;
issued and outstanding 30,054,256 and 29,720,163 shares
    
    
    121,464
    
    
    
    115,270Common stock held in Rabbi Trust for deferred compensation
    
    
    (808
    )
    
    
    (636
    )Deferred compensation payable in common stock
    
    
    808
    
    
    
    636Retained earnings
    
    
    198,085
    
    
    
    178,008Accumulated other comprehensive (loss) income:Unrealized (losses) gains on securities available for sale, net
    
    
    (4,862
    )
    
    
    6,161Total shareholders equity
    
    
    314,687
    
    
    
    299,439Total liabilities and shareholders equity
    
    $
    4,431,605
    
    
    $
    4,206,693
 See accompanying notes to consolidated financial statements. 52




---



##### 



First Charter Corporation and Subsidiaries
Consolidated Statements of Income Years Ended December 31(Dollars in thousands, except share and per share data)
    
    2004
    
    
    2003
    
    
    2002Interest income:Loans
    
    $
    124,169
    
    
    $
    118,911
    
    
    $
    135,085Federal funds sold
    
    
    19
    
    
    
    20
    
    
    
    20Interest bearing bank deposits
    
    
    201
    
    
    
    465
    
    
    
    169Securities
    
    
    62,914
    
    
    
    58,896
    
    
    
    61,114Total interest income
    
    
    187,303
    
    
    
    178,292
    
    
    
    196,388Interest expense:Deposits
    
    
    35,350
    
    
    
    41,544
    
    
    
    50,957Federal funds purchased and securities
sold under agreements to repurchase
    
    
    2,969
    
    
    
    2,288
    
    
    
    2,492Federal Home Loan Bank and other borrowings
    
    
    25,974
    
    
    
    26,658
    
    
    
    29,778Total interest expense
    
    
    64,293
    
    
    
    70,490
    
    
    
    83,227Net interest income
    
    
    123,010
    
    
    
    107,802
    
    
    
    113,161Provision for loan losses
    
    
    8,425
    
    
    
    27,518
    
    
    
    8,270Net interest income after provision for loan losses
    
    
    114,585
    
    
    
    80,284
    
    
    
    104,891Noninterest income:Service charges on deposit accounts
    
    
    25,564
    
    
    
    22,143
    
    
    
    19,133Financial management income
    
    
    5,848
    
    
    
    3,705
    
    
    
    2,396Gain on sale of securities, net
    
    
    2,383
    
    
    
    10,287
    
    
    
    11,539Gain on sale of credit card loan portfolio
    
    
    
    
    
    
    2,262
    
    
    
    Loss from equity method investees
    
    
    (349
    )
    
    
    (285
    )
    
    
    (5,801
    )Mortgage services income
    
    
    1,748
    
    
    
    2,912
    
    
    
    2,236Brokerage services income
    
    
    3,112
    
    
    
    3,016
    
    
    
    2,288Insurance services income
    
    
    11,269
    
    
    
    9,408
    
    
    
    8,770Trading gains
    
    
    163
    
    
    
    1,801
    
    
    
    2,078Bank owned life insurance
    
    
    3,413
    
    
    
    3,888
    
    
    
    16Other
    
    
    7,745
    
    
    
    4,796
    
    
    
    4,755Total noninterest income
    
    
    60,896
    
    
    
    63,933
    
    
    
    47,410Noninterest expense:Salaries and employee benefits
    
    
    58,493
    
    
    
    54,752
    
    
    
    50,085Occupancy and equipment
    
    
    17,226
    
    
    
    16,504
    
    
    
    16,032Data processing
    
    
    4,034
    
    
    
    2,816
    
    
    
    2,968Marketing
    
    
    4,351
    
    
    
    4,435
    
    
    
    2,562Postage and supplies
    
    
    4,959
    
    
    
    4,521
    
    
    
    4,333Professional services
    
    
    9,574
    
    
    
    11,582
    
    
    
    6,615Telephone
    
    
    1,998
    
    
    
    2,267
    
    
    
    1,951Amortization of intangibles
    
    
    461
    
    
    
    441
    
    
    
    367Prepayment costs on borrowings
    
    
    
    
    
    
    19,089
    
    
    
    3,284Other
    
    
    9,921
    
    
    
    10,378
    
    
    
    9,354Total noninterest expense
    
    
    111,017
    
    
    
    126,785
    
    
    
    97,551Income before income taxes
    
    
    64,464
    
    
    
    17,432
    
    
    
    54,750Income taxes
    
    
    22,022
    
    
    
    3,286
    
    
    
    14,947Net income
    
    $
    42,442
    
    
    $
    14,146
    
    
    $
    39,803Net income per share:Basic
    
    $
    1.42
    
    
    $
    0.47
    
    
    $
    1.30Diluted
    
    $
    1.40
    
    
    $
    0.47
    
    
    $
    1.30Weighted average shares:Basic
    
    
    29,859,683
    
    
    
    29,789,969
    
    
    
    30,520,125Diluted
    
    
    30,277,063
    
    
    
    30,007,435
    
    
    
    30,702,107
 See accompanying notes to consolidated financial statements. 53




---



##### 



First Charter Corporation and Subsidiaries
Consolidated Statements of Shareholders Equity Common Stockheld in Rabbi
    
    
    Deferred
    
    
    
    
    
    
    AccumulatedTrust for
    
    
    Compensation
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Deferred
    
    
    Payable in
    
    
    Retained
    
    
    Comprehensive(Dollars in thousands, except share data)
    
    Shares
    
    
    Amount
    
    
    Compensation
    
    
    Common Stock
    
    
    Earnings
    
    
    Income (Loss)
    
    
    TotalBalance, December 31, 2001
    
    
    30,742,532
    
    
    $
    135,167
    
    $
    
    (388
    )
    
    $
    388
    
    
    $
    168,334
    
    
    $
    5,840
    
    
    $
    309,341Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,803
    
    
    
    
    
    
    
    39,803Unrealized gain on securities available
for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,076
    
    
    
    10,076Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49,879Common stock purchased by Rabbi Trust
for deferred compensation
    
    
    
    
    
    
    
    
    
    
    (88
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (88
    )Deferred compensation payable
in common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88
    
    
    
    
    
    
    
    
    
    
    
    88Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,237
    )
    
    
    
    
    
    
    (22,237
    )Stock options exercised and Dividend

Reinvestment Plan stock issued
    
    
    136,215
    
    
    
    1,596
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,596Purchase and retirement of common stock
    
    
    (809,600
    )
    
    
    (13,894
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,894
    )Balance, December 31, 2002
    
    
    30,069,147
    
    
    
    122,870
    
    
    
    (476
    )
    
    
    476
    
    
    
    185,900
    
    
    
    15,916
    
    
    
    324,686Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,146
    
    
    
    
    
    
    
    14,146Unrealized loss on securities available
for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,755
    )
    
    
    (9,755
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,391Common stock purchased by Rabbi Trust
for deferred compensation
    
    
    
    
    
    
    
    
    
    
    (160
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (160
    )Deferred compensation payable
in common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    160
    
    
    
    
    
    
    
    
    
    
    
    160Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,038
    )
    
    
    
    
    
    
    (22,038
    )Stock options exercised
    
    
    137,575
    
    
    
    1,700
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,700Shares issued in connection with
business acquisition
    
    
    78,441
    
    
    
    1,323
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,323Purchase and retirement of common stock
    
    
    (565,000
    )
    
    
    (10,623
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,623
    )Balance, December 31, 2003
    
    
    29,720,163
    
    
    
    115,270
    
    
    
    (636
    )
    
    
    636
    
    
    
    178,008
    
    
    
    6,161
    
    
    
    299,439Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,442
    
    
    
    
    
    
    
    42,442Unrealized loss on securities available
for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,023
    )
    
    
    (11,023
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,419Common stock purchased by Rabbi Trust
for deferred compensation
    
    
    
    
    
    
    
    
    
    
    (172
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (172
    )Deferred compensation payable
in common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    172
    
    
    
    
    
    
    
    
    
    
    
    172Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,365
    )
    
    
    
    
    
    
    (22,365
    )Stock options exercised and Dividend
Reinvestment Plan stock issued
    
    
    267,576
    
    
    
    4,605
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,605Shares issued in connection with
business acquisition
    
    
    47,970
    
    
    
    1,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,175Restricted stock issued
    
    
    18,547
    
    
    
    414
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    414Balance, December 31, 2004
    
    
    30,054,256
    
    
    $
    121,464
    
    
    $
    (808
    )
    
    $
    808
    
    
    $
    198,085
    
    
    $
    (4,862
    )
    
    $
    314,687
 See accompanying notes to consolidated financial statements. 54




---



##### 



First Charter Corporation and Subsidiaries 
 Consolidated Statements of Cash Flows
 Years Ended December 31(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Cash flows from operating activities:Net income
    
    $
    42,442
    
    
    $
    14,146
    
    
    $
    39,803Adjustments to reconcile net income to net cash provided by (used in)
operating activities:Provision for loan losses
    
    
    8,425
    
    
    
    27,518
    
    
    
    8,270Depreciation
    
    
    9,064
    
    
    
    8,952
    
    
    
    9,535Amortization of intangibles
    
    
    461
    
    
    
    441
    
    
    
    367Premium amortization and discount accretion, net
    
    
    3,296
    
    
    
    6,867
    
    
    
    1,466Net gain on securities available for sale transactions
    
    
    (2,383
    )
    
    
    (10,287
    )
    
    
    (11,539
    )Net (gain) loss on foreclosed assets
    
    
    (172
    )
    
    
    265
    
    
    
    211Write-downs on foreclosed assets
    
    
    116
    
    
    
    
    
    
    
    Net loss from equity method investments
    
    
    349
    
    
    
    285
    
    
    
    5,801Net gain on sale of property
    
    
    (777
    )
    
    
    (382
    )
    
    
    (904
    )Net loss (gain) on sale of equipment
    
    
    62
    
    
    
    5
    
    
    
    (39
    )Gain on sale of credit card loan portfolio
    
    
    
    
    
    
    (2,262
    )
    
    
    Gain on sale of deposits and loans
    
    
    (339
    )
    
    
    
    
    
    
    Origination of mortgage loans held for sale
    
    
    (95,635
    )
    
    
    (278,165
    )
    
    
    (159,049
    )Proceeds from sale of mortgage loans held for sale
    
    
    54,704
    
    
    
    144,510
    
    
    
    137,736Increase in cash surrender value of bank owned life insurance
    
    
    (3,413
    )
    
    
    (3,888
    )
    
    
    Decrease (increase) in other assets
    
    
    6,463
    
    
    
    (5,954
    )
    
    
    865Increase (decrease) in other liabilities
    
    
    9,425
    
    
    
    (9,642
    )
    
    
    4,238Net cash provided by (used in) operating activities
    
    
    32,088
    
    
    
    (107,591
    )
    
    
    36,761Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    139,261
    
    
    
    1,004,264
    
    
    
    746,886Proceeds from calls and maturities of securities available for sale
    
    
    419,251
    
    
    
    551,072
    
    
    
    275,298Purchase of securities available for sale
    
    
    (587,582
    )
    
    
    (1,753,691
    )
    
    
    (1,048,473
    )Purchase of bank owned life insurance
    
    
    
    
    
    
    
    
    
    
    (70,000
    )Net increase in loans and loans held for sale
    
    
    (204,108
    )
    
    
    (267,843
    )
    
    
    (267,168
    )Proceeds from sale of loans
    
    
    5,828
    
    
    
    40,220
    
    
    
    Proceeds from sales of other real estate
    
    
    5,433
    
    
    
    10,452
    
    
    
    3,153Net purchases of premises and equipment
    
    
    (10,136
    )
    
    
    (9,528
    )
    
    
    (7,166
    )Proceeds from sale of credit card portfolio
    
    
    
    
    
    
    13,242
    
    
    
    Divestitures and acquisition of business activities, net of cash paid
    
    
    (6,755
    )
    
    
    (991
    )
    
    
    Net cash used in investing activities
    
    
    (238,808
    )
    
    
    (412,803
    )
    
    
    (367,470
    )Cash flows from financing activities:Net increase in demand, money market and savings accounts
    
    
    93,219
    
    
    
    210,268
    
    
    
    85,765Net increase (decrease) in certificates of deposit
    
    
    98,229
    
    
    
    (105,016
    )
    
    
    73,936Net increase in securities sold under repurchase
agreements and other borrowings
    
    
    17,537
    
    
    
    389,759
    
    
    
    233,928Purchase and retirement of common stock
    
    
    
    
    
    
    (10,623
    )
    
    
    (13,894
    )Proceeds from issuance of common stock
    
    
    4,605
    
    
    
    1,700
    
    
    
    1,596Dividends paid
    
    
    (22,365
    )
    
    
    (22,038
    )
    
    
    (22,237
    )Net cash provided by financing activities
    
    
    191,225
    
    
    
    464,050
    
    
    
    359,094Net (decrease) increase in cash and cash equivalents
    
    
    (15,495
    )
    
    
    (56,344
    )
    
    
    28,385Cash and cash equivalents at beginning of period
    
    
    113,506
    
    
    
    169,850
    
    
    
    141,465Cash and cash equivalents at end of period
    
    $
    98,011
    
    
    $
    113,506
    
    
    $
    169,850Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    62,977
    
    
    $
    72,699
    
    
    $
    85,070Cash paid for income taxes
    
    
    18,548
    
    
    
    12,619
    
    
    
    4,352Supplemental disclosure of non-cash transactions:Transfer of loans and premises and equipment to other real estate owned
    
    
    2,385
    
    
    
    7,272
    
    
    
    5,593Unrealized (loss) gain on securities available for sale
(net of tax effect of ($7,045), ($6,254), and $6,451 for the years ended
December 31, 2004, 2003, and 2002, respectively)
    
    
    (11,023
    )
    
    
    (9,755
    )
    
    
    10,076Issuance of common stock for business acquisitions
    
    
    1,175
    
    
    
    1,323
    
    
    
    Loans held for sale securitized and transferred to the securities
available for sale portfolio
    
    
    40,742
    
    
    
    286,922
    
    
    
    130,084Allowance related to loans sold, securitized or transferred
to held for sale
    
    
    584
    
    
    
    20,783
    
    
    
    647
 See accompanying notes to consolidated financial statements. 55




---



##### 



First Charter Corporation and Subsidiaries 
 Notes to Consolidated Financial Statements
 December 31, 2004, 2003 and 2002
 Note One - Summary of Significant Accounting Policies The following is a description of the more significant accounting and reporting policies which
First Charter Corporation (the Corporation) and its subsidiary, First Charter Bank (FCB or the
Bank), follow in preparing and presenting their consolidated financial statements. The
consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America. Principles of Consolidation and Basis of Presentation The accompanying consolidated financial statements include the accounts of the Corporation and
its wholly-owned subsidiary, FCB, a North Carolina state bank. In addition, through First Charter
Brokerage Services, Inc., a subsidiary of FCB, the Corporation 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 two other subsidiaries: First
Charter Insurance Services, Inc. and First Charter Leasing and Investments, 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 Leasing and
Investments, Inc. is a North Carolina corporation engaged in commercial equipment leasing and the
management of investment securities. It also acts as the holding company for First Charter of
Virginia Realty Investments, Inc., a Virginia corporation. First Charter of Virginia Realty
Investments, Inc. is 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. First
Charter Realty Investments, Inc. is the holding company for FCB Real Estate, Inc., a North Carolina
real estate investment trust, and First Charter Real Estate Holdings, LLC, a North Carolina limited
liability company, which owns and maintains the real estate property and assets of the Corporation.
FCB Real Estate, Inc. primarily invests in commercial and 1-4 family residential real estate
loans. The Bank also has a majority ownership in Lincoln Center at Mallard Creek, LLC, a North
Carolina limited liability company. Lincoln Center is a three-story office building occupied in
part by a branch of FCB. The preparation of the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America requires management to make estimates
and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent
liabilities at
the date of the consolidated financial statements, as well as the amounts of income and expenses
during the reporting period. Actual results could differ from those estimates. Reclassifications of certain amounts in the previously issued consolidated financial
statements have been made to conform to the financial statement presentation for 2004. Such
reclassifications had no effect on the net income or shareholders equity of the combined entity as
previously reported. Business The Bank, either directly or through its subsidiaries, provides businesses and individuals a
broad range of financial services, including banking, comprehensive financial planning, funds
management, investments, insurance, mortgages and a full array of employee benefit programs. The
Bank is a regional financial services company operating 53 financial centers, seven insurance
offices and 110 ATMs located in 18 counties throughout North Carolina. FCB also operates an
additional mortgage origination office in Virginia. 56




