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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 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
  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
    
    56-1355866(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification No.)
 10200 David Taylor Drive, Charlotte, NC
    
    28262-2373(Address of Principal Executive Offices)
    
    (Zip Code)
 Registrants telephone number, including area code (704) 688-4300 Securities registered pursuant to Section 12(b) of the Act: Title of each class
    
    Name of each exchange on which
registeredN/A
    
    N/A
 Securities registered pursuant to Section 12(g) of the Act: Common stock, no par value Series X Junior Participating Preferred Stock Purchase Rights 
  Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes 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, 2003 was $479,489,405. As
of March 5, 2004 the Registrant had outstanding 29,735,990 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 2004 Annual Meeting of Shareholders to be held on April 28, 2004.
(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, 2003 TABLE OF CONTENTS PagePART IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    9Item 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 Stock and Related Shareholder Matters
    
    
    11Item 6.
    
    Selected Financial Data
    
    
    11Item 7.
    
    Managements Discussion and Analysis of Financial Conditions and Results of Operations
    
    
    11Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    47Item 8.
    
    Financial Statements and Supplementary Data
    
    
    48Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    84Item 9A.
    
    Controls and Procedures
    
    
    84PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    84Item 11.
    
    Executive Compensation
    
    
    84Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    85Item 13.
    
    Certain Relationships and Related Transactions
    
    
    85Item 14.
    
    Principal Accountant Fees and Services
    
    
    85PART IVItem 15.
    
    Exhibits, Financial Statement Schedules and Reports on Form 8-K
    
    
    86
 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 Bank accounts
for over 98 percent of the Registrants consolidated assets and consolidated
revenues. The principal executive offices of the Corporation are located at
10200 David Taylor Drive, Charlotte, North Carolina 28262. Its telephone number
is (704) 688-4300. FCB, a North Carolina state bank, is the successor entity to The Concord
National Bank, which was established in 1888. On 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 continued to operate its financial center network franchise under the
First Charter brand name. FCB is a full service bank, which now operates 54 financial centers, five
insurance offices and one mortgage origination office in addition to its main
office, as well as 93 ATMs (automated teller machines). These facilities are
located in Ashe, Alleghany, Avery, Buncombe, Cabarrus, Cleveland, Guilford,
Iredell, Jackson, Lincoln, McDowell, Mecklenburg, Rowan, Rutherford, Swain,
Transylvania and Union counties of North Carolina. 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, 2003, the unemployment rate for the Charlotte Metro region
was 6.2 percent compared to 6.1 percent for the state of North Carolina.
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 non-interest bearing checking
accounts; Money Market Rate accounts; certificates of deposit; individual
retirement accounts; overdraft protection; commercial, consumer, agriculture,
real estate, residential mortgage and home equity loans; personal and corporate
trust services; safe deposit boxes; and automated banking. In addition, through First Charter Brokerage Services, 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 3




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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. At December 31, 2003, the Registrant and its subsidiaries had 1,031
full-time equivalent employees. The Registrant had no employees who were not
also employees of FCB. The Registrant considers its relations with its
employees to be good. As part of its operations, the Registrant is not dependent upon a single
customer or a few customers whose loss would have a material adverse effect on
the Registrant. As part of its operations, the Registrant regularly holds discussions and
evaluates the potential acquisition of, or merger with, various financial
institutions. In addition, the Registrant periodically enters new markets and
engages in new activities in which it competes with established financial
institutions. There can be no assurance as to the success of any such new
office or activity. Furthermore, as the result of such expansions, the
Registrant may from time to time incur start-up costs that could affect the
financial results of the Registrant. Competition The banking laws of North Carolina allow banks located in North Carolina
to develop branches throughout the state. In addition, out-of-state
institutions may open de novo branches in North Carolina as well as acquire or
merge with institutions located in North Carolina. As a result of such laws,
banking activities in North Carolina are highly competitive. FCBs service delivery facilities are located in Ashe, Alleghany, Avery,
Buncombe, Cabarrus, Cleveland, Guilford, Iredell, Jackson, Lincoln, McDowell,
Mecklenburg, Rowan, Rutherford, Swain, Transylvania and Union counties of North
Carolina. These locations also have numerous branches of money-center,
super-regional, regional, and statewide institutions, some of which have a
major presence in Charlotte. In its market area, the Registrant faces
competition from other banks, savings and loan associations, savings banks,
credit unions, finance companies and major retail stores that offer competing
financial services. Many of these competitors have greater resources, broader
geographic coverage and higher lending limits than the Bank. The Banks primary
method of competition is to provide quality service and fairly priced products. Government Supervision and Regulation General. As a registered bank holding company, the Registrant is subject
to the supervision of and regular inspection by, the Board of Governors of the
Federal Reserve System (the Federal Reserve). The Corporation is a North
Carolina chartered banking corporation and a Federal Reserve member bank, with
deposits insured by the Federal Deposit Insurance Corporations (FDIC)
insurance funds: the Bank Insurance Fund (BIF) and the Savings Association
Insurance Fund (SAIF). FCB is subject to extensive regulation and examination
by the Office of the 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. 4