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##### 



Recently Adopted Accounting Pronouncements In October 2002, the Financial Accounting Standards Board (FASB) issued Financial Accounting
Standards Board Interpretation No. 45, (FASB Interpretation No. 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,
which establishes disclosure standards for a guarantor about its obligations under certain
guarantees that it has issued. Under FASB Interpretation No. 45 a guarantor is required to disclose
the nature of the guarantee, including the approximate term of the guarantee, how the guarantee
arose, and the events or circumstances that would require the guarantor to perform under the
guarantee. The guarantor is also required to disclose the maximum potential amount of future
payments under the guarantee, the carrying amount of the liability, if any, for the guarantors
obligations under the guarantee, and the nature and extent of any recourse provisions or available
collateral that would enable the guarantor to recover the amounts paid under the guarantee. The
initial recognition and measurement of FASB Interpretation No. 45 are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. Accordingly, the Corporation
adopted these provisions of FASB Interpretation No. 45 on January 1, 2003. The impact to the
Corporation upon adoption was immaterial. See Note Seventeenfor relevant disclosures about the
Corporations guarantees. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS
No. 148), Accounting for Stock-Based Compensation  Transition and Disclosure, an amendment of
FASB Statement No. 123. This Statement amends SFAS No. 123, to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of accounting for
stock-based employee compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an entitys accounting
policy with respect to stock-based employee compensation. Finally, this Statement amends APB
Opinion No. 28 (APB No. 28), Interim Financial Reporting, to require disclosure about those
effects in interim financial information. The disclosure provisions of this statement, except for
the amendment of APB No. 28, are effective for financial statements for fiscal years ending after
December 15, 2002. Accordingly, the Corporation adopted the disclosure provisions pursuant to this
portion of the interpretation on December 31, 2002 and these disclosures are presented in Note
Sixteen. The provisions of this statement related to the amendment of APB Opinion No. 28 are
effective for financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. Accordingly, the Corporation adopted the disclosure provisions
relevant to interim financial reporting on January 1, 2003, and these disclosures are presented in
the notes to the Corporations interim and annual consolidated financial statements. In January 2003, the FASB issued Financial Accounting Standards Board Interpretation No. 46,
(FIN 46), Consolidation of Variable Interest Entities, which addresses consolidation of
variable interest entities by business enterprises. Variable interest entities are entities with
equity interests that do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. An enterprise shall consolidate a variable
interest entity if that enterprise has a variable interest (or combination of variable interests)
that will absorb a majority of expected losses if they occur, receive a majority of the entitys
residual returns if they occur, or both. The enterprise that consolidates the variable interest
entity is called the primary beneficiary of that entity. Under FIN 46 an enterprise that holds
significant variable interests in a variable interest entity, but is not the primary beneficiary,
is required to disclose the nature, purpose, size, and activities of the variable interest entity,
its exposure to loss as a result of the variable interest holders involvement with the entity, and
the nature of its involvement with the entity and date when the involvement began. The primary
beneficiary of a variable interest entity is required to disclose the nature, purpose, size, and
activities of the variable interest entity, the carrying amount and classification of consolidated
assets that are collateral for the variable interest entitys obligations, and any lack of recourse
by creditors (or beneficial interest holders) of a consolidated variable interest entity to the
general credit of the primary beneficiary. In December 2003, the FASB issued a revision to FIN 46
(FIN 46 R), which clarifies and interprets certain provisions of FIN 46, without changing the
basic accounting model of FIN 46. The Corporation adopted the provisions of FIN 46 and FIN 46 R
effective March 2004 with no material effect on its consolidated financial statements. At December
31, 2004, the Corporation did not have any significant investments in variable interest entities. 57




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In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (SFAS No.
149), Amendment of Statement 133 on Derivative Instruments and Hedging Activities, which amends
and clarifies financial accounting and reporting for derivative instruments and for hedging
activities under Statement of Financial Accounting Standards No. 133 (SFAS No. 133). This
statement clarifies when a contract with an initial net investment meets the characteristic of a
derivative, clarifies when a derivative instrument contains a financing component, amends the
definition of an underlying to conform it to language used in Financial Accounting Standards Board
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, and amends certain other existing
pronouncements. This Statement requires that contracts with comparable characteristics be
accounted for similarly. This Statement is effective for most contracts entered into or modified
after June 30, 2003 and for hedging relationships designated after June 30, 2003. For contracts
with forward purchases or sales of when-issued securities or other securities that do not yet
exist, this Statement is effective for both existing contracts and new contracts entered into after
June 30, 2003. All provisions of this Statement should be applied prospectively. The Corporation
adopted SFAS No. 149 on July 1, 2003 with no material effect on its consolidated financial
statements. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS No.
150), Accounting for Certain Financial Instruments with Characteristics of both Liabilities and
Equity, which establishes standards for how an issuer classifies and measures certain financial
instruments with characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an asset in some
circumstances). This Statement is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective at the beginning of the first interim period
beginning after June 15, 2003. Accordingly, the Corporation adopted SFAS No. 150 on July 1, 2003,
with no effect on its consolidated financial statements. In November 2003, the Emerging Issues Task Force (EITF) issued EITF Issue No. 03-01, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments (EITF
03-01). EITF 03-01 provided guidance for evaluating whether an investment is
other-than-temporarily impaired and requires certain disclosures with respect to these investments.
The disclosure requirements in EITF 03-01 were effective for fiscal years ending after December 15,
2003. The Corporation adopted the disclosure provisions on December 31, 2003. In March 2004, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin
No. 105 (SAB 105), which contains specific guidance on the inputs to a valuation-recognition
model to measure loan commitments accounted for at fair value. SAB 105 requires that fair-value
measurement
include only differences between the guaranteed interest rate in the loan commitment and a
market interest rate, excluding any expected future cash flows related to the customer relationship
or loan servicing. SAB 105 is effective for mortgage-loan commitments that are accounted for as
derivatives and are entered into after March 31, 2004. The Corporation adopted SAB 105 on April 1,
2004, with no material effect on its consolidated financial statements. From time to time, the FASB issues exposure drafts for proposed statements of financial
accounting standards. Such exposure drafts are subject to comment from the public, to revisions by
the FASB and to final issuance by the FASB as statements of financial accounting standards.
Management considers the effect of the proposed statements on the consolidated financial statements
of the Corporation and monitors the status of changes to and proposed effective dates of exposure
drafts. Securities The Corporation classifies securities as available-for-sale, held-to-maturity or trading based
on managements intent at the date of purchase or securitization. At December 31, 2004, all of the
Corporations securities are categorized as available-for-sale and, accordingly, are reported at
fair value, based on quoted market prices, with any unrealized gains or losses, net of taxes,
reflected as an element of accumulated other comprehensive income in shareholders equity. The
Corporation intends to hold these available-for-sale securities for an indefinite period of time,
but may sell them prior to maturity in response to changes in interest rates, changes in prepayment
risk, changes in the liquidity needs of the Bank, and other factors. Securities for which there is
an unrealized loss that is deemed to be other-than- 58




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##### 



temporary are written down to fair value with
the write-down recorded as a realized loss in noninterest income. The fair value of the securities
is determined by a third party as of a date in close proximity to the end of the reporting period.
The valuation is based on available quoted market prices or quoted market prices for similar
securities if a quoted market price is not available. Securities that the Corporation has the
positive intent and ability to hold to maturity would be classified as held to maturity and
reported at cost. At December 31, 2004, the Corporation held no securities in this category. As
more fully discussed in Note Seven, the Corporation had a nominal amount of trading assets at
December 31, 2004, which are carried at fair value. These trading assets are held for resale in the
near term, and changes in their fair value are reflected in the statement of income. The fair value
of trading account assets is based on quoted market prices. Gains and losses on sales of securities are recognized when realized on the trade date on a
specific identification basis. Premiums and discounts are amortized or accreted into interest
income using a level yield method. Loans Held for Sale Loans held for sale include mortgage loans and are valued at the lower of cost or market.
Market value is determined by outstanding commitments from investors or current investor yield
requirements. Periodically, the Corporation securitizes mortgage loans held for sale and these
assets are classified as securities-available-for-sale. Loans Loans are carried at their principal amount outstanding. Interest income is recorded as earned
on an accrual basis. The determination to discontinue the accrual of interest is based on a review
of each loan. Generally, accrual of interest is discontinued on loans 90 days past due as to
principal or interest unless in managements opinion collection of both principal and interest is
assured by way of collateralization, guarantees or other security and the loan is in the process of
collection. Loans are returned to accrual status when management determines, based on an evaluation
of the underlying collateral together with the borrowers payment record and financial condition,
that the borrower has the ability and intent to meet the contractual obligations of the loan
agreement. Management considers a loan to be impaired when, based on current information and events, it
is probable that the Bank will be unable to collect all amounts due according to the contractual
terms of the
loan agreement. Factors that influence managements judgment include, but are not limited to, loan
payment pattern, source of repayment, and value of collateral. A loan would not be considered
impaired if an insignificant delay in loan payment occurs and management expects to collect all
amounts due. The major sources for identification of loans to be evaluated for impairment include
past due and nonaccrual reports, internally generated lists of loans of certain risk grades, and
regulatory reports of examination. Allowance for Loan Losses The Corporation uses the allowance method to provide for loan losses. Accordingly, all loan
losses are charged to the allowance for loan losses and all recoveries are credited to it. The
provision for loan losses is based on consideration of specific loans, past loan loss experience
and other factors, which in managements judgment, deserve current recognition in estimating
probable loan losses. Such other factors considered by management include the growth and
composition of the loan portfolio and current economic conditions. Allowances for loan losses related to loans that are identified as impaired, in accordance
with the impairment policy set forth above, are based on discounted cash flows using the loans
initial interest rates or the fair value of the collateral if the loans are collateral dependent.
Large groups of smaller-balance, homogenous loans that are collectively evaluated for impairment
(residential mortgage, consumer installment, and certain commercial loans) are excluded from this
impairment evaluation and their allowance is calculated in accordance with the allowance for loan
losses policy discussed above. 59




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Management considers the allowance for loan losses adequate to cover inherent losses in the
Banks loan portfolio as of the date of the financial statements. Management believes it has
established the allowance in consideration of the current economic environment. While management
uses the best information available to make evaluations, future additions to the allowance may be
necessary based on changes in economic and other conditions. Additionally, various regulatory
agencies, as an integral part of their examination process, periodically review the Banks
allowances for loan losses. Such agencies may require the recognition of adjustments to the
allowances based on their judgments of information available to them at the time of their
examinations. Derivative Instruments The Corporation enters into interest rate swap agreements as business conditions warrant.
These interest rate swap agreements provide an exchange of interest payments computed on notional
amounts that will offset any undesirable change in fair value resulting from market rate changes on
designated hedged items. A swap agreement is a contract between two parties to exchange cash flows
based on specified underlying notional amounts, assets and/or indices. The interest rate swap
agreements utilized by the Corporation qualify for hedge accounting as fair value hedges. The Corporation accounts for these interest rate swaps as a hedge of the fair value of the
designated Federal Home Loan Bank (FHLB) advances. According to the provisions of Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), the short cut method assumes that the
change in the fair value of the derivative hedging instrument and the hedged debt obligation is one
hundred percent correlated, which results in no ineffectiveness and no income statement effect.
Currently, three of the seven interest rate swaps meet the criteria for the short-cut accounting
method. For interest rate swaps that do not meet the criteria for the short-cut accounting method,
the Corporation records on a quarterly basis, in noninterest income, the net change in the fair
value of the interest rate swap and the designated FHLB advances, attributed to changes in interest
rates, provided the criteria for hedge accounting continue to be met. In the event the criteria for
hedge accounting are not met in a future period, the Corporation will cease recording the change in
fair value of the FHLB advances and will amortize into earnings the then carrying value of the
interest rate swap over the life of the hedged item. The derivative hedging instruments are
recorded at fair value in other assets or other liabilities. The Corporation formally documents at inception all relationships between hedging instruments
and hedged items, as well as its risk management objectives and strategies for undertaking various
hedge transactions as required by SFAS No. 133. This documentation includes analysis at inception
and is
ongoing relative to the effectiveness of the hedging relationship. The Corporation will
discontinue hedge accounting when it is determined that a derivative is not expected to be or has
ceased to be highly effective as a hedge, and will reflect changes in fair value through the income
statement. The fair value of the interest rate swaps is determined by a third party at inception and is
valued subsequently on a quarterly basis. The valuation is determined using a discounted cash flow
model and a volatility index. The Corporation performs a quarterly assessment based on the third
party valuations to assess whether the derivative used in its hedging transaction has been highly
effective in offsetting changes in the fair value of the hedged item. The effectiveness assessment
is conducted using the cumulative dollar offset method. Interest rate swaps assist the Corporations Asset Liability Management (ALM) process. The
Corporations interest rate risk management strategy includes the use of interest rate contracts to
minimize significant unplanned fluctuations in earnings that are caused by interest rate
volatility. The Corporations goal is to manage interest rate sensitivity so that movements in
interest rates do not have significant adverse effects on net interest income. As a result of
interest rate fluctuations, hedged fixed-rate liabilities appreciate or depreciate in market value.
Gains or losses on the derivative instruments that are linked to the hedged fixed-rate liabilities
are expected to substantially offset this unrealized appreciation or depreciation. Interest rate contracts, which are non-leveraged interest rate swaps, allow the Corporation to
effectively manage its interest rate risk position. Non-leveraged interest rate swaps involve the
exchange 60




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##### 



of fixed-rate and variable-rate interest payments based on the contractual underlying
notional amount. Exposure to loss on these contracts will increase or decrease over their
respective lives as interest rates fluctuate. Credit risk associated with derivatives is measured as the net replacement cost should the
counter-parties with contracts in a gain position to the Corporation completely fail to perform
under the terms of those contracts assuming no recoveries of underlying collateral. In managing
derivative credit risk, both the current exposure, which is the replacement cost of contracts on
the measurement date, as well as an estimate of the potential change in value of contracts over
their remaining lives are considered. In managing credit risk associated with its derivative
activities, the Corporation deals primarily with commercial banks, broker-dealers and corporations.
To minimize credit risk, the Corporation enters into legally enforceable master netting agreements,
which reduce risk by permitting the closeout and netting of transactions with the same
counter-party upon the occurrence of certain events. Loan Securitizations The Corporation periodically securitizes mortgage loans and transfers them to
securities-available-for-sale. This is accomplished by exchanging the loans for mortgage-backed
securities issued primarily by Freddie Mac and Fannie Mae. Following the transfers, the securities
are reported at estimated fair value based on quoted market prices, with unrealized gains and
losses reflected in accumulated other comprehensive income, net of deferred income taxes. Since the
transfers are not considered a sale, no gain or loss is recorded in conjunction with these
transactions. The Corporation retains the mortgage servicing on the loans exchanged for securities.
As of December 31, 2004, the Corporation retained $92.3 million of securitized mortgage loans in
its available-for-sale securities portfolio. Servicing Rights The Corporation capitalizes servicing rights when mortgage loans are either securitized or
sold and the loan servicing is retained. The cost of servicing rights is amortized in proportion to
and over the estimated period of net servicing revenues. The amortization of servicing rights is
recognized in the income statement as an offset to noninterest income. The carrying value and aggregate estimated fair value of mortgage servicing rights at December
31, 2004 was $1.6 million and $2.6 million, respectively, compared to a carrying value and
estimated fair value of $2.1 million and $2.7 million at December 31, 2003. Servicing rights are
periodically evaluated for
impairment based on their fair value. This fair value is estimated based on market prices for
similar assets and on the discounted estimated present value of future net cash flows based on
market consensus loan prepayment estimates, historical prepayment rates, interest rates and other
economic factors. For purposes of impairment evaluation, the servicing assets are stratified based
on predominant risk characteristics of the underlying loans, including loan type (conventional or
government) and note rate. The Corporation had write-downs related to its servicing rights of
$30,000, $530,000 and $430,000 for the years ended December 31, 2004, December 31, 2003 and
December 31, 2002, respectively. The following is an analysis of capitalized mortgage servicing rights included in other assets
in the consolidated balance sheets: Capitalized MortgageServicing Rights(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Balance, January 1,
    
    $
    2,106
    
    
    $
    1,478
    
    
    $
    3,028Servicing rights capitalized
    
    
    474
    
    
    
    2,440
    
    
    
    Amortization expense
    
    
    (903
    )
    
    
    (1,282
    )
    
    
    (1,120
    )Write-downs
    
    
    (30
    )
    
    
    (530
    )
    
    
    (430
    )Balance, December 31,
    
    $
    1,647
    
    
    $
    2,106
    
    
    $
    1,478
 An increase in prepayment speeds of 10 percent and 20 percent variations may result in a
decline in fair value of $6,000 and $23,000, respectively. Also, the effect of a variation in a
particular assumption on 61




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##### 



the fair value of the mortgage servicing rights is calculated
independently without changing any other assumption. In reality, changes in one factor may result
in changes in another (for example, changes in mortgage interest rates, which drive changes in
prepayment rate estimates, could result in changes in the discount rates), which might magnify or
counteract the sensitivities. Loan Fees and Costs Nonrefundable loan fees and certain direct costs associated with originating or acquiring
loans are deferred and recognized over the contractual life of the related loans as an adjustment
to interest income. Premises and Equipment Premises and equipment are stated at cost, less accumulated depreciation. Depreciation and
amortization of premises and equipment are computed using the straight-line method over the
estimated useful lives. Useful lives range from three to ten years for furniture and equipment,
from fifteen to fifty years for buildings and over the shorter of the estimated useful lives or the
terms of the respective leases for leasehold improvements. Foreclosed Properties Foreclosed properties are included in other assets and represent real estate acquired through
foreclosure or deed in lieu thereof and are carried at the lower of cost or fair value, less
estimated costs to sell. The fair values of such properties are evaluated annually and the carrying
value, if greater than the estimated fair value less costs to sell, is adjusted with a charge to
income. Intangible Assets Net assets of companies acquired in purchase transactions are recorded at fair value in other
assets at the date of acquisition, and therefore, the historical cost basis of individual assets
and liabilities are adjusted to reflect their fair value. When a purchase agreement contemplates
contingent consideration based on the performance of the acquired business, the contingent payments
are recorded at the performance measurement date as an additional cost of the acquired enterprise.
The additional cost is allocated to the appropriate assets, which are goodwill or other intangible
assets with finite useful lives.
Additional costs allocated to assets with finite useful lives are amortized over the remaining
period benefited. Identified intangibles are amortized on an accelerated or straight-line basis over the period
benefited, which is generally less than fifteen years. Goodwill is not amortized but is reviewed
for potential impairment on an annual basis, or if events or circumstances indicate a potential
impairment, at the reporting unit level. A reporting unit is defined as an operating segment or one
level below an operating segment. First Charter Insurance Services, Inc. and the Bank are the only
reporting units, which carry goodwill on their balance sheets. The impairment test is performed in two phases. The first step of the goodwill impairment test
compares the fair value of the reporting unit with its carrying amount, including goodwill. If the
fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is
considered not impaired; however, if the carrying amount of the reporting unit exceeds its fair
value, an additional procedure must be performed. That additional procedure compares the implied
fair value of the reporting units goodwill with the carrying amount of that goodwill. An
impairment loss is recorded to the extent that the carrying amount of goodwill exceeds its implied
fair value. In 2004 and 2003, the Corporation was not required to perform the second step of the
impairment test as the fair value of its reporting units exceeded the carrying amount. Other intangible assets are amortized on an accelerated basis or straight-line basis over the
period benefited, which is generally less than fifteen years. They are evaluated for impairment if
events and 62




---



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circumstances indicate a possible impairment. Such evaluation of other intangible assets
is based on undiscounted cash flow projections. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and
liabilities are recognized for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period that includes the
enactment date. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts
due from banks and federal funds sold. Generally, federal funds are sold for one-day periods. Securities Sold under Agreements to Repurchase Securities sold under agreements to repurchase, which are classified as secured short-term
borrowed funds, generally mature less than one year from the transaction date. Securities sold
under agreements to repurchase are reflected at the amount of cash received in connection with the
borrowing. The terms of the repurchase agreement may require the Corporation to provide additional
collateral if the fair value of the securities underlying the borrowings decline during the term of
the agreement. Equity Method Investments The Corporations equity method investments represent investments in venture capital limited
partnerships. The Corporations recognition of earnings or losses from an equity method investment is
determined by the Corporations share of the investees earnings on a quarterly basis (or, in the
case of some smaller investments, on an annual basis if there has been no significant change in
values). The limited
partnerships generally provide their financial information during the quarter after the end of
a given period, and the Corporations policy is to record its share of earnings or losses on these
equity method investments in the quarter such financial information is received. 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 by
the management of the limited partnerships and are reviewed by the Corporations management for
reasonableness. The assumptions in the valuation of these investments include the viability of the
business model, the ability of the investee company to obtain alternative financing, the 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. Net Income Per Share Basic net income per share is computed by dividing net income by the weighted average number
of shares of common stock outstanding for the year. Diluted net income per share reflects the
potential 63




---



##### 



dilution that could occur if the Corporations potential common stock and contingently
issuable shares, which consist of dilutive stock options and restricted stock, were issued. The
numerators of the basic net income per share computations are the same as the numerators of the
diluted net income per share computations for all periods presented. A reconciliation of the basic average common shares outstanding to the diluted average common
shares outstanding is as follows: Years Ended December 312004
    
    
    2003
    
    
    2002Basic weighted average number of common shares outstanding
    
    
    29,859,683
    
    
    
    29,789,969
    
    
    
    30,520,125Dilutive effect arising from
potential common stock issuances
    
    
    417,380
    
    
    
    217,466
    
    
    
    181,982Diluted weighted average number of common shares outstanding
    
    
    30,277,063
    
    
    
    30,007,435
    
    
    
    30,702,107
 The effects of outstanding antidilutive stock options are excluded from the computation
of diluted earnings per share. These amounts were 720,000 shares at December 31, 2004, 723,000
shares at December 31, 2003 and 1.3 million shares at December 31, 2002. Dividends Per Share Dividends declared by the Corporation were $0.75 per share, $0.74 per share and $0.73 per
share for the years ended December 31, 2004, 2003 and 2002, respectively. Stock-Based Compensation At December 31, 2004, as described above, the Corporation had various stock-based compensation
plans. The Corporation accounts for stock-based compensation under the provisions of Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. The pro forma impact
on net income per share as if the fair value of stock-based compensation plans had been recorded as
a component of compensation expense in the consolidated financial statements as of the date of
grant of awards related to such plans, pursuant to the provisions of the Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation and Statement of Financial
Accounting
Standards No. 148, Accounting for Stock-Based Compensation  Transition and Disclosure an
amendment to FASB Statement No. 123, is disclosed as follows: Years Ended December 31,(Dollars in thousands, except per share data)
    
    2004
    
    
    2003
    
    
    2002Net income, as reported
    
    $
    42,442
    
    
    $
    14,146
    
    
    $
    39,803Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (1,821
    )
    
    
    (2,293
    )
    
    
    (2,755
    )Pro forma net income
    
    $
    40,621
    
    
    $
    11,853
    
    
    $
    37,048Earnings per share:Basic-as reported
    
    $
    1.42
    
    
    $
    0.47
    
    
    $
    1.30Basic-pro forma
    
    $
    1.36
    
    
    $
    0.40
    
    
    $
    1.21Diluted-as reported
    
    $
    1.40
    
    
    $
    0.47
    
    
    $
    1.30Diluted-pro forma
    
    $
    1.34
    
    
    $
    0.40
    
    
    $
    1.21
 64




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The fair value of each option granted during 2004, 2003 and 2002 was estimated using the
Black-Scholes option-pricing model with the following weighted average assumptions: Years Ended December 31,2004
    
    
    2003
    
    
    20022000 Omnibus Stock Option and
Award PlanDividend yield
    
    
    3.52
    %
    
    
    3.79
    %
    
    
    4.03
    %Risk free interest rates
    
    
    4.04
    %
    
    
    4.09
    %
    
    
    4.90
    %Expected lives
    
    8 years
    
    8 years
    
    10 yearsVolatility
    
    
    26
    %
    
    
    33
    %
    
    
    38
    %Forfeiture rate
    
    
    2
    %
    
    
    2
    %
    
    
    0
    %Director PlanDividend yield
    
    
    3.70
    %
    
    
    3.79
    %
    
    
    4.03
    %Risk free interest rates
    
    
    4.05
    %
    
    
    3.95
    %
    
    
    4.88
    %Expected lives
    
    10 years
    
    9 years
    
    10 yearsVolatility
    
    
    26
    %
    
    
    33
    %
    
    
    38
    %Forfeiture rate
    
    
    0.5
    %
    
    
    0.5
    %
    
    
    0
    %1999 Employee Stock Purchase PlanDividend yield
    
    
    3.76
    %
    
    
    3.79
    %
    
    
    4.03
    %Risk free interest rates
    
    
    1.31
    %
    
    
    4.07
    %
    
    
    5.20
    %Expected lives
    
    1 year
    
    1 year
    
    1 yearVolatility
    
    
    23
    %
    
    
    33
    %
    
    
    38
    %Forfeiture rate
    
    
    9
    %
    
    
    9
    %
    
    
    0
    %
 Note Two - Business Segment Information The Corporation has only one reportable segment, FCB, the Corporations primary banking
subsidiary. FCB provides businesses and individuals with commercial loans, retail loans, and
deposit banking services. Other Operating Segments include brokerage, insurance, mortgage, leasing
and investments, and financial management, which provide comprehensive financial planning, funds management and
investments. The results of operations of FCB constitute a substantial majority of the consolidated
net income, revenues and assets of the Corporation. Included in Other are revenue, expenses and
assets of the parent company, which include cash, equity investments and investments in venture
capital limited partnerships, and eliminating intercompany transactions. Business segments are determined based on the Corporations internal management accounting
process. The internal management accounting process, unlike financial accounting in accordance with
generally accepted accounting principles, is based on the method management uses to view its
business and is not necessarily comparable with information disclosed by other financial
institutions. The accounting policies of the business segments differ from those described in Note
Onein that management allocations have been made for overhead expenses. Certain expenses not
directly attributable to a specific business segment are allocated to the segments based on
pre-determined means. Occupancy costs are allocated based on headcount and certain payroll benefits
are allocated based on a predetermined percentage of salary expense. The results of operations and
segment assets are based upon monthly internal management reports. There are no significant
intersegment transactions, and there are no significant reconciling items between the reportable
segments and consolidated amounts. 65




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Information regarding the reportable segments separate results of operations and segment
assets is illustrated in the following tables: 2004Other Operating(Dollars in thousands)
    
    FCB
    
    
    Segments (1)
    
    
    Other (2)
    
    
    TotalsTotal interest income
    
    $
    186,435
    
    
    $
    818
    
    
    $
    50
    
    
    $
    187,303Total interest expense
    
    
    63,511
    
    
    
    
    
    
    
    782
    
    
    
    64,293Net interest income
    
    
    122,924
    
    
    
    818
    
    
    
    (732
    )
    
    
    123,010Provision for loan losses
    
    
    8,425
    
    
    
    
    
    
    
    
    
    
    
    8,425Total noninterest income
    
    
    37,632
    
    
    
    22,007
    
    
    
    1,257
    
    
    
    60,896Total noninterest expense
    
    
    88,199
    
    
    
    22,616
    
    
    
    202
    
    
    
    111,017Income before income taxes
    
    
    63,932
    
    
    
    209
    
    
    
    323
    
    
    
    64,464Income tax expense
    
    
    21,840
    
    
    
    72
    
    
    
    110
    
    
    
    22,022Net income
    
    $
    42,092
    
    
    $
    137
    
    
    $
    213
    
    
    $
    42,442Total loans held for sale and loans, net
    
    $
    2,410,671
    
    
    $
    7,184
    
    
    $
    
    
    
    $
    2,417,855Total assets
    
    
    4,330,771
    
    
    
    79,310
    
    
    
    21,524
    
    
    
    4,431,605
 2003Other Operating(Dollars in thousands)
    
    FCB
    
    
    Segments (1)
    
    
    Other (2)
    
    
    TotalsTotal interest income
    
    $
    177,680
    
    
    $
    540
    
    
    $
    72
    
    
    $
    178,292Total interest expense
    
    
    69,893
    
    
    
    
    
    
    
    597
    
    
    
    70,490Net interest income
    
    
    107,787
    
    
    
    540
    
    
    
    (525
    )
    
    
    107,802Provision for loan losses
    
    
    27,518
    
    
    
    
    
    
    
    
    
    
    
    27,518Total noninterest income
    
    
    44,677
    
    
    
    19,219
    
    
    
    37
    
    
    
    63,933Total noninterest expense
    
    
    106,420
    
    
    
    20,298
    
    
    
    67
    
    
    
    126,785Income (loss) before income taxes
    
    
    18,526
    
    
    
    (539
    )
    
    
    (555
    )
    
    
    17,432Income tax expense (benefit)
    
    
    3,493
    
    
    
    (102
    )
    
    
    (105
    )
    
    
    3,286Net income (loss)
    
    $
    15,033
    
    
    $
    (437
    )
    
    $
    (450
    )
    
    $
    14,146Total loans held for sale and loans, net
    
    $
    2,225,776
    
    
    $
    6,391
    
    
    $
    
    
    
    $
    2,232,167Total assets
    
    
    4,157,694
    
    
    
    25,363
    
    
    
    23,636
    
    
    
    4,206,693
 2002Other Operating(Dollars in thousands)
    
    FCB
    
    
    Segments (1)
    
    
    Other (2)
    
    
    TotalsTotal interest income
    
    $
    195,919
    
    
    $
    297
    
    
    $
    172
    
    
    $
    196,388Total interest expense
    
    
    82,543
    
    
    
    
    
    
    
    684
    
    
    
    83,227Net interest income
    
    
    113,376
    
    
    
    297
    
    
    
    (512
    )
    
    
    113,161Provision for loan losses
    
    
    8,270
    
    
    
    
    
    
    
    
    
    
    
    8,270Total noninterest income
    
    
    35,419
    
    
    
    15,905
    
    
    
    (3,914
    )
    
    
    47,410Total noninterest expense
    
    
    80,036
    
    
    
    17,429
    
    
    
    86
    
    
    
    97,551Income (loss) before income taxes
    
    
    60,489
    
    
    
    (1,227
    )
    
    
    (4,512
    )
    
    
    54,750Income tax expense (benefit)
    
    
    16,515
    
    
    
    (336
    )
    
    
    (1,232
    )
    
    
    14,947Net income (loss)
    
    $
    43,974
    
    
    $
    (891
    )
    
    $
    (3,280
    )
    
    $
    39,803
   (1)
    
    Included in Other Operating Segments are revenues, expenses and assets of insurance services, brokerage,
mortgage, leasing and investments, and financial management.(2)
    
    Included in Other are revenues, expenses and assets of the parent company and eliminations. Note Three - Acquisitions (a) Insurance Agencies. In December of 2004, the Corporation, through a subsidiary of FCB,
acquired Smith & Associates Insurance Services, Inc. This acquisition was recorded using the
purchase accounting method. The purchase price delivered at closing consisted of 27,726 shares of
First Charter common stock valued at $750,000, and the agreement contemplates additional common
stock payments valued at up to $750,000 based on the post-closing performance of the business. 66




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##### 



In July and October of 2003, the Corporation, through a subsidiary of FCB, acquired Piedmont
Insurance Agency, Inc. and Robertson Insurance Agency, Inc., respectively. These acquisitions were
recorded using the purchase accounting method. The initial purchase price for both agencies totaled
$1.1 million in cash. The purchase agreements also contemplate additional cash payments based on
the post-closing performance of the acquired businesses. Based on this agreement and the
performance of the businesses, during 2004 the Corporation paid approximately $415,000. The amount
of subsequent additional payments, if earned, is currently expected to total approximately
$750,000. Pro forma financial information reflecting the effect of these acquisitions on periods
prior to the combination is not considered material. (b) Third Party Benefits Administrator. In July of 2003, the Corporation, through a
subsidiary of FCB, purchased a third party benefits administrator in a stock transaction. This
acquisition was accounted for as a purchase. The purchase price delivered at closing consisted of
First Charter common stock valued at $1.32 million, and the agreement contemplates additional
common stock payments based on the post-closing performance of the business. Based on this
agreement and the performance of the business, during the third quarter of 2004 the Corporation
issued 20,244 additional shares of common stock valued at $425,000 for the period of July 1, 2003
through June 30, 2004. The value of subsequent additional payments, if earned, is currently
expected to total approximately $440,000. The results of operations of this entity are included in
the consolidated results of operations of the Corporation from the date of the acquisition. Pro
forma financial information reflecting the effect of this acquisition on periods prior to the
combination is not considered material. Note Four - Goodwill and Other Intangible Assets The following is a summary of the gross carrying amount and accumulated amortization of
amortized intangible assets and the carrying amount of unamortized intangible assets as of December
31, 2004 and December 31, 2003: 2004
    
    
    2003Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    Accumulated(Dollars in thousands)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAmortized intangible assets:Noncompete agreements (1)
    
    $
    1,037
    
    
    $
    949
    
    
    $
    946
    
    
    $
    861Customer lists (1)
    
    
    2,270
    
    
    
    545
    
    
    
    1,471
    
    
    
    236Mortgage servicing rights (1)
    
    
    7,557
    
    
    
    5,910
    
    
    
    7,083
    
    
    
    4,977Branch acquisitions (2)
    
    
    1,111
    
    
    
    1,111
    
    
    
    1,111
    
    
    
    1,097Other intangibles (1) (3)
    
    
    306
    
    
    
    72
    
    
    
    232
    
    
    
    22Total
    
    $
    12,281
    
    
    $
    8,587
    
    
    $
    10,843
    
    
    $
    7,193Unamortized intangible assets:Goodwill (4)
    
    $
    19,547
    
    
    $
    
    
    
    $
    19,222
    
    
    $
    
   (1)
    
    Noncompete agreements, customer lists, mortgage servicing rights and other intangibles are recorded in the Other Operating
Segments as described in Note Two(2)
    
    Branch acquisition intangible assets are recorded in the FCB segment as described in Note Two(3)
    
    Other intangibles include trade name and proprietary software.(4)
    
    Goodwill of $6,662 is recorded in the Other
Operating Segments and $12,885 is recorded in FCB as described inNote Two The gross carrying amount of noncompete agreements increased approximately $90,000 due to the
acquisition of Smith & Associates Insurance Services, Inc. during 2004. The noncompete agreements
will be amortized over the three-year agreement period. The gross carrying amount of customer lists increased to $2.3 million at December 31, 2004
from $1.5 million at December 31, 2003. The increase was due to the following: $378,000 recorded
from the acquisition of Smith & Associates Insurance Services, Inc. to be amortized over the
estimated useful life of eight years, $276,000 recorded from the previously mentioned performance
payments for Piedmont Insurance Agency, Inc. and Robertson Insurance Agency, Inc. to be amortized
over the remaining estimated useful life of six years, and $145,000 recorded from the previously
mentioned performance 67




---



##### 



payments for a third party benefits administrator to be amortized over the
remaining estimated useful life of nine years. The gross carrying amount of other intangibles increased to $0.3 million at December 31, 2004
from $0.2 million at December 31, 2003 due to $74,000 recorded from the previously mentioned
performance payments for a third party benefits administrator to be amortized over the remaining
estimated useful life of nine years. The gross carrying amount of goodwill increased to $19.5 million at December 31, 2004 from
$19.2 million at December 31, 2003 primarily due to goodwill of $394,000 associated with the
acquisition of Smith & Associates Insurance Services, Inc. and $206,000 related to the contractual
payments made in connection with the performance of the Corporations third party benefits
administrator. In addition, goodwill of $328,000 was removed with the sale of a branch facility in
the third quarter. There was no impairment of goodwill for the years ended December 31, 2004 and
2003. Amortization expense, excluding amortization of mortgage servicing rights, totaled $461,000,
$441,000 and $367,000 for the years ended December 31, 2004, 2003 and 2002, respectively. The following table presents the estimated amortization expense for intangible assets for the
years ended December 31, 2005, 2006, 2007, 2008, 2009, and 2010 and thereafter: Noncompete
    
    
    Customer
    
    
    Mortgage
    
    
    Other(Dollars in thousands)
    
    Agreements
    
    
    Lists
    
    
    Servicing Rights
    
    
    Intangibles
    
    
    Total2005
    
    $
    30
    
    
    $
    415
    
    
    $
    515
    
    
    $
    51
    
    
    $
    1,0112006
    
    
    30
    
    
    
    353
    
    
    
    377
    
    
    
    45
    
    
    
    8052007
    
    
    28
    
    
    
    290
    
    
    
    281
    
    
    
    39
    
    
    
    6382008
    
    
    
    
    
    
    228
    
    
    
    186
    
    
    
    32
    
    
    
    4462009
    
    
    
    
    
    
    165
    
    
    
    117
    
    
    
    26
    
    
    
    3082010 and after
    
    
    
    
    
    
    274
    
    
    
    171
    
    
    
    41
    
    
    