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In addition to state and federal banking laws, regulations and regulatory
agencies, the Corporation and FCB are subject to various other laws and
regulations and supervision and examination by other regulatory agencies, all
of which directly or indirectly affect the Corporations operations, management
and ability to make distributions. The following discussion summarizes certain
aspects of those laws and regulations that affect the Corporation. 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 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 customers 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. 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 broadens existing anti-money laundering
legislation and the extraterritorial jurisdiction of the United States, imposes
new compliance and due diligence obligations, creates new crimes and penalties,
compels 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 clarifies 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 addresses corporate governance and securities reporting
requirements. Among its requirements are 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. 6




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Capital and Operational Requirements The Federal Reserve and the FDIC issued substantially similar minimum
capital adequacy standards of which both the Corporation and the Bank must
comply. The risk-based guidelines define a 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, 2003, 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, 2003 were 10.00 percent and 10.97 percent, respectively.
The Corporation did not have any subordinated debt that qualified as Tier 3
Capital at December 31, 2003. The leverage ratio is calculated by dividing Tier 1 Capital by adjusted
total assets. The Corporations leverage ratio at December 31, 2003 was 6.53
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 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, 2003. See Note Nineteen
of the consolidated financial statements. 7




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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 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 system. Under this system, the assessment rates for an insured
depository institution vary according to the level of risk incurred in its
activities. To arrive at a risk assessment for a banking institution, the FDIC
places it in one of nine risk categories using
a process based on capital ratios and on other relevant information from
supervisory evaluations of the bank by the banks primary federal regulator,
the Federal Reserve, statistical analyses of financial statements and other
relevant information. The deposits of FCB are insured by the BIF, administered by the FDIC.
Under the FDICs risk-based insurance system, assessments currently can range
from no assessment to an assessment of 27 basis points per $100 of insured
deposits, with the exact assessment determined by 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.
However, the FDIC has publicly stated that its BIF will soon fall below its
mandatory reserve limit and that such an event would likely trigger additional
premiums for all banks. At this time, the amount of any future premiums
required to be paid by FCB is not known. Source of Strength. According to Federal Reserve policy, bank holding
companies are expected to act as a source of financial strength to subsidiary
banks and to commit resources to support each such subsidiary. This support may
be required at times when a bank holding company may not be able to provide
such support. Similarly, under the cross-guaranty provisions of the Federal
Deposit Insurance Act, in the event of a loss suffered or anticipated by the
FDIC, either as a result of default of a banking or thrift subsidiary of the
Corporation or related to FDIC assistance provided to a subsidiary in danger of
default, 8