    486Total
    
    $
    88
    
    
    $
    1,725
    
    
    $
    1,647
    
    
    $
    234
    
    
    $
    3,694
 Note Five - Comprehensive Income Comprehensive income is defined as the change in equity from all transactions other than those
with stockholders, and it includes net income and other comprehensive income. The Corporations
only component of other comprehensive income is the change in unrealized gains and losses on available
for sale securities. The Corporations total comprehensive income for the years ended December 31, 2004, 2003
and 2002 was $31.4 million, $4.4 million and $49.9 million, respectively. Information concerning
the Corporations other comprehensive income for the years ended December 31, 2004, 2003 and 2002
is as follows: 2004
    
    
    2003
    
    
    2002Before Tax
    
    
    
    
    
    
    After Tax
    
    
    Before Tax
    
    
    
    
    
    
    After Tax
    
    
    Before Tax
    
    
    
    
    
    
    After Tax(Dollars in thousands)
    
    Amount
    
    
    Tax Effect
    
    
    Amount
    
    
    Amount
    
    
    Tax Effect
    
    
    Amount
    
    
    Amount
    
    
    Tax Effect
    
    
    AmountComprehensive income:Net income
    
    $
    64,464
    
    
    $
    22,022
    
    
    $
    42,442
    
    
    $
    17,432
    
    
    $
    3,286
    
    
    $
    14,146
    
    
    $
    54,750
    
    
    $
    14,947
    
    
    $
    39,803Other comprehensive
(loss) income:Unrealized (losses) gains
on securities:Unrealized (losses) gains
arising during period
    
    
    (15,685
    )
    
    
    (6,116
    )
    
    
    (9,569
    )
    
    
    (5,722
    )
    
    
    (2,242
    )
    
    
    (3,480
    )
    
    
    28,066
    
    
    
    10,951
    
    
    
    17,115Less: Reclassification for
realized gains
    
    
    2,383
    
    
    
    929
    
    
    
    1,454
    
    
    
    10,287
    
    
    
    4,012
    
    
    
    6,275
    
    
    
    11,539
    
    
    
    4,500
    
    
    
    7,039Unrealized (losses) gains,
net of reclassification
    
    $
    (18,068
    )
    
    $
    (7,045
    )
    
    $
    (11,023
    )
    
    $
    (16,009
    )
    
    $
    (6,254
    )
    
    $
    (9,755
    )
    
    $
    16,527
    
    
    $
    6,451
    
    
    $
    10,076Total comprehensive income
    
    $
    46,396
    
    
    $
    14,977
    
    
    $
    31,419
    
    
    $
    1,423
    
    
    $
    (2,968
    )
    
    $
    4,391
    
    
    $
    71,277
    
    
    $
    21,398
    
    
    $
    49,879
 68




---



##### 



Note Six - Securities-Available-for-Sale Securities-available-for-sale at December 31, 2004 and 2003 are summarized as follows: 2004Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS government obligations
    
    $
    54,755
    
    
    $
    331
    
    
    $
    712
    
    
    $
    54,374US government agency obligations
    
    
    697,083
    
    
    
    908
    
    
    
    6,021
    
    
    
    691,970Mortgage-backed securities
    
    
    731,389
    
    
    
    3,349
    
    
    
    8,357
    
    
    
    726,381State, county, and municipal obligations
    
    
    112,935
    
    
    
    2,568
    
    
    
    123
    
    
    
    115,380Equity securities
    
    
    64,541
    
    
    
    86
    
    
    
    
    
    
    
    64,627Total
    
    $
    1,660,703
    
    
    $
    7,242
    
    
    $
    15,213
    
    
    $
    1,652,732
 2003Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    Fair(Dollars in thousands)
    
    Cost
    
    
    Gains
    
    
    Losses
    
    
    ValueUS government obligations
    
    $
    59,715
    
    
    $
    875
    
    
    $
    317
    
    
    $
    60,273US government agency obligations

    
    
    630,629
    
    
    
    6,480
    
    
    
    1,842
    
    
    
    635,267Mortgage-backed securities
    
    
    771,440
    
    
    
    6,613
    
    
    
    6,896
    
    
    
    771,157State, county, and municipal obligations
    
    
    69,425
    
    
    
    3,662
    
    
    
    
    
    
    
    73,087Equity securities
    
    
    60,594
    
    
    
    1,522
    
    
    
    
    
    
    
    62,116Total
    
    $
    1,591,803
    
    
    $
    19,152
    
    
    $
    9,055
    
    
    $
    1,601,900
 The expected maturity distribution and yields (computed on a taxable-equivalent basis)
of the Corporations securities portfolio at December 31, 2004 are summarized below. Expected
maturities may differ from contractual maturities since borrowers may have the right to pre-pay
these obligations without pre-payment penalties. Due after 1
    
    Due after 5Due in 1 year
    
    through 5
    
    through 10
    
    Due afteror less
    
    years
    
    years
    
    10 years
    
    Total(Dollars in thousands)
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    Yield
    
    
    Amount
    
    
    YieldFair
value of securities   available for saleU.S. government
obligations
    
    $
    
    
    
    
    
    %
    
    $
    54,374
    
    
    
    3.20
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    $
    54,374
    
    
    
    3.20
    %U.S. government
agency obligations
    
    
    95,271
    
    
    
    4.12
    
    
    
    572,226
    
    
    
    3.44
    
    
    
    24,473
    
    
    
    3.90
    
    
    
    
    
    
    
    
    
    
    
    691,970
    
    
    
    3.55Mortgage-backed
securities (1)
    
    
    30,303
    
    
    
    3.51
    
    
    
    546,453
    
    
    
    4.11
    
    
    
    122,020
    
    
    
    4.26
    
    
    
    27,605
    
    
    
    4.62
    
    
    
    726,381
    
    
    
    4.13State and municipal
obligations
    
    
    13,801
    
    
    
    4.74
    
    
    
    50,333
    
    
    
    4.43
    
    
    
    16,601
    
    
    
    3.18
    
    
    
    34,645
    
    
    
    1.96
    
    
    
    115,380
    
    
    
    3.54Equity securities (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    64,627
    
    
    
    3.79
    
    
    
    64,627
    
    
    
    3.79Total
    
    $
    139,375
    
    
    
    4.05
    %
    
    $
    1,223,386
    
    
    
    3.77
    %
    
    $
    163,094
    
    
    
    4.10
    %
    
    $
    126,877
    
    
    
    3.47
    %
    
    $
    1,652,732
    
    
    
    3.80
    %Amortized cost of securities
available for sale
    
    $
    138,773
    
    
    
    
    
    
    $
    1,230,265
    
    
    
    
    
    
    $
    164,762
    
    
    
    
    
    
    $
    126,903
    
    
    
    
    
    
    $
    1,660,703
   (1)
    
    Maturities estimated based on average life of security.(2)
    
    Although equity securities have no stated maturity, they are presented for illustrative purposes only. Securities with an aggregate carrying value of $1.1 billion at December 31, 2004 were
pledged to secure public deposits, securities sold under agreements to repurchase and Federal Home
Loan Bank FHLB borrowings. Proceeds from the sale of securities-available-for-sale were $139.3
million in 2004, $1.0 billion in 2003, and $746.9 million in 2002. 69




---



##### 



Gross gains and losses recognized on the sale of securities are summarized as follows: (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Gross Gains
    
    $
    3,447
    
    
    $
    10,376
    
    
    $
    14,974Gross Losses
    
    
    (1,064
    )
    
    
    (89
    )
    
    
    (3,435
    )Net Gains
    
    $
    2,383
    
    
    $
    10,287
    
    
    $
    11,539
 At December 31, 2004 and 2003, the Bank owned stock in the Federal Home Loan Bank of
Atlanta with a cost basis (par value) of $59.3 million and $53.8 million, respectively, which is
included in equity securities. While these securities have no quoted fair value, they are
redeemable at par value from the FHLB. In addition, the Bank owned Federal Reserve Bank stock with
a cost basis (par value) of $4.1 million at both December 31, 2004 and 2003, respectively, which is
included in equity securities. There were no write-downs for other-than-temporary declines in the fair value of debt and
equity securities in 2004, 2003 or 2002. As of December 31, 2004, there were no issues of securities-available-for-sale (excluding U.S.
government agency obligations), which had carrying values that exceeded 10 percent of shareholders
equity of the Corporation. At December 31, 2004, mortgage-backed securities of $534.6 million were considered temporarily
impaired. Mortgage-backed securities are investment grade securities backed by a pool of mortgages
or trust deeds. Principal and interest payments on the underlying mortgages are used to pay monthly
interest and principal on the securities. Cash flow from the principal and interest payments on the
underlying mortgages is used to pay off the bonds. Because some mortgage pools will pay off faster
than others, mortgaged-backed securities are typically issued as a series of several different
bonds, each having a different maturity date. U.S. government agency obligations of $530.7 million
were considered temporarily impaired at December 31, 2004. U.S. government agency obligations are
interest-bearing debt securities of U.S. government agencies (i.e. FNMA and FHLMC). U.S. government
obligations of $39.2 million were considered temporarily impaired at December 31, 2004. These
obligations are securities issued by the U.S. Treasury. State, county and municipal obligations of
$7.3 million were considered temporarily impaired at December 31, 2004. These obligations are debt
instruments that are obligations of a state, county or municipality. The unrealized losses shown in the following table resulted primarily from an increase in
rates across the yield curve. As of December 31,
2004 Less than 12 months
    
    
    12 months or longer
    
    
    TotalGross
    
    
    
    
    
    
    Gross
    
    
    
    
    
    
    GrossUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    Losses
    
    
    Fair Value
    
    
    LossesUS government obligations
    
    $
    39,248
    
    
    $
    (712
    )
    
    $
    
    
    
    $
    
    
    
    $
    39,248
    
    
    $
    (712
    )US government agency obligations
    
    
    359,223
    
    
    
    (2,547
    )
    
    
    171,428
    
    
    
    (3,474
    )
    
    
    530,651
    
    
    
    (6,021
    )Mortgage-backed securities
    
    
    233,239
    
    
    
    (2,304
    )
    
    
    301,345
    
    
    
    (6,053
    )
    
    
    534,584
    
    
    
    (8,357
    )State, county and municipal obligations
    
    
    7,283
    
    
    
    (123
    )
    
    
    
    
    
    
    
    
    
    
    7,283
    
    
    
    (123
    )Total temporarily impaired securities
    
    $
    638,993
    
    
    $
    (5,686
    )
    
    $
    472,773
    
    
    $
    (9,527
    )
    
    $
    1,111,766
    
    
    $
    (15,213
    )
 Investments that are in a gross unrealized loss position include five U.S. government
obligations, forty-one U.S. agency securities, thirty-seven mortgage-backed securities and six
municipal obligations. The unrealized losses associated with these securities are not considered to
be other-than-temporary, because they are related to changes in interest rates and do not affect
the expected cash flows of the underlying collateral or the issuer. In addition, investments that
have been in an unrealized loss position for longer than one year have an external credit rating of
AAA. 70




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##### 



Note Seven - Trading Activity The Corporation engages in writing over-the-counter covered call options on specific fixed
income securities in the available for sale portfolio. Under these agreements, the Corporation
agrees to sell, upon election by the optionholder, a fixed income security at a fixed price. The
Corporation receives a premium from the optionholder in exchange for writing the option contract.
In addition, the Corporation records the write up or write down in the market value of the First
Charter Option Plan Trust (the OPT Plan) as a trading gain or loss. The OPT Plan is a
tax-deferred capital accumulation plan. For more information concerning the OPT Plan, see Note
Sixteen. The Corporation recognized income of $0.2 million in 2004 primarily from the mark to
market of the investments in the OPT Plan. Income of $1.8 million and $2.1 million was recognized
in 2003 and 2002, respectively, primarily from written covered call options. There were no written
covered call options outstanding at December 31, 2004, or at any time during 2004. There were no
written covered call options outstanding at December 31, 2003 and December 31, 2002. The highest
written covered call options outstanding at any time during 2003 and 2002 were $125.2 million and
$194.0 million, respectively. Note Eight - Derivatives The Corporation accounts for interest rate swaps as a hedge of the fair value of the
designated FHLB advances. For the year ended December 31, 2004, the Corporation recognized a net
gain of $69,000 for the ineffective portion of the interest rate swaps. At December 31, 2004, the
derivative hedging instruments were recorded at fair value in other assets. These instruments had
gross unrealized gains of $1.5 million and gross unrealized losses of $5.7 million at December 31,
2004. Information concerning the Corporations derivative instruments for the year ended December
31, 2004 is as follows: December 31, 2004Average
    
    
    Average
    
    
    AverageNotional
    
    
    Receive
    
    
    Pay
    
    
    Maturity
    
    
    Fair Value(Dollars in thousands)
    
    Amount
    
    
    Rate
    
    
    Rate
    
    
    in Years
    
    
    Gains
    
    
    Losses
    
    
    IneffectivenessFair Value Hedges:Interest rate swaps
    
    $
    222,000
    
    
    
    5.16
    %
    
    
    3.33
    %
    
    
    5.86
    
    
    $
    1,477
    
    
    $
    (5,724
    )
    
    $
    69
 According to the provisions of SFAS No. 133, the short cut method assumes that the
change in the fair value of the derivative hedging instrument and the hedged debt obligation is one
hundred percent correlated, which results in no ineffectiveness and no income statement effect. Of
the $222.0 million aggregate notional amount of interest rate swap agreements entered into during
2004, three out of seven agreements totaling $90.0 million qualify for the short cut method
assumption of no ineffectiveness; therefore, there was no impact on earnings during the year ended
December 31, 2004 from those interest rate swap agreements. Note Nine - Loans The Corporations primary market area includes North Carolina, and predominately centers
around the Metro region of Charlotte, North Carolina. At December 31, 2004, the majority of the
total loan portfolio was to borrowers within this region. The diversity of the regions economic
base provides a stable lending environment. No areas of significant concentrations of credit risk
have been identified due to the diverse industrial base in the region. 71




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##### 



Loans at December 31, 2004 and 2003 were: 2004
    
    
    2003(Dollars in thousands)
    
    Amount
    
    
    Percent
    
    
    Amount
    
    
    PercentCommercial real estate
    
    $
    776,474
    
    
    
    31.8
    %
    
    $
    724,340
    
    
    
    32.2
    %Commercial non real estate
    
    
    212,031
    
    
    
    8.7
    
    
    
    212,010
    
    
    
    9.4Construction
    
    
    332,264
    
    
    
    13.6
    
    
    
    358,217
    
    
    
    15.9Mortgage
    
    
    347,606
    
    
    
    14.2
    
    
    
    280,748
    
    
    
    12.5Consumer
    
    
    304,151
    
    
    
    12.5
    
    
    
    284,448
    
    
    
    12.6Home equity
    
    
    467,166
    
    
    
    19.2
    
    
    
    393,041
    
    
    
    17.4Total
    
    $
    2,439,692
    
    
    
    100.0
    %
    
    $
    2,252,804
    
    
    
    100.0
    %
 Loans held for sale consists primarily of 15- and 30-year mortgages which the Corporation
intends to securitize or sell as whole loans. Loans held for sale are carried at the lower of
aggregate cost or market. Loans held for sale were $5.3 million and $5.1 million at December 31,
2004 and December 31, 2003, respectively. Loans held for sale was impacted by originations, sales
activity and securitizations, which is reflected in the Consolidated Statement of Cash Flows. No
valuation allowance to reduce these loans to lower of cost or market was required at December 31,
2004 and December 31, 2003. The table below summarizes the Corporations nonperforming assets and loans 90 days or more
past due and still accruing interest at December 31, 2004 and 2003. (Dollars in thousands)
    
    2004
    
    
    2003Nonaccrual loans
    
    $
    13,970
    
    
    $
    14,910Other real estate owned
    
    
    3,844
    
    
    
    6,836Total nonperforming assets
    
    
    17,814
    
    
    
    21,746Loans 90 days or more past due and still accruing
    
    
    
    
    
    
    21Total nonperforming assets and loans 90 days
or more past due and still accruing
    
    $
    17,814
    
    
    $
    21,767
 Interest income that would have been recorded on nonaccrual loans and restructured loans
for the years ended December 31, 2004, 2003, and 2002, had they performed in accordance with their
original terms, amounted to approximately $1.1 million, $1.0 million, and $2.5 million,
respectively. Interest income on all such loans included in the results of operations for 2004,
2003 and 2002 amounted to approximately $0.3 million, $0.3 million, and $0.5 million, respectively. The recorded investment in individually impaired loans was $7.7 million (all of which were on
nonaccrual status) and $4.7 million (all of which were on nonaccrual status) at December 31, 2004
and 2003, respectively. The related allowance for loan losses on these loans was $2.1 million and
$0.9 million at December 31, 2004 and 2003, respectively. The average recorded investment in
individually impaired loans for 2004 was $6.8 million, and the income recognized during 2004 was
approximately $18,000, all of which was recognized using the cash method of income recognition. The
average recorded investment in individually impaired loans for 2003 was $10.5 million, and the
income recognized during 2003 was $0.1 million, all of which was recognized using the cash method
of income recognition. The average recorded investment in individually impaired loans for 2002 was
$18.7 million, and the income recognized during 2002 was $0.2 million, all of which was recognized
using the cash method of income recognition. The following is a reconciliation of loans outstanding to executive officers, directors and
their associates for the year ended December 31, 2004: (Dollars in thousands)Balance at December 31, 2003
    
    $
    2,584New loans
    
    
    351Principal repayments
    
    
    (2,175
    )Balance at December 31, 2004
    
    $
    760
 72




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##### 



In the opinion of management, these loans were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for comparable
transactions with other borrowers. Such loans, in the opinion of management, do not involve more
than the normal risks of collectibility. Note Ten - Allowance for Loan Losses The following is a summary of the changes in the allowance for loan losses for each of the
years in the three-year period ended December 31, 2004, 2003 and 2002: (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Beginning balance
    
    $
    25,607
    
    
    $
    27,204
    
    
    $
    25,843Provision for loan losses
    
    
    8,425
    
    
    
    27,518

    
    
    
    8,270Allowance related to loans sold, securitized
or transferred to held for sale
    
    
    (584
    )
    
    
    (20,783
    )
    
    
    (647
    )Charge-offs
    
    
    (8,552
    )
    
    
    (9,480
    )
    
    
    (6,990
    )Recoveries
    
    
    1,976
    
    
    
    1,148
    
    
    
    728Net loan charge-offs
    
    
    (6,576
    )
    
    
    (8,332
    )
    
    
    (6,262
    )Ending balance
    
    $
    26,872
    
    
    $
    25,607
    
    
    $
    27,204
 Note Eleven - Premises and Equipment Premises and equipment at December 31, 2004 and 2003 are summarized as follows: (Dollars in thousands)
    
    2004
    
    
    2003Land
    
    $
    23,490
    
    
    $
    22,692Buildings
    
    
    71,745
    
    
    
    69,291Furniture and equipment
    
    
    55,261
    
    
    
    50,157Leasehold improvements
    
    
    2,973
    
    
    
    2,600Construction in progress
    
    
    2,384
    
    
    
    1,572Total premises and equipment
    
    
    155,853
    
    
    
    146,312Less accumulated depreciation and amortization
    
    
    58,288
    
    
    
    50,556Premises and equipment, net
    
    $
    97,565
    
    
    $
    95,756
 Note Twelve - Deposits A summary of deposit balances at December 31, 2004 and 2003 is as follows: (Dollars in thousands)
    
    2004
    
    
    2003Noninterest bearing demand
    
    $
    377,793
    
    
    $
    326,679Interest bearing demand
    
    
    348,677
    
    
    
    322,471Money market accounts
    
    
    478,314
    
    
    
    470,551Savings deposits
    
    
    119,615
    
    
    
    118,025Certificates of deposit
    
    
    1,285,447
    
    
    
    1,190,171Total deposits
    
    $
    2,609,846
    
    
    $
    2,427,897
 At December 31, 2004, the aggregate amount of certificates of deposit with denominations
of $100,000 or more was $760.5 million, with $233.8 million maturing within three months, $123.5
million maturing within three to six months, $276.8 million maturing within six to twelve months
and $126.4 million maturing after twelve months. 73




---



##### 



At December 31, 2004, the scheduled maturities of all certificates of deposit are as follows: (Dollars in thousands)2005
    
    $
    1,011,1312006
    
    
    153,2282007
    
    
    109,0752008
    
    
    8,7262009
    
    
    3,1662010 and after
    
    
    121Total
    
    $
    1,285,447
 Note Thirteen - Other Borrowings The following is a schedule of other borrowings which consists of the following categories:
securities sold under repurchase agreements, federal funds purchased and FHLB borrowings for the
years ended December 31, 2004 and 2003: (Dollars in thousands)
    
    2004
    
    
    2003Securities sold under
agreements to repurchase
    
    $
    230,314
    
    
    $
    319,018Federal funds purchased
    
    
    20,000
    
    
    
    FHLB borrowings
    
    
    1,127,738
    
    
    
    1,063,106Other
    
    
    71,684
    
    
    
    50,076Total
    
    $
    1,449,736
    
    
    $
    1,432,200
 Securities sold under agreements to repurchase represent short-term borrowings by the
Bank with maturities less than one year collateralized by a portion of the Corporations securities
of the United States government or its agencies, which have been delivered to a third party
custodian for safekeeping. Securities with an aggregate carrying value of $227.9 million at
December 31, 2004 were pledged to secure securities sold under agreements to repurchase. Federal funds purchased represent unsecured overnight borrowings from other financial
institutions by the Bank. At December 31, 2004, FCB had federal funds back-up lines of credit
totaling $85.0 million with $20.0 million outstanding. FHLB borrowings are collateralized by securities from the Corporations investment portfolio,
and a blanket lien on certain qualifying commercial and single-family loans held in the
Corporations loan portfolio. FHLB advances with balances of $307.0 million at December 31, 2004,
were subject to being called by the FHLB at par. If these advances were called, the Corporation
would have the option to pay off the advances, convert the advances to 3 month LIBOR or fund the
payoffs with new advances. During 2003, the Corporation incurred $19.1 million in prepayment
penalties associated with the refinancing of $131.0 million in FHLB fixed-term advances. As part of
the Corporations ALM strategy, in 2004 the Corporation replaced $255.0 million of existing FHLB
floating rate overnight borrowings with fixed-rate FHLB advances with maturities of one to three
years. At December 31, 2004, the Corporation had a line of credit with Wells Fargo Bank totaling
$25.0 million with $12.0 million outstanding and commercial paper outstandings of $59.7 million. 74




---



##### 



The following is a schedule of annual maturities of other borrowings: As of December 31, 2004(Dollars in thousands)
    
    2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    Thereafter
    
    
    TotalSecurities sold under agreements
to repurchase
    
    $
    230,314
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    230,314Federal funds purchased
    
    
    20,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,000FHLB borrowings
    
    
    364,000
    
    
    
    323,930
    
    
    
    110,000
    
    
    
    100,000
    
    
    
    49,963
    
    
    
    179,845
    
    
    
    1,127,738Other
    
    
    71,684
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    71,684Total other borrowings
    
    $
    685,998
    
    
    $
    323,930
    
    
    $
    110,000
    
    
    $
    100,000
    
    
    $
    49,963
    
    
    $
    179,845
    
    
    $
    1,449,736
 Note Fourteen - Income Tax Total income taxes for the years ended December 31, 2004, 2003 and 2002 were allocated as
follows: Years ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Net income
    
    $
    22,022
    
    
    $
    3,286
    
    
    $
    14,947Shareholders equity, for unrealized (losses)/gains
on securities available for sale
    
    
    (7,045
    )
    
    
    (6,254
    )
    
    
    6,451Total
    
    $
    14,977
    
    
    $
    (2,968
    )
    
    $
    21,398
 Income tax expense (benefit) attributable to income consists of: Years ended December 31,(Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Current:Federal
    
    $
    15,470
    
    
    $
    (473
    )
    
    $
    24,621State
    
    
    2,426
    
    
    
    94
    
    
    
    440Total current
    
    $
    17,896
    
    
    $
    (379
    )
    
    $
    25,061Deferred:Federal
    
    $
    4,193
    
    
    $
    3,565
    
    
    $
    (9,566
    )State
    
    
    (67
    )
    
    
    100
    
    
    
    (548
    )Total deferred
    
    $
    4,126
    
    
    $
    3,665
    
    
    $
    (10,114
    )Total income taxes:Federal
    
    $
    19,663
    
    
    $
    3,092
    
    
    $
    15,055State
    
    
    2,359
    
    
    
    194
    
    
    
    (108
    )Total income taxes
    
    $
    22,022
    
    
    $
    3,286
    
    
    $
    14,947
 75




---



##### 



Income tax expense attributable to net income was $22.0 million, $3.3 million and $14.9
million for the years ended December 31, 2004, 2003 and 2002, respectively, and differed from the
amounts computed by applying the U.S. federal income tax rate of 35 percent to pretax income as a
result of the following: Years ended December 31,(Dollars in thousands)
    
    2004
    
    
    
    
    
    
    2003
    
    
    
    2002Computed expected tax expense
    
    $
    22,563
    
    
    
    35.00
    %
    
    $
    6,101
    
    
    
    35.00
    %
    
    $
    19,163
    
    
    
    35.00
    %Increase (reduction) in income taxes
resulting from:Tax exempt income
    
    
    (1,318
    )
    
    
    (2.04
    )
    
    
    (1,058
    )
    
    
    (6.07
    )
    
    
    (1,467
    )
    
    
    (2.68
    )Bank owned life insurance
    
    
    (1,195
    )
    
    
    (1.85
    )
    
    
    (1,361
    )
    
    
    (7.81
    )
    
    
    (16
    )
    
    
    (0.03
    )State income tax, net of
federal benefits
    
    
    1,534
    
    
    
    2.37
    
    
    
    126
    
    
    
    0.72
    
    
    
    (71
    )
    
    
    (0.12
    )Subsidiary stock, recognition of
basis difference
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,313
    )
    
    
    (6.05
    )Change in valuation allowance
    
    
    (200
    )
    
    
    (0.31
    )
    
    
    63
    
    
    
    0.36
    
    
    
    773
    
    
    
    1.41Other, net
    
    
    638
    
    
    
    0.99
    
    
    
    (585
    )
    
    
    (3.35
    )
    
    
    (122
    )
    
    
    (0.22
    )Total
    
    $
    22,022
    
    
    
    34.16
    %
    
    $
    3,286
    
    
    
    18.85
    %
    
    $
    14,947
    
    
    
    27.31
    %
 The change in net deferred tax assets for the years ended December 31, 2004, 2003 and
2002 are as follows: (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Deferred tax expense (benefit) (exclusive of the
effects of other components below)
    
    $
    4,126
    
    
    $
    3,665
    
    
    $
    (10,114
    )Shareholders equity, for unrealized (losses)/gains
on securities available for sale
    
    
    (7,045
    )
    
    
    (6,254
    )
    
    
    6,451Purchase accounting adjustment
    
    
    (135
    )
    
    
    (269
    )
    
    
    Total
    
    $
    (3,054
    )
    
    $
    (2,858
    )
    
    $
    (3,663
    )
 The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2004 and 2003 are presented below. (Dollars in thousands)
    
    2004
    
    
    2003Deferred tax assets:Allowance for loan loss
    
    $
    10,631
    
    
    $
    10,177Unrealized losses on securities available for sale
    
    
    2,978
    
    
    
    Deferred compensation
    
    
    2,571
    
    
    
    2,711Market adjustment for investments
    
    
    523
    
    
    
    674Basis difference in depreciable assets
    
    
    6,076
    
    
    
    7,737Other
    
    
    1,310
    
    
    
    825Total gross deferred tax assets
    
    
    24,089
    
    
    
    22,124Less valuation allowance
    
    
    636
    
    
    
    836Net deferred tax assets
    
    
    23,453
    
    
    
    21,288Deferred tax liabilities:Loan Origination Costs
    
    
    (2,605
    )
    
    
    Unrealized (gains) on securities available for sale
    
    
    
    
    
    
    (4,067
    )Federal Home Loan Bank of Atlanta stock
    
    
    (1,053
    )
    
    
    (1,052
    )Mortgage Servicing Rights
    
    
    (650
    )
    
    
    (832
    )Intangibles
    
    
    (944
    )
    
    
    (637
    )Other
    
    
    (623
    )
    
    
    (176
    )Total gross deferred tax liabilities
    
    
    (5,875
    )
    
    
    (6,764
    )Net deferred tax assets
    
    $
    17,578
    
    
    $
    14,524
 76




---



##### 



The valuation allowance for deferred tax assets was $836,000 as of January 1, 2004 and
$773,000 as of January 1, 2003. The total valuation allowance relative to capital loss
carryforwards and state net operating loss carryforward decreased $200,000 during 2004 and
increased $63,000 during 2003. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets
will not be realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary differences become
deductible. Management considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making this assessment. In order to fully
realize the deferred tax asset, the Company will need to generate future taxable income prior to
the expiration of the deferred tax assets governed by the tax code. Based upon the level of
historical taxable income and projections for future taxable income over the periods in which the
deferred tax assets are deductible, management believes it is more likely than not the Company will
realize the benefits of these deductible differences, net of the existing valuation allowances at
December 31, 2004. The amount of the deferred tax asset considered realizable, however, could be
reduced in the near term if estimates of future taxable income during the carryforward period are
reduced. Federal tax returns for 2000 and subsequent years are subject to examination by taxing
authorities. During the third quarter of 2004, the Corporation received a proposed income tax
assessment from the North Carolina Department of Revenue for the 1999 and 2000 tax years. As a

result of this assessment, the Corporation increased its tax reserves by $818,000 during 2004. The
Corporations maximum exposure related to this assessment in excess of the current reserve is
approximately $1.5 million, net of tax. The Corporation may also have similar exposure related to
its 2001 -  2004 state tax filings. The Corporation is in the process of appealing this assessment.
The Corporation believes it has substantial authority for its reporting and believes that the
ultimate outcome will not result in an adverse impact to its results of operations. The Corporation
will re-evaluate the adequacy of this reserve as new information or circumstances warrant. Retained earnings at December 31, 2004 and 2003 includes approximately $7.2 million (tax
effect) representing pre-1988 tax bad debt reserve base year reserve amount for which no deferred
income tax liability has been provided since these reserves are not expected to reverse and may
never reverse. Circumstances that would require an accrual of a portion or all of this unrecorded
tax liability are a reduction in qualifying loan levels relative to the end of 1987, failure to
meet the definition of a bank, dividend payments in excess of current year or accumulated tax
earnings and profits, or other distributions in dissolution, liquidation or redemption of the
Corporations stock. Note Fifteen - Employee Benefit Plans First Charter Retirement Savings Plan.The Corporation has a qualified Retirement Savings Plan
(the Savings Plan) for all eligible employees of the Corporation. Pursuant to the Savings Plan,
an eligible employee may elect to defer between 1 percent and 50 percent of compensation. At the
discretion of the Board of Directors, the Corporation may contribute an amount necessary to match
all or a portion of a participants elective deferrals in an amount to be determined by the Board
of Directors from time to time, up to a maximum of six percent of a participants compensation. In
addition, the Corporation may contribute an additional amount to each participants Savings Plan
account as determined at the discretion of the Board of Directors. Participants may invest their
Savings Plan account in a variety of investment options, including the Corporations stock.
Effective March 1, 2002 the portion of the Savings Plan consisting of the Company Stock Fund (ESOP)
was designated as an employee stock ownership plan under Code section 4975(e)(7) and that fund is
designed to invest primarily in the Corporations stock. As part of the Savings Plan, the
Corporation has a qualified Money Purchase Pension Plan for all eligible employees of the
Corporation. Pursuant to the Money Purchase Pension Plan, the Corporation contributes annually to
each participants Plan account an amount equal to three percent of the participants compensation.
The Corporations aggregate contributions to the Savings Plan and the Money Purchase Pension Plan
amounted to $2.5 million, $1.8 million and $2.5 million for 2004, 2003 and 2002, respectively. 77




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##### 



First Charter Option Plan Trust.Effective December 1, 2001, the Corporation approved and
adopted a non-qualified compensation deferral arrangement called the First Charter Option Plan
Trust (the OPT Plan). The OPT Plan is a tax-deferred capital accumulation plan. Under the OPT
Plan, eligible participants may elect to defer all of their base salary and bonus and receive
options on mutual fund investments. In addition, the Corporation may grant participants bonus
options in lieu of cash bonuses. Participants are offered the opportunity to direct an
administrative committee to invest in separate investment funds with distinct investment objectives
and risk tolerances. Eligible employees for the OPT Plan include executive management as well as
key members of senior management. The deferred compensation obligation pursuant to this plan is
equal to the Plan assets, which are held in a Rabbi Trust. Plan assets totaled $887,000 and
$989,000 at December 31, 2004 and 2003, respectively, and are classified as trading assets, which
is included in other assets on the consolidated balance sheet. First Charter Directors Option Deferral Plan.Effective May 1, 2001, the Corporation approved
and adopted a non-qualified compensation deferral arrangement called the First Charter Corporation
Directors Option Deferral Plan (the Plan). Under the Plan, eligible directors may elect to defer
all of their directors fees and receive option grants on mutual fund investments. Participants are
offered the opportunity to direct an administrative committee to invest in separate investment
funds with distinct investment objectives and risk tolerances. The deferred compensation obligation
pursuant to this plan is equal to the Plan assets, which are held in a Rabbi Trust. Plan assets
totaled $181,000 and $148,000 at December 31, 2004 and 2003, respectively, and are classified as
trading assets, which is included in other assets on the consolidated balance sheet. Note Sixteen -  Shareholders Equity, Stock Plans and Stock Awards Stock Repurchase Programs.On January 23, 2002, the Corporations Board of Directors
authorized the repurchase of up to 1.5 million shares of the Corporations common stock. As of
December 31, 2004, the Corporation had repurchased a total of 1.4 million shares of its common
stock at an average per-share price of $17.52 under this authorization, which has reduced
shareholders equity by $24.5 million. No shares were repurchased under this authorization during
the year ended December 31, 2004. On October 24, 2003, the Corporations Board of Directors authorized the repurchase of up to
1.5 million additional shares of the Corporations common stock. At December 31, 2004, no shares
had been repurchased under this authorization. Deferred Compensation for Non-Employee Directors.Effective May 1, 2001, the Corporation
amended and restated the First Charter Corporation 1994 Deferred Compensation Plan for Non-Employee
Directors. Under the Deferred Compensation Plan, eligible directors may elect to defer all or part
of their directors fees for a calendar year, in exchange for common stock of the Corporation. The
amount deferred, if any, shall be in multiples of 25 percent of their total directors fees. Each
participant is fully vested in his account balance under the plan. The plan generally provides for
fixed payments or a lump sum payment, or a combination of both, in shares of common stock of the
Corporation after the participant ceases to serve as a director for any reason. 78