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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 with the Federal Reserve Bank of Richmond and the Office of the North
Carolina Commissioner of Banks, the Banks primary federal and state regulatory
agencies. The agreement arises out of certain previously disclosed regulatory
examinations and requires 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
has subsequently taken substantial actions, and adopted and implemented a
number of policies and procedures, to address the concerns of the regulatory
agencies. Other Considerations There are particular risks and uncertainties that are applicable to an
investment in our common stock. Specifically, there are risks and uncertainties
that bear on our future financial results that may cause our future earnings
and financial condition to be less than our expectations. Some of the risks and
uncertainties relate to economic conditions generally, and would affect other
financial institutions in similar ways. These aspects are discussed under the
heading Factors that May Affect Future Results in the accompanying
Managements Discussion and Analysis of Financial Condition and Results of
Operations. This section addresses particular risks and uncertainties that are
specific to our business. 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 54 financial centers, five
insurance offices and 93 ATMs located in 17
counties throughout North Carolina. As of December 31, 2003, the Corporation
and its subsidiaries owned 36 financial center locations, leased 18 financial
center locations and leased five 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 our third party benefits
administrator. 9




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##### 



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, 2003. Item 4A.Executive Officers of the Registrant The following list sets forth with respect to each of the current
executive officers of the registrant his or her name, age, positions and
offices held with the Registrant and the 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. Year PositionName
    
    Age
    
    Office and Position
    
    HeldLawrence M. Kimbrough
    
    
    63
    
    
    President and Chief Executive Officer
of the Registrant  and FCB
    
    1986 - PresentRobert O. Bratton
    
    
    55
    
    
    Executive Vice President, Chief
Financial Officer,  Treasurer of the
Registrant and Executive Vice
President  of FCB
    
    1983 - PresentRobert E. James, Jr.
    
    
    53
    
    
    Executive Vice President of the
Registrant and Executive  Vice
President of FCB
    
    1999 - PresentStephen M. Rownd
    
    
    44
    
    
    Executive Vice President
of the Registrant and Executive
  Vice President and Chief
Credit Officer of FCB
    
    2001 - PresentDirector of Risk Management,
SunTrust Banks, Inc.
    
    1999 - 2001Executive Vice President and
Chief Credit Officer,  SunTrust
Bank of Gulf Coast
    
    1996 - 1999
 10




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##### 



PART II Item 5.Market For Registrants Common Stock and Related Shareholder Matters The principal market on which the Common Stock is traded is the Nasdaq
National Market. The following table sets forth the high and low sales prices
of the Common Stock for the periods indicated, as reported on the Nasdaq
National Market: Quarter
    
    High
    
    Low2002
    
    first
    
    $
    19.45
    
    
    $
    16.75second
    
    
    20.57
    
    
    
    17.30third
    
    
    17.99
    
    
    
    15.33fourth
    
    
    19.19
    
    
    
    16.052003
    
    first
    
    
    19.40
    
    
    
    17.25second
    
    
    19.56
    
    
    
    16.69third
    
    
    20.40
    
    
    
    17.04fourth
    
    
    21.20
    
    
    
    19.27
 As
of March 5, 2004, there were 7,660 record holders of the Corporations
Common Stock. During 2002 and 2003, 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
    
    Dividend2002
    
    first
    
    $
    0.180second
    
    
    0.180third
    
    
    0.185fourth
    
    
    0.1852003
    
    first
    
    
    0.185second
    
    
    0.185third
    
    
    0.185fourth
    
    
    0.185
 For additional information regarding the Corporations ability to pay
dividends, see Managements Discussion and Analysis of Financial Condition and
Results of Operations  Capital Resources. 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. 11




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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 our 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) decisions to change the business mix of 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 54 financial
centers and five insurance offices located in 17 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 economic diversity of the region; however, North Carolina was one of the
states hardest hit by the recent recession. Over the last two years, personal
income growth in North Carolina of 4.63 percent lagged the growth of its
neighbors, Georgia, 6.23 percent, and Virginia, 6.06 percent. 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. Currently, the finance and
insurance industries have shown the most growth. The unemployment rate for the
Charlotte Metro region was 6.2 percent in December 2003 compared to 5.7 percent

in December 2002. This is the result of several layoffs in the manufacturing
sector. The increased unemployment rates reflect the structural changes taking
place in the economy of the Charlotte Metro region. The service industry is now
the major employer followed by wholesale and retail trade. Two other sectors
have begun to emerge as significant contributors, education and health services
along with the leisure and hospitality sectors. While commercial real estate
lending is still not at levels seen before the recession, there has been an
increase in activity. During the third quarter, there was some speculative
development and a steady stream of property acquisitions and expansions in the
office, mixed use, retail and industrial sectors. For those areas suffering
from the decline of manufacturing, not only is unemployment high, but there is
also a large amount of textile manufacturing and warehouse space on the market. 12