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##### 



The common stock purchased by the Corporation for this deferred compensation plan is
maintained in the First Charter Corporation Directors Deferred Compensation Trust, a Rabbi Trust
(the Trust), on behalf of the participants. The assets of the Trust are subject to the claims of
general creditors of the Corporation. Dividends payable on the common shares held by the Trust will
be reinvested in additional shares of common stock of the Corporation and held in the Trust for the
benefit of the participants. Since the deferred compensation plan does not provide for
diversification of the Trusts assets and can only be settled with a fixed number of shares of the
Corporations common stock, the deferred compensation obligation is classified as a component of
shareholders equity and the common stock held by the Trust is classified as a reduction of
shareholders equity. Subsequent changes in the fair value of the common stock are not reflected in
earnings or shareholders equity of the Corporation. The obligations of the Corporation under the
deferred compensation plan, and the shares held by the Trust, have no net effect on net income per
share. Stockholder Protection Rights Agreement.On July 19, 2000 the Corporation entered into a
Stockholder Protection Rights Agreement. In connection with the agreement, the Board declared a
dividend of one share purchase right (Right) on each outstanding share of common stock. Issuances
of the Corporations common stock after August 9, 2000 include share purchase Rights. Generally,
the Rights will be exercisable only if a person or group acquires 15 percent or more of
Corporations common stock or announces a tender offer. Each Right will entitle stockholders to buy
1/1000 of a share of a new series of junior participating preferred stock of the Company at an
exercise price of $80. Prior to the time they become exercisable, the Rights are redeemable for one
cent per Right at the option of the Board of Directors. If the Corporation is acquired after a person has acquired 15 percent or more of its common
stock, each Right will entitle its holder to purchase, at the Rights then-current exercise price,
a number of shares of the acquiring companys common stock having a market value of twice such
price. Additionally, if the Corporation is not acquired, a Rights holder (other than the person or
group acquiring 15 percent or more) will be entitled to purchase, at the Rights then-current
exercise price, a number of shares of the Corporations common stock having a market value of twice
such price. Following the acquisition of 15 percent or more of the common stock, but less than 50 percent
by any Person or Group, the Board may exchange the Rights (other than Rights owned by such person
or group) at an exchange ratio of one share of common stock for each Right. The Rights were distributed on August 9, 2000, to stockholders of record as of the close of
business on such date. The Rights will expire on July 19, 2010. Dividend Reinvestment and Stock Purchase Plan.The Corporation maintains the Dividend
Reinvestment and Stock Purchase Plan (the DRIP), pursuant to which 1,000,000 shares of common
stock of the Corporation have been reserved for issuance. Shareholders may elect to participate in
the DRIP and have dividends on shares of common stock reinvested and may make optional cash
payments of up to $3,000 per calendar quarter to be invested in common stock of the Corporation.
Pursuant to the terms of the DRIP, upon reinvestment of the dividends and optional cash payments,
the Corporation can either issue new shares valued at the then current market value of the common
stock or the administrator of the DRIP can purchase shares of common stock in the open market.
During 2004, the Corporation issued 33,958 shares and the administrator of the DRIP purchased
154,680 shares in the open market. During 2003 and 2002, the Corporation issued no shares and the
administrator of the DRIP purchased 179,861 shares and 197,719 shares, respectively, in the open
market. 79




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##### 



Restricted Stock Award Program.In April 1995, the shareholders approved the First Charter
Corporation Restricted Stock Award Program (the Restricted Stock Plan). Awards of restricted
stock may be made under the Restricted Stock Plan at the discretion of the Compensation Committee
of the Board of Directors of the Corporation, which shall determine the key participants, the
number of shares awarded to participants, and the vesting terms and conditions applicable to such
awards. A maximum of 360,000 shares of common stock are reserved for issuance under the Restricted
Stock Plan. Compensation expense of approximately $71,000 and $50,000 was recognized during 2004
and 2003, respectively, in connection with the Restricted Stock Plan. During the third quarter of
2004, 18,547 shares were granted under the Restricted Stock Plan with vesting periods of three
years. The following table presents the status of the Restricted Stock Plan as of December 31, 2004
and 2003 and changes during the years then ended: Weighted AverageShares
    
    
    Grant PriceOutstanding at December 31, 2002
    
    
    4,000
    
    
    $
    15.7813Granted
    
    
    
    
    
    
    Vested
    
    
    (3,000
    )
    
    
    16.5625Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2003
    
    
    1,000
    
    
    $
    13.4375Granted
    
    
    18,547
    
    
    
    22.3400Vested
    
    
    (1,000
    )
    
    
    13.4375Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2004
    
    
    18,547
    
    
    $
    22.3400
 First Charter Comprehensive Stock Option Plan.Under the terms of the First Charter
Corporation Comprehensive Stock Option Plan (the Comprehensive Stock Option Plan), stock options
(which can be incentive stock options or non-qualified stock options) may be periodically granted
to key employees of the Corporation or its subsidiaries. The terms and vesting schedules of options
granted under the Comprehensive Plan generally shall be determined by the Compensation Committee of
the Board of Directors of the Corporation (the Compensation Committee). However, no options may
be exercisable prior to six months following the grant date, and certain additional restrictions,
including the term and exercise price, apply with respect to any incentive stock options. Under
the First Charter Comprehensive Stock Option Plan, 480,000 shares of common stock are reserved for
issuance. At December 31, 2004, 109,327 shares were available for future issuance. First Charter Corporation Stock Option Plan for Non-Employee Directors.In April 1997, the
shareholders approved the First Charter Corporation Stock Option Plan for Non-Employee Directors
(the Director Plan). Under the Director Plan, non-statutory stock options may be granted to
non-employee Directors of the Corporation and its subsidiaries. The terms and vesting schedules of
any options granted under the Director Plan generally shall be determined by the Compensation
Committee. The exercise price for each option granted, however, shall be the fair value of the
common stock as of the date of grant. A maximum of 180,000 shares are reserved for issuance under
the Director Plan. As of December 31, 2004, 2,940 shares were available for future issuance. 2000 Omnibus Stock Option and Award Plan.In June 2000, the shareholders approved the First
Charter Corporation 2000 Omnibus Stock Option and Award Plan (the 2000 Omnibus Plan). Under the
2000 Omnibus Plan, 2,000,000 shares of common stock are reserved for issuance. Stock options (which
can be incentive stock options or non-qualified stock options) and other stock-based awards may be
periodically granted to key employees of First Charter and its Directors. The terms and vesting
schedules of options granted under the 2000 Omnibus Plan shall be determined by the Compensation
Committee, and certain additional restrictions, including the term and exercise price, apply with
respect to any incentive stock options. At December 31, 2004, 345,842 shares were available for
future issuance. Employee Stock Purchase Plans. The Corporation previously adopted an Employee Stock Purchase
Plan (the ESPP) in 1998 and 1996, pursuant to which stock options were granted to employees,
based
on their eligibility and compensation, at a price of 85 percent to 90 percent of the fair market
value of the 80




---



##### 



shares at the date of grant. The option and vesting period was generally for a term of
two years. A maximum of 180,000 shares are reserved for issuance under the 1996 ESPP and 180,000
shares are reserved for issuance under the 1998 ESPP, which was approved by the shareholders of the
Corporation in April 1997. The Board of Directors of the Corporation determined that it was in the best interest of the
Corporation to implement a new employee stock purchase plan that may continue beyond a two-year
period, to allow more flexibility with the timing of the grant of, and the exercise periods for,
options granted to employees. The 1999 ESPP, described below, allows for multiple grants of options
thereunder and is designed to remain in effect as long as there are shares available for purchases
under the 1999 ESPP. Pursuant to the terms of the 1999 ESPP, a maximum of 300,000 shares of the
Corporations Common Stock may be issued to employees under the 1999 ESPP, subject to adjustment,
generally to protect against dilution in the event of changes in the capitalization of the
Corporation. At December 31, 2004, 110,723 shares were available for future issuance. The 1999 ESPP is administered by the Compensation Committee. The Compensation Committee is
able to prescribe rules and regulations for such administration and to decide questions with
respect to the interpretation or application of the 1999 ESPP. The Corporation intends that options granted under the 1999 ESPP will satisfy the requirements
of Section 423 of the Internal Revenue Code of 1986, as amended (the Code), and the regulations
thereunder. The 1999 ESPP, however, is not qualified under the provisions of Section 401(a) of the
Code and is not subject to any of the provisions of the Employee Retirement Income Security Act of
1974, as amended. Summary of Stock Option and Employee Stock Purchase Plan Programs.The following is a summary
of activity under the Comprehensive Plan, the Director Plan, the 2000 Omnibus Plan and the 1999,
1998 and 1996 ESPPs during the periods indicated. 2004
    
    
    2003
    
    
    2002Weighted-
    
    
    
    
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    Exercise(Option)
    
    
    
    
    
    
    (Option)
    
    
    
    
    
    
    (Option)Shares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at January 1
    
    
    2,495,869
    
    
    $
    19.14
    
    
    
    2,405,901
    
    
    $
    19.43
    
    
    
    2,176,607
    
    
    $
    19.25Granted
    
    
    393,134
    
    
    
    20.33
    
    
    
    558,576
    
    
    
    18.20
    
    
    
    548,915
    
    
    
    17.12Exercised
    
    
    (238,827
    )
    
    
    16.51
    
    
    
    (113,019
    )
    
    
    11.57
    
    
    
    (134,608
    )
    
    
    11.73Forfeited
    
    
    (167,730
    )
    
    
    21.57
    
    
    
    (355,589
    )
    
    
    22.07
    
    
    
    (185,013
    )
    
    
    16.05Outstanding at December 31
    
    
    2,482,446
    
    
    
    19.41
    
    
    
    2,495,869
    
    
    
    19.14
    
    
    
    2,405,901
    
    
    
    19.43Options exercisable at December 31
    
    
    1,604,950
    
    
    
    19.66
    
    
    
    1,601,789
    
    
    
    20.01
    
    
    
    1,691,703
    
    
    
    20.61Weighted-average Black-Scholes fair value
of options granted during the year
    
    
    
    
    
    $
    4.48
    
    
    
    
    
    
    $
    4.81
    
    
    
    
    
    
    $
    5.38
 The weighted average remaining contractual lives of stock options were 5.6 years at
December 31, 2004. 81




---



##### 



The following table provides certain information about stock options outstanding at December
31, 2004: Outstanding Options
    
    
    
    
    
    
    Options ExercisableNumber
    
    
    Weighted Average
    
    
    
    
    
    
    NumberRange of
    
    Outstanding
    
    
    Remaining
    
    
    Weighted Average
    
    
    Outstanding
    
    
    Weighted AverageExercise Prices
    
    at December 31
    
    
    Contractual Life
    
    
    Exercise Price
    
    
    at December 31
    
    
    Exercise Price$0.0000 - $5.0000
    
    
    12,468
    
    
    1.2 years
    
    $
    4.9700
    
    
    
    12,468
    
    
    $
    4.9700$5.0100 - $10.0000
    
    
    3,400
    
    
    4.7 years
    
    
    9.0400
    
    
    
    3,400
    
    
    
    9.0400$10.0100 - $12.5000
    
    
    19,765
    
    
    4.0 years
    
    
    11.5439
    
    
    
    19,765
    
    
    
    11.5439$12.5000 - $15.0000
    
    
    184,324
    
    
    5.1 years
    
    
    14.4163
    
    
    
    179,804
    
    
    
    14.4273$15.0100 - $17.5000
    
    
    629,507
    
    
    6.6 years
    
    
    16.6214
    
    
    
    421,532
    
    
    
    16.5029$17.5100 - $20.0000
    
    
    691,389
    
    
    6.4 years
    
    
    18.3579
    
    
    
    342,772
    
    
    
    18.2323$20.0100 - $22.5000
    
    
    314,469
    
    
    9.0 years
    
    
    20.8384
    
    
    
    8,150
    
    
    
    22.0905$22.5100 - $25.0000
    
    
    399,591
    
    
    2.2 years
    
    
    23.9993
    
    
    
    399,091
    
    
    
    24.0005$25.0100 - $27.5000
    
    
    227,533
    
    
    2.6 years
    
    
    25.9975
    
    
    
    217,968
    
    
    
    26.0013Total
    
    
    2,482,446
    
    
    5.6 years
    
    $
    19.4132
    
    
    
    1,604,950
    
    
    $
    19.6560
 Note Seventeen  -  Commitments, Contingencies and Off-Balance Sheet Risk Commitments and Off-Balance Sheet Risk. The Corporation is party to various financial
instruments with off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers. These financial instruments include commitments to extend credit and
standby letters of credit and involve, to varying degrees, elements of credit and interest rate
risk in excess of the amounts recognized in the consolidated financial statements. Commitments to
extend credit are agreements to lend to a customer so long as there is no violation of any
condition established in the contract. Commitments generally have fixed expiration dates and may
require collateral from the borrower if deemed necessary by the Corporation. Standby letters of
credit are conditional commitments issued by the Corporation to guarantee the performance of a
customer to a third party up to a stipulated amount and with specified terms and conditions.
Standby letters of credit are recorded as a liability by the Corporation at the fair value of the
obligation undertaken in issuing the guarantee. The fair value and carrying value at December 31,
2004 of standby letters of credit issued or modified during the year ended December 31, 2004 was
immaterial. Commitments to extend credit are not recorded as an asset or liability by the
Corporation until the instrument is exercised. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for instruments reflected in the
consolidated financial statements. The creditworthiness of each customer is evaluated on a
case-by-case basis. At December 31, 2004, the Corporations exposure to credit risk was represented by preapproved
but unused lines of credit totaling $370.7 million, loan commitments totaling $473.0 million and
standby letters of credit in an aggregate amount of $9.1 million. Of the $370.7 million of
preapproved unused lines of credit, $28.7 million were at fixed rates and $341.9 million were at
floating rates. Of the $473.0 million of loan commitments, $113.9 million were at fixed rates and
$359.1 million were at floating rates. Of the $9.1 million of standby letters of credit, $7.8
million expire in less than one year and $1.3 million expire in one to three years. The maximum
amount of credit loss of standby letters of credit is represented by the contract amount of the
instruments. Management expects that these commitments can be funded through normal operations. The
amount of collateral obtained if deemed necessary by the Corporation upon extension of credit is
based on managements credit evaluation of the borrower at that time. The Corporation generally
extends credit on a secured basis. Collateral obtained may include, but is not limited to, accounts
receivable, inventory and commercial and residential real estate. The Bank primarily makes commercial and installment loans to customers throughout its market
area. The Corporations primary market area includes the state of North Carolina, and predominately
centers on the Metro region of Charlotte, North Carolina. The real estate loan portfolio can be
affected by the condition of the local real estate markets. Minimum operating lease payments due in each of the five years subsequent to December 31, 2004
are as follows: 2005, $2.0 million; 2006, $1.4 million; 2007, $1.1 million; 2008, $1.1 million;
2009, $0.9 82




---



##### 



million and subsequent years $12.5 million. Rental expense for all operating leases for
the three years ended December 31, 2004, 2003 and 2002 was $2.6 million, $2.0 million and $1.7
million, respectively. Average daily Federal Reserve balance requirements for the year ended December 31, 2004
amounted to $32.1 million. Contingencies. The Corporation and the Bank are defendants in certain claims and legal actions
arising in the ordinary course of business. In the opinion of management, after consultation with
legal counsel, the ultimate disposition of these matters is not expected to have a material adverse
effect on the consolidated operations, liquidity or financial position of the Corporation or the
Bank. See Note Fourteenfor tax contingency information. Note Eighteen -  Related Party Transactions In the ordinary course of business, the Corporation engages in business transactions with
certain of its directors. Such transactions are competitively negotiated at arms-length by the
Corporation and are not considered to include terms which are unfavorable to the Corporation. During 2001, the Corporation implemented an automatic overdraft product, which allows
customers the ability to overdraw their account and have their transactions honored for a fee.
During the fourth quarter of 2001, the Corporation engaged Impact Financial Services (Impact) to
provide this product. Impact received a fee from the Corporation equal to 15 percent of the
incremental income from this new product for a twenty four-month period commencing the fourth full
month after the Corporation began to offer the product. John Godbold, a director of the
Corporation, is the president and owner of Godbold Financial Associates, Inc. (GFA), which acts
as an independent sales representative for Impact for Maryland, North Carolina, South Carolina and
Virginia, and as such GFA and Mr. Godbold received commissions from Impact based on fees earned by
Impact. Management believes that the transaction was at arms-length. Pursuant to the Corporations
conflict of interest policy for directors and executive officers, the members of the Corporations
Board of Directors who did not have a direct or indirect interest in the related party transaction
reviewed this related party transaction and determined that it was fair to the Corporation and
subsequently approved and ratified the transaction. As described above, no fees were required to be
paid to Impact until the fourth full month following introduction of the new product, therefore, no
fees were payable to Impact and no commissions were payable to GFA and Mr. Godbold until March
2002. This arrangement terminated on March 31, 2004. For the three months ended March 31, 2004, the
Corporation received revenues of approximately $1.1 million, which resulted in fees of $164,000 to
Impact and resulted in Impact paying commissions to GFA (and Mr. Godbold) of $115,000. For the
years ended December 31, 2003 and December 31, 2002, the Corporation received revenues of
approximately $7.4 million and $4.9 million, respectively, which resulted in fees of $1.1 million
and $627,000, respectively, to Impact and resulted in Impact paying commissions to GFA (and Mr.
Godbold) of $759,000 and $439,000, respectively. During the third quarter of 2004, the Corporation entered into a three-year contract
pertaining to a software licensing agreement and regulatory compliance guarantee with Impact. The
aggregate cost for the three-year period is $76,000. Mr. Godbold has a 50 percent financial
interest in this transaction. Pursuant to the Corporations conflict of interest policy for
directors and executive officers, the members of the Corporations Board of Directors who did not
have a direct or indirect interest in the related party transaction reviewed this related party
transaction and determined that it was fair to the Corporation and subsequently approved the
transaction. See Note Ninefor related party loans information. Note Nineteen -  Fair Value of Financial Instruments Fair value estimates of financial instruments are made at a specific point in time, based on
relevant market information and information about the financial instrument. These estimates do not
reflect any 83




---



##### 



premium or discount that could result from offering for sale at one time the
Corporations entire holdings of a particular financial instrument. Because no market exists for a
significant portion of the Corporations financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are subjective
in nature and involve uncertainties and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly affect the estimates. Where
information regarding the fair value of a financial instrument is available, those values are used,
as is the case with investment securities. In this case, an open market exists in which this
financial instrument is actively traded. Fair value estimates are based on existing on- and off-balance sheet financial instruments
without attempting to estimate the value of anticipated future business and the value of assets and
liabilities that are not considered financial instruments. For example, FCB has a substantial trust
department that contributes net fee income annually. The trust department is not considered a
financial instrument, and its value has not been incorporated into the fair value estimates. Other
significant assets and liabilities that are not considered financial assets or liabilities include
the mortgage broker and insurance agency operations and premises and equipment. In addition, tax
ramifications related to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in any of the estimates. The Corporations fair value methods and assumptions are as follows: Cash and due from banks, federal funds sold, interest-bearing bank deposits -the carrying
value is a reasonable estimate of fair value due to the short-term nature of these financial
instruments. Securities-available-for-sale -the fair value is determined by a third party. The valuation
is determined as of a date in close proximity to the end of the reporting period based on
available quoted market prices or quoted market prices for similar securities if a quoted
market price is not available. Derivatives  -the fair value of the interest rate swaps is determined by a third party
using a discounted cash flow model and a volatility index. Loans held for sale- mortgage loans held for sale are valued at the lower of cost or
market. Market value is determined by outstanding commitments from investors or current
investor yield requirements. Loans- the carrying value for variable rate loans is a reasonable estimate of fair value
due to contractual interest rates being based on current indices. Fair value for fixed rate
loans is estimated based upon discounted future cash flows using discount rates comparable
to rates currently offered for such loans. Deposit accounts- the fair value of certificates of deposit is estimated using rates
currently offered for deposits of similar remaining maturities. The fair value of all other
deposit account types is the amount payable on demand at year-end. Other borrowings -the carrying value for shorter-term borrowings is a reasonable estimate
of fair value because these instruments are generally payable in 90 days or less. The fair
value for borrowings with maturities greater than 90 days is estimated based upon discounted
future cash flows using a discount rate comparable to the current market rate for such
borrowings. 84




---



##### 



Based on the limitations, methods, and assumptions noted above, the following table
presents the carrying amounts and fair values of the Corporations financial instruments at
December 31, 2004 and 2003: December 31,2004
    
    
    2003Estimated
    
    
    
    
    
    
    EstimatedCarrying
    
    
    Fair
    
    
    Carrying
    
    
    Fair(Dollars in thousands)
    
    Amount
    
    
    Value
    
    
    Amount
    
    
    ValueFinancial assets:Cash and due from banks
    
    $
    90,238
    
    
    $
    90,238
    
    
    $
    88,564
    
    
    $
    88,564Federal funds sold
    
    
    1,589
    
    
    
    1,589
    
    
    
    1,311
    
    
    
    1,311Interest bearing bank deposits
    
    
    6,184
    
    
    
    6,184
    
    
    
    23,631
    
    
    
    23,631Securities available for sale
    
    
    1,652,732
    
    
    
    1,652,732
    
    
    
    1,601,900
    
    
    
    1,601,900Loans held for sale
    
    
    5,326
    
    
    
    5,326
    
    
    
    5,137
    
    
    
    5,147Loans, net of allowance for loan losses
    
    
    2,412,529
    
    
    
    2,522,645
    
    
    
    2,227,030
    
    
    
    2,243,991Financial liabilities:Deposits
    
    
    2,609,846
    
    
    
    2,558,570
    
    
    
    2,427,897
    
    
    
    2,428,913Other borrowings
    
    
    1,449,736
    
    
    
    1,470,822
    
    
    
    1,432,200
    
    
    
    1,449,092Derivative instruments
    
    
    4,247
    
    
    
    4,247
    
    
    
    
    
    
    
    
 Note Twenty -  Regulatory Matters The Corporation and the Bank are subject to various regulatory capital requirements
administered by bank regulatory agencies. Failure to meet minimum capital requirements can initiate
certain mandatory  -  and possibly discretionary  -  actions by regulators that, if undertaken, could
have a direct material effect on the Corporations financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank
must meet specific capital guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting practices. The
capital amounts and classifications are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the
Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of
Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and
of Tier I capital (as defined)
to adjusted average assets (as defined). Management believes, as of December 31, 2004, that the
Corporation and the Bank meet all capital adequacy requirements to which they are subject. The Corporations and the Banks various regulators have issued regulatory capital guidelines
for U.S. banking organizations. Failure to meet the capital requirements can initiate certain
mandatory and discretionary actions by regulators that could have a material effect on the
Corporations financial statements. At December 31, 2004, the Corporation and the Bank were
classified as well capitalized under these regulatory frameworks. In the judgment of management,
there have been no events or conditions since December 31, 2004 that would change the well
capitalized status of the Corporation or the Bank. 85




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##### 



The Corporations and the Banks actual capital amounts and ratios are presented in the table
below: To Be Well CapitalizedFor Capital
    
    
    Under Current PromptAdequacy Purposes
    
    
    Corrective Action ProvisionsActual
    
    
    
    
    
    
    Minimum
    
    
    
    
    
    
    Minimum(Dollars
in thousands)
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAt December 31, 2004:Total Capital (to Risk Weighted Assets)First Charter Corporation
    
    $
    324,814
    
    
    
    10.99
    %
    
    $
    236,421
    
    
    
    8.00
    %
    
    None
    
    NoneFirst Charter Bank
    
    
    314,491
    
    
    
    10.70
    
    
    
    235,183
    
    
    
    8.00
    
    
    $
    293,978
    
    
    
    10.00
    %Tier I Capital (to Risk Weighted Assets)First Charter Corporation
    
    $
    297,906
    
    
    
    10.08
    %
    
    $
    118,211
    
    
    
    4.00
    %
    
    None
    
    NoneFirst Charter Bank
    
    
    287,619
    
    
    
    9.78
    
    
    
    117,591
    
    
    
    4.00
    
    
    $
    176,387
    
    
    
    6.00
    %Tier I Capital (to Adjusted Average Assets)First Charter Corporation
    
    $
    297,906
    
    
    
    6.76
    %
    
    $
    176,194
    
    
    
    4.00
    %
    
    None
    
    NoneFirst Charter Bank
    
    
    287,619
    
    
    
    6.46
    
    
    
    178,106
    
    
    
    4.00
    
    
    $
    222,633
    
    
    
    5.00
    %At December 31, 2003:Total Capital (to Risk Weighted Assets)First Charter Corporation
    
    $
    298,709
    
    
    
    10.97
    %
    
    $
    217,905
    
    
    
    8.00
    %
    
    None
    
    NoneFirst Charter Bank
    
    
    291,903
    
    
    
    10.79
    
    
    
    216,521
    
    
    
    8.00
    
    
    $
    270,652
    
    
    
    10.00
    %Tier I Capital (to Risk Weighted Assets)First Charter Corporation
    
    $
    272,417
    
    
    
    10.00
    %
    
    $
    108,953
    
    
    
    4.00
    %
    
    None
    
    NoneFirst Charter Bank
    
    
    266,296
    
    
    
    9.84
    
    
    
    108,261
    
    
    
    4.00
    
    
    $
    162,391
    
    
    
    6.00
    %Tier I Capital (to Adjusted Average Assets)First Charter Corporation
    
    $
    272,417
    
    
    
    6.53
    %
    
    $
    166,844
    
    
    
    4.00
    %
    
    None
    
    NoneFirst Charter Bank
    
    
    266,296
    
    
    
    6.44
    
    
    
    165,327
    
    
    
    4.00
    
    
    $
    206,659
    
    
    
    5.00
    %
 The primary source of funds available to the Parent Company is payment of dividends from the
Bank. Banking laws and other regulations limit the amount of dividends a bank subsidiary may pay
without prior regulatory approval. At December 31, 2004, $21.0 million of the net assets of the
Bank were available for payment as dividends without prior regulatory approval. Subsidiary net
assets of $292.3 million were restricted as to payments to the Parent Company at December 31, 2004. During the third quarter of 2003, the Bank entered into a written agreement (the Written
Agreement) with the Federal Reserve Bank of Richmond (the
Federal Reserve Bank) and
the Office of the North Carolina Commissioner of Banks (the Banking Commissioner), the Banks
primary federal and state regulatory agencies. The Written Agreement required the Bank to take
appropriate actions to improve its programs and procedures for complying with the Currency and
Foreign Transactions Reporting Act and the anti-money laundering provisions of Regulation H of the
Board of Governors of the Federal Reserve System. The Bank subsequently took substantial actions,
and adopted and implemented a number of policies and procedures, to address the concerns
of the regulatory agencies. As a result of these actions, the Federal Reserve Bank, in concurrence
with the Banking Commissioner, terminated the Written Agreement effective July 2, 2004. Note Twenty-One -  First Charter Corporation (Parent Company) The principal assets of the Parent Company are its investment in the Bank, and its principal
source of income is dividends from the Bank. Certain regulatory and other requirements restrict the
lending of funds by the Bank to the Parent Company and the amount of dividends that can be paid to
the Parent Company. In addition, certain regulatory agencies may prohibit the payment of dividends
by the Bank if they determine that such payment would constitute an unsafe or unsound practice. 86




---



##### 



The Parent Companys condensed balance sheet data as of December 31, 2004 and 2003 and related
condensed statements of income and cash flow data for each of the years in the three-year period
ended December 31, 2004 are as follows: (Dollars in thousands)
    
    2004
    
    
    2003Balance sheet data:Cash
    
    $
    65,828
    
    
    $
    38,656Securities available for sale
    
    
    1,048
    
    
    
    3,831Investment in subsidiaries
    
    
    313,347
    
    
    
    301,874Receivable from subsidiaries
    
    
    6,000
    
    
    
    5,500Other assets
    
    
    5,480
    
    
    
    4,819Total assets
    
    $
    391,703
    
    
    $
    354,680Accrued liabilities
    
    $
    5,332
    
    
    $
    5,165Borrowed funds
    
    
    71,684
    
    
    
    50,076Shareholders equity
    
    
    314,687
    
    
    
    299,439Total liabilities and shareholders equity
    
    $
    391,703
    
    
    $
    354,680
 (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Income statement data:Dividends from subsidiaries
    
    $
    21,290
    
    
    $
    28,484
    
    
    $
    33,083Interest income
    
    
    50
    
    
    
    72
    
    
    
    172Noninterest income
    
    
    1,257
    
    
    
    37
    
    
    
    (3,914
    )Total income
    
    
    22,597
    
    
    
    28,593
    
    
    
    29,341Interest expense
    
    
    782
    
    
    
    597
    
    
    
    684Noninterest expense
    
    
    203
    
    
    
    67
    
    
    
    86Total expense
    
    
    985
    
    
    
    664
    
    
    
    770Income before income tax and equity in undistributednet income of subsidiaries
    
    
    21,612
    
    
    
    27,929
    
    
    
    28,571Income tax expense (benefit)
    
    
    110
    
    
    
    (105
    )
    
    
    (1,232
    )Income before equity in undistributednet income of subsidiaries
    
    
    21,502
    
    
    
    28,034
    
    
    
    29,803Equity in undistributed (excess of dividends over)net income of subsidiaries
    
    
    20,940
    
    
    
    (13,888
    )
    
    
    10,000Net income
    
    $
    42,442
    
    
    $
    14,146
    
    
    $
    39,803
 (Dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002Cash flow statement data:Cash flows from operating activities:Net income
    
    $
    42,442
    
    
    $
    14,146
    
    
    $
    39,803Net gain on securities available for sale
    
    
    (1,362
    )
    
    
    (226
    )
    
    
    (1,806
    )Increase (decrease) in accrued liabilities
    
    
    167
    
    
    
    (185
    )
    
    
    (222
    )(Increase) decrease in other assets
    
    
    (97
    )
    
    
    469
    
    
    
    4,980(Increase) decrease in receivable from subsidiaries
    
    
    (500
    )
    
    
    1,500
    
    
    
    1,000(Equity in undistributed) excess of dividends paid over
net income of subsidiaries
    
    
    (20,440
    )
    
    
    12,388
    
    
    
    (11,000
    )Net cash provided by operating activities
    
    
    20,210
    
    
    
    28,092
    
    
    
    32,755Cash flows from investing activities:Purchase of securities available for sale
    
    
    (46
    )
    
    
    
    
    
    
    (6
    )Proceeds from sale of securities available for sale
    
    
    2,746
    
    
    
    577
    
    
    
    5,954Proceeds from sale of property
    
    
    
    
    
    
    
    
    
    
    95Other investing activities
    
    
    
    
    
    
    (9
    )
    
    
    Net cash provided by investing activities
    
    
    2,700
    
    
    
    568
    
    
    
    6,043Cash flows from financing activities:Purchase and retirement of common stock
    
    
    
    
    
    
    (10,623
    )
    
    
    (13,894
    )Proceeds from issuance of common stock
    
    
    5,019
    
    
    
    1,700
    
    
    
    1,596Net increase in other borrowings
    
    
    21,608
    
    
    
    16,711
    
    
    
    1,505Dividends paid
    
    
    (22,365
    )
    
    
    (22,038
    )
    
    
    (22,237
    )Net cash provided by (used in) financing activities
    
    
    4,262
    
    
    
    (14,250
    )
    
    
    (33,030
    )Net increase in cash
    
    
    27,172
    
    
    
    14,410
    
    
    
    5,768Cash at beginning of year
    
    
    38,656
    
    
    
    24,246
    
    
    
    18,478Cash at end of year
    
    $
    65,828
    
    
    $
    38,656
    
    
    $
    24,246
 87




---



##### 



Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None 
 Item 9A.Controls and Procedures Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, an evaluation of the effectiveness of the
Registrants disclosure controls and procedures (as defined in Rule 13(a)-15(e) and 15d-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act)) was
performed under the supervision and with the participation of the Registrants management,
including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the
Registrants Chief Executive Officer and Chief Financial Officer have concluded that the
Registrants disclosure controls and procedures were effective to ensure that information required
to be disclosed by the Registrant in its reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
Exchange Commission rules and forms. Managements Annual Report on Internal Control Over Financial Reporting The Registrants management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rule 13a  15(f) and 15d-15(f) promulgated under
the Exchange Act). Under the supervision and with the participation of the Registrants management,
including the Registrants Chief Executive Officer and Chief Financial Officer, the Registrants
Management conducted an assessment of the effectiveness of its internal control over financial
reporting based on the criteria set forth in the Internal Control  Integrated Frameworkissued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on that
assessment, the Registrants management concluded that its internal control over financial
reporting was effective as of December 31, 2004. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate. As stated in its report, KPMG LLP, the Registrants independent registered public accounting
firm, has issued an attestation report on the assessment performed by the Registrants management
with respect to the Registrants internal control over financial
reporting, which begins on page 49
of this report and is incorporated herein by reference. Change in Internal Control Over Financial Reporting During the Registrants fourth fiscal quarter, there has been no change in the Corporations
internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) promulgated
under the Exchange Act) that has materially affected, or is reasonably likely to materially affect,
the Registrants internal controls over financial reporting. 
 Item 9B.Other Information None 
 PART III 
 Item 10.Directors and Executive Officers of the Registrant The information called for by Item 10 with respect to directors and Section 16 matters is set
forth in the Registrants Proxy Statement for its 2005 Annual Meeting of Shareholders under the
captions Election of 88




---



##### 



Directors, and Section 16(a) Beneficial Ownership Reporting Compliance,
respectively, and is incorporated herein by reference. The information called for by Item 10 with
respect to executive officers is set forth in Part I, Item 4A hereof. The information called for by
Item 10 with respect to the identification of the members of the Registrants Audit Committee, the
presence of an audit committee financial expert and the Registrants Code of Business Conduct and
Ethics is set forth in the Registrants Proxy Statement for its 2005 Annual Meeting of Shareholders
under the captions Committees of the Board of Directors and Corporate Governance Matters, and
is incorporated herein by reference. 
 Item 11.Executive Compensation The information called for by Item 11 is set forth in the Registrants Proxy Statement for its
2005 Annual Meeting of Shareholders under the captions Election of Directors, Executive
Compensation, Compensation Committee Interlocks and Insider Participation in Compensation
Decisions and Report of the Compensation Committee on Executive Compensation, respectively, and
is incorporated herein by reference. 
 Item 12.Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters The information called for by Item 12 is set forth in the Registrants Proxy Statement for its
2005 Annual Meeting of Shareholders under the captions Approval of Amendment to First Charter
Corporation 2000 Omnibus Stock Option and Award Plan and Ownership of Common Stock,
respectively, and is hereby incorporated by reference. 
 Item 13.Certain Relationships and Related Transactions The information called for by Item 13 is set forth in the Registrants Proxy Statement for its
2005 Annual Meeting of Shareholders under the captions Compensation Committee Interlocks and
Insider Participation in Compensation Decisions and Certain Relationships and Related
Transactions and is incorporated herein by reference. 
 Item 14.Principal Accountant Fees and Services The information called for by Item 14 is set forth in the Registrants Proxy Statement for its
2005 Annual Meeting of Shareholders under the caption Ratification of Independent Certified Public
Accountants,  and is incorporated herein by reference. 89




---



##### 



PART IV 
 Item 15.Exhibits and Financial Statement Schedules The following documents are filed as part of this report: (1) Financial Statements: PageReports of Independent Registered Public Accounting Firm
    
    
    49Consolidated Balance Sheets, December 31, 2004 and 2003
    
    
    52Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002
    
    
    53Consolidated Statements of Shareholders Equity for the years ended December 31, 2004,
2003 and 2002
    
    
    54Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    55Notes to Consolidated Financial Statements
    
    
    56
 (2) Financial Statement Schedules: None 90




---



##### 



(3) Exhibits. Exhibit No.(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits3.1
    
    Amended and Restated Articles of Incorporation of the Registrant, incorporated herein by
reference to Exhibit 3.1 of the Registrants Quarterly Report on Form 10-Q for the quarter
ended March 31, 2004 (Commission File No. 0-15829).3.2
    
    Amended and Restated By-laws of the Registrant, as amended, incorporated herein by reference
to Exhibit 3.2 of the Registrants Quarterly Report on Form 10-Q for the quarter ended March
31, 2004 (Commission File No. 0-15829).*10.1
    
    Comprehensive Stock Option Plan, incorporated herein by reference to Exhibit 10.1 of the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1992
(Commission File No. 0-15829).10.2
    
    Dividend Reinvestment and Stock Purchase Plan, incorporated herein by reference to Exhibit
99.1 of the Registrants Registration Statement No. 333-60641, dated August 8, 1998.*10.3
    
    Executive Incentive Bonus Plan, incorporated herein by reference to
Exhibit 10.3 of the Registrants Annual Report on Form 10-K for the
year ended December 31, 1998 (Commission File No. 0-15829.)*10.4
    
    Amended and Restated Employment Agreement dated December 19, 2001
for Lawrence M. Kimbrough, incorporated herein by reference to
Exhibit 10.4 of the Registrants Annual Report on Form 10-K for the
year ended December 31, 2001 (Commission File No. 0-15829).*10.5
    
    Amended and Restated Employment Agreement dated December 19, 2001
for Robert O. Bratton, incorporated herein by reference to Exhibit
10.5 of the Registrants Annual Report on Form 10-K for the year
ended December 31, 2001 (Commission File No. 0-15829).*10.6
    
    Amended and Restated Employment Agreement dated December 19, 2001
for Robert E. James, incorporated herein by reference to Exhibit
10.6 of the Registrants Annual Report on Form 10-K for the year
ended December 31, 2001 (Commission File No. 0-15829).*10.7
    
    Amended and Restated Supplemental Agreement dated December 19, 2001
for Lawrence M. Kimbrough, incorporated herein by reference to
Exhibit 10.8 of the Registrants Annual Report on Form 10-K for the
year ended December 31, 2001 (Commission File No. 0-15829).*10.8
    
    Amended and Restated Supplemental Agreement dated December 19, 2001
for Robert O. Bratton, incorporated herein by reference to Exhibit
10.9 of the Registrants Annual Report on Form 10-K for the year
ended December 31, 2001 (Commission File No. 0-15829).
 91




---



##### 



Exhibit No.(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits*10.9
    
    Amended and Restated Supplemental Agreement dated December 19, 2001
for Robert E. James, incorporated herein by reference to Exhibit
10.10 of the Registrants Annual Report on Form 10-K for the year
ended December 31, 2001 (Commission File No. 0-15829).*10.10
    
    Change in Control Agreement dated November 16, 1994 for Robert G.
Fox, Jr. incorporated herein by reference to Exhibit 10.7 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 1994 (Commission File No. 0-15829.)*10.11
    
    Restricted Stock Award Program, incorporated herein by reference to
Exhibit 99.1 of the Registrants Registration Statement No.
333-60949, dated July 10, 1995.*10.12
    
    The 1999 Employee Stock Purchase Plan, incorporated herein by
reference to the Registrants Registration Statement No. 333-54019,
dated May 29, 1998.*10.13
    
    The First Charter Corporation Comprehensive Stock Option Plan,
incorporated herein by reference to Exhibit 99.1 of the
Registrants Registration Statement No. 333-54021, dated May 29,
1998.*10.14
    
    The Stock Option Plan for Non-employee Directors, incorporated
herein by reference to Exhibit 24.2 of the Registrants
Registration Statement No. 333-54023, dated May 29, 1998.*10.15
    
    The Home Federal Savings and Loan Employee Stock Ownership Plan,
incorporated herein by reference to the Registrants Registration
Statement No. 333-71495, dated January 29, 1999.*10.16
    
    The HFNC Financial Corp. Stock Option Plan, incorporated herein by
reference to the Registrants Registration Statement No. 333-71497,
dated February 1, 1999.10.17
    
    Agreement and Plan of Merger by and between the Registrant and Carolina First Bancshares,
Inc. dated as of November 7, 1999, incorporated herein by reference to Appendix A of the
Registrants Registration Statement No. 333-95003 filed January 20, 1999.*10.18
    
    Amended and Restated Employment Agreement dated December 19, 2001
for Stephen M. Rownd, incorporated herein by reference to Exhibit
10.22 of the Registrants Annual Report on Form 10-K for the year
ended December 31, 2001 (Commission File No. 0-15829).*10.19
    
    The First Charter Corporation 2000 Omnibus Stock Option and Award
Plan, incorporated herein by reference to Exhibit 10.25 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 2000 (Commission File No. 0-15829).*10.20
    
    The First Charter 1994 Deferred Compensation Plan for Non-Employee
Directors, incorporated herein by reference to Exhibit 10.26 of the
Registrants
Annual Report on Form 10-K for the year ended December 31, 2000 (Commission
File No. 0-15829).
 92




---



##### 



Exhibit No.(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits*10.21
    
    The First Charter Option Plan Trust, incorporated herein by
reference to Exhibit 10.27 of the Registrants Annual Report on Form
10-K for the year ended December 31, 2000 (Commission File No.
0-15829).*10.22
    
    The Carolina First BancShares, Inc. Amended 1990 Stock Option Plan,
incorporated herein by reference to Exhibit 10.28 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 2000 (Commission File No. 0-15829).*10.23
    
    The Carolina First BancShares, Inc. 1999 Long-Term Incentive Plan,
incorporated herein by reference to Exhibit 10.29 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 2000 (Commission File No. 0-15829).*10.24
    
    Deferred Compensation Agreement dated as of February 18, 1993 by and
between Cabarrus Bank of North Carolina and Ronald D. Smith,
incorporated herein by reference to Exhibit 10.30 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 2000 (Commission File No. 0-15829).*10.25
    
    Deferred Compensation Agreement dated as of December 31, 1996 by and
between Carolina First BancShares, Inc. and James E. Burt, III,
incorporated herein by reference to Exhibit 10.31 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 2000 (Commission File No. 0-15829).*10.26
    
    Separation and Consulting Agreement between First Charter
Corporation and James E. Burt, III dated June 29, 2000, incorporated
herein by reference to Exhibit 10.32 of the Registrants Annual
Report on Form 10-K for the year ended December 31, 2000 (Commission
File No. 0-15829).*10.27
    
    Carolina First BancShares, Inc. Amended and Restated Directors
Deferred Compensation Plan, incorporated herein by reference to
Exhibit 10.33 of the Registrants Annual Report on Form 10-K for the
year ended December 31, 2000 (Commission File No. 0-15829).*10.28
    
    Amended and Restated Deferred Compensation Plan for Non-Employee
Directors, incorporated herein by reference to Exhibit 10.1 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended
June 30, 2001(Commission File No. 0-15829).*10.29
    
    First Charter Corporation Directors Option Deferral Plan,
incorporated herein by reference to Exhibit 10.35 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 2001 (Commission File No. 0-15829).*10.30
    
    Supplemental Agreement dated December 19, 2001 for Stephen M. Rownd,
incorporated herein by reference to Exhibit 10.37 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 2001 (Commission File No. 0-15829).10.31
    
    Stockholder Protection Rights Agreement dated July 19, 2000
incorporated herein by reference to the Corporations Current Report
on Form 8-K dated July 21, 2000.*10.32
    
    Form of Award Agreement for Incentive Stock Options Granted under
the First Charter Corporation 2000 Omnibus Stock Option and Award
Plan.
 93




---



##### 



Exhibit No.(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits*10.33
    
    Form of Award Agreement for Nonqualified Stock Options Granted under
the First Charter Corporation 2000 Omnibus Stock Option and Award
Plan.*10.34
    
    Form of First Charter Corporation Incentive Stock Option Agreement
Pursuant to First Charter Corporation Comprehensive Stock Option
Plan.*10.35
    
    Form of First Charter Corporation Nonqualified Stock Option
Agreement Pursuant to First Charter Corporation Comprehensive Stock
Option Plan.*10.36
    
    Form of First Charter Corporation Restricted Stock Award Agreement.11.1
    
    Statement regarding computation of per share earnings, incorporated
herein by reference to Footnote 1 of the Consolidated Financial
Statements.21.1
    
    List of subsidiaries of the Registrant.23.1
    
    Consent of KPMG LLP.31.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
   * Indicates a management contract or compensatory plan 94




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##### 



(THIS PAGE INTENTIONALLY LEFT BLANK)         95




---



##### 



SIGNATURES Pursuant to the requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST CHARTER CORPORATION(Registrant)
 By:
    /s/ Lawrence M. KimbroughLawrence M. Kimbrough, President andChief Executive Officer Date: March 11, 2005
 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates indicated: Signature
    
    Title
    
    Date/s/ Lawrence M. Kimbrough

(Lawrence M. Kimbrough)
    
    President, Chief Executive Officer
and Director (Principal Executive
Officer)
    
    March 11, 2005/s/ James E. Burt, III

(James E. Burt, III)
    
    Chairman of the Board
and Director
    
    March 11, 2005/s/ Michael R. Coltrane

(Michael R. Coltrane)
    
    Vice Chairman of the
Board and Director
    
    March 11, 2005/s/ Robert O. Bratton

(Robert O. Bratton)
    
    Executive Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
and Principal Accounting Officer)
    
    March 11, 2005/s/ Harold D. Alexander
    
    Director
    
    March 11, 2005(Harold D. Alexander)/s/ William R. Black

(William R. Black)
    
    Director
    
    March 11, 2005/s/ Jerry A. Felts

(Jerry A. Felts)
    
    Director
    
    March 11, 2005/s/ John J. Godbold, Jr.

(John J. Godbold, Jr.)
    
    Director
    
    March 11, 2005/s/ H. Clark Goodwin

(H. Clark Goodwin)
    
    Director
    
    March 11, 2005/s/ Charles A. James

(Charles A. James)
    
    Director
    
    March 11, 2005
 96




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##### 



Signature
    
    Title
    
    Date/s/ Walter H. Jones, Jr.

      (Walter H. Jones, Jr.)
    
    Director
    
    March 11, 2005/s/ Samuel C. King, Jr.

      (Samuel C. King, Jr.)
    
    Director
    
    March 11, 2005/s/ Jerry E. McGee

      (Jerry E. McGee)
    
    Director
    
    March 11, 2005/s/ Ellen L. Messinger

      (Ellen L. Messinger)
    
    Director
    
    March 11, 2005/s/ Hugh H. Morrison

      (Hugh H. Morrison)
    
    Director
    
    March 11, 2005/s/ Thomas R. Revels

      (Thomas R. Revels)
    
    Director
    
    March 11, 2005/s/ L. D. Warlick, Jr.

      (L. D. Warlick, Jr.)
    
    Director
    
    March 11, 2005/s/ William W. Waters

      (William W. Waters)
    
    Director
    
    March 11, 2005
 97




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##### 



(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits3.1
    
    Amended and Restated Articles of Incorporation of the Registrant, incorporated herein by
reference to Exhibit 3.1 of the Registrants Quarterly Report on Form 10-Q for the quarter ended
March 31, 2004 (Commission File No. 0-15829).3.2
    
    Amended and Restated By-laws of the Registrant, as amended, incorporated herein by reference to Exhibit 3.2 of the
Registrants Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (Commission File No. 0-15829).*10.1
    
    Comprehensive Stock Option Plan, incorporated herein by reference to Exhibit 10.1 of the
Registrants Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (Commission
File No. 0-15829).10.2
    
    Dividend Reinvestment and Stock Purchase Plan, incorporated herein by reference to Exhibit 99.1
of the Registrants Registration Statement No. 333-60641, dated August 8, 1998.*10.3
    
    Executive Incentive Bonus Plan, incorporated herein by reference to Exhibit 10.3 of the
Registrants Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No.
0-15829.)*10.4
    
    Amended and Restated Employment Agreement dated December 19, 2001 for Lawrence M. Kimbrough,
incorporated herein by reference to Exhibit 10.4 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 2001 (Commission File No. 0-15829).*10.5
    
    Amended and Restated Employment Agreement dated December 19, 2001 for Robert O. Bratton,
incorporated herein by reference to Exhibit 10.5 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 2001 (Commission File No. 0-15829).*10.6
    
    Amended and Restated Employment Agreement dated December 19, 2001 for Robert E. James,
incorporated herein by reference to Exhibit 10.6 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 2001 (Commission File No. 0-15829).*10.7
    
    Amended and Restated Supplemental Agreement dated December 19, 2001 for Lawrence M. Kimbrough,
incorporated herein by reference to Exhibit 10.8 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 2001 (Commission File No. 0-15829).*10.8
    
    Amended and Restated Supplemental Agreement dated December 19, 2001 for Robert O. Bratton,
incorporated herein by reference to Exhibit 10.9 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 2001 (Commission File No. 0-15829).
 98




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##### 



(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits*10.9
    
    Amended and Restated Supplemental Agreement dated December 19, 2001 for Robert E. James,
incorporated herein by reference to Exhibit 10.10 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 2001 (Commission File No. 0-15829).*10.10
    
    Change in Control Agreement dated November 16, 1994 for Robert G. Fox, Jr. incorporated herein by
reference to Exhibit 10.7 of the Registrants Annual Report on Form 10-K for the year ended
December 31, 1994 (Commission File No. 0-15829.)*10.11
    
    Restricted Stock Award Program, incorporated herein by reference to Exhibit 99.1 of the
Registrants Registration Statement No. 333-60949, dated July 10, 1995.*10.12
    
    The 1999 Employee Stock Purchase Plan, incorporated herein by reference to the Registrants
Registration Statement No. 333-54019, dated May 29, 1998.*10.13
    
    The First Charter Corporation Comprehensive Stock Option Plan, incorporated herein by reference
to Exhibit 99.1 of the Registrants Registration Statement No. 333-54021, dated May 29, 1998.*10.14
    
    The Stock Option Plan for Non-employee Directors, incorporated herein by reference to Exhibit
24.2 of the Registrants Registration Statement No. 333-54023, dated May 29, 1998.*10.15
    
    The Home Federal Savings and Loan Employee Stock Ownership Plan, incorporated herein by reference
to the Registrants Registration Statement No. 333-71495, dated January 29, 1999.*10.16
    
    The HFNC Financial Corp. Stock Option Plan, incorporated herein by reference to the Registrants
Registration Statement No. 333-71497, dated February 1, 1999.10.17
    
    Agreement and Plan of Merger by and between the Registrant and Carolina First Bancshares, Inc.
dated as of November 7, 1999, incorporated herein by reference to Appendix A of the Registrants
Registration Statement No. 333-95003 filed January 20, 1999.*10.18
    
    Amended and Restated Employment Agreement dated December 19, 2001 for Stephen M. Rownd,
incorporated herein by reference to Exhibit 10.22 of the Registrants Annual Report on Form 10-K
for the year ended December 31, 2001 (Commission File No. 0-15829).*10.19
    
    The First Charter Corporation 2000 Omnibus Stock Option and Award Plan, incorporated herein by
reference to Exhibit 10.25 of the Registrants Annual Report on Form 10-K for the year ended
December 31, 2000 (Commission File No. 0-15829).*10.20
    
    The First Charter 1994 Deferred Compensation Plan for Non-Employee Directors, incorporated herein
by reference to Exhibit 10.26 of the Registrants Annual Report on Form 10-K for the year ended
December 31, 2000 (Commission File No. 0-15829).
 99




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##### 



(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits*10.21
    
    The First Charter Option Plan Trust, incorporated herein by
reference to Exhibit 10.27 of the Registrants Annual Report
on Form 10-K for the year ended December 31, 2000 (Commission
File No. 0-15829).*10.22
    
    The Carolina First BancShares, Inc. Amended 1990 Stock Option
Plan, incorporated herein by reference to Exhibit 10.28 of the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2000 (Commission File No. 0-15829).*10.23
    
    The Carolina First BancShares, Inc. 1999 Long-Term Incentive
Plan, incorporated herein by reference to Exhibit 10.29 of the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2000 (Commission File No. 0-15829).*10.24
    
    Deferred Compensation Agreement dated as of February 18, 1993
by and between Cabarrus Bank of North Carolina and Ronald D.
Smith, incorporated herein by reference to Exhibit 10.30 of
the Registrants Annual Report on Form 10-K for the year ended
December 31, 2000 (Commission File No. 0-15829).*10.25
    
    Deferred Compensation Agreement dated as of December 31, 1996
by and between Carolina First BancShares, Inc. and James E.
Burt, III, incorporated herein by reference to Exhibit 10.31
of the Registrants Annual Report on Form 10-K for the year
ended December 31, 2000 (Commission File No. 0-15829).*10.26
    
    Separation and Consulting Agreement between First Charter
Corporation and James E. Burt, III dated June 29, 2000,
incorporated herein by reference to Exhibit 10.32 of the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2000 (Commission File No. 0-15829).*10.27
    
    Carolina First BancShares, Inc. Amended and Restated
Directors Deferred Compensation Plan, incorporated herein by
reference to Exhibit 10.33 of the Registrants Annual Report
on Form 10-K for the year ended December 31, 2000 (Commission
File No. 0-15829).*10.28
    
    Amended and Restated Deferred Compensation Plan for
Non-Employee Directors, incorporated herein by reference to
Exhibit 10.1 of the Registrants Quarterly Report on Form 10-Q
for the quarter ended June 30, 2001(Commission File No.
0-15829).*10.29
    
    First Charter Corporation Directors Option Deferral Plan,
incorporated herein by reference to Exhibit 10.35 of the
Registrants Annual Report on Form 10-K for the year ended
December 31, 2001 (Commission File No. 0-15829).*10.30
    
    Supplemental Agreement dated December 19, 2001 for Stephen M.
Rownd, incorporated herein by reference to Exhibit 10.37 of
the Registrants Annual Report on Form 10-K for the year ended
December 31, 2001 (Commission File No. 0-15829).10.31
    
    Stockholder Protection Rights Agreement dated July 19, 2000
incorporated herein by reference to the Corporations Current
Report on Form 8-K dated July 21, 2000.*10.32
    
    Form of Award Agreement for Incentive Stock Options Granted
under the First Charter Corporation 2000 Omnibus Stock Option
and Award Plan.
 100




---



##### 



(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits*10.33
    
    Form of Award Agreement for Nonqualified Stock Options Granted
under the First Charter Corporation 2000 Omnibus Stock Option
and Award Plan.*10.34
    
    Form of First Charter Corporation Incentive Stock Option
Agreement Pursuant to First Charter Corporation Comprehensive
Stock Option Plan.*10.35
    
    Form of First Charter Corporation Nonqualified Stock Option
Agreement Pursuant to First Charter Corporation Comprehensive
Stock Option Plan.*10.36
    
    Form of First Charter Corporation Restricted Stock Award
Agreement.11.1
    
    Statement regarding computation of per share earnings,
incorporated herein by reference to Footnote 1 of the
Consolidated Financial Statements.21.1
    
    List of subsidiaries of the Registrant.23.1
    
    Consent of KPMG LLP.31.1
    
    Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.32.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
   *
    
    Indicates a management contract or compensatory plan 101