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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 non-interest 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 93 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. First Charter Brokerage Services offers full service and discount
brokerage services, 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
our 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. Improving the net interest margin is critical to the Corporations
strategy to grow earnings. The declining interest rate environment has
continued to compress the net interest margin as assets repriced faster than
liabilities due to the asset sensitive nature of the Corporations balance
sheet. In addition, the margin was impacted by lower effective yields on
mortgage-backed securities due to increased amortization of premiums resulting
from increased prepayment speeds of the underlying mortgages. The Corporation
has recently taken major steps towards improving earnings. In 2003, the
Corporation prepaid $131 million in longer-term, fixed rate Federal Home Loan
Bank (FHLB) advances to improve the net interest margin. The Corporation also
restructured the securities available for sale portfolio to stabilize cash
flows and improve the effective yields in the portfolio. In addition, during
the first quarter of 2004, the Corporation entered into a series of interest
rate swap agreements which is expected to lower interest expense in 2004. Maintaining sound asset quality is a major focus for the Corporation.
Several steps were taken in 2003 to improve asset quality. The Corporation sold
$60.9 million in nonaccruing and accruing higher risk loans to improve the
asset quality of the loan portfolio and to contain the financial risk of these
loans. The Corporation anticipated that significant future collections costs
would be eliminated while allowing the Corporation to focus additional efforts
on growing traditional banking activities and additional sources of income
discussed above. Also, the Corporation sold its $11.7 million credit card
portfolio in the first quarter of 2003. The sale of the consumer credit card
balances was a strategic decision that will allow First Charter to continue to
offer a First Charter credit card through MBNA and continue to receive ongoing
fee income. These changes are expected to reduce the credit risk profile of the
Corporation, which should have a positive impact on earnings. 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 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 Corporation. The Corporation faces the challenge of retaining existing customers and
attracting new customers. The Corporations primary methods of competition are
to provide exceptional customer service and fairly priced products. The
Corporation uses a quarterly independent survey of customers to review its
level of customer service. For 2003, customer satisfaction scores surpassed the
Corporations threshold of 75 percent very satisfied. The Corporation
experienced a 19 percent decrease in the customer attrition ratio and increased
opportunities to expand relationships with our customers. Our main strategy for
obtaining new customers is our Checking Account Marketing Program (CHAMP), a
continuous direct mailing 13




---



##### 



campaign. Its success has provided the Corporation
with opportunities to develop new customer relationships to generate additional
fee income and to shift our funding mix towards lower-cost funding sources. To
meet the needs of existing and potential customers, the Corporation upgraded
five branches, opened one new branch, provided extend hours in select branches
and its call center and added bilingual personnel. The Corporation will
continue to update existing branch and expand into new areas as both market and
economic conditions warrant. Another challenge for the Corporation is growing fee income through other
lines of business. These sources of income provide stability to our earnings
with minimal credit risk and less exposure to interest rate risk than our
community banks traditional lines of business. In addressing this challenge,
the Corporation acquired two insurance agencies to expand the reach of our
insurance products with businesses and individuals throughout the Charlotte
Metro region. In addition, the Corporation acquired a third party benefits
administrator which adds new customers, expands our product line and improves
our technology platform. As a result of the growth in our other lines of
business, we experienced increases in noninterest income in 2003. The
Corporation continuously reviews other opportunities for expansion as
conditions warrant. Financial Summary In 2003, the results of operations were impacted by several significant
events. They include the sale of $60.9 million in nonaccruing and accruing
higher risk loans to investors in June 2003 (the June Loan Sale), the sale of
the Corporations credit card portfolio, the restructuring of the securities
available for sale portfolio and the prepayment of FHLB longer-term fixed rate
advances. The June Loan Sale significantly improved the asset quality of the loan
portfolio and contained the future financial risk of these loans. The effect of
the June Loan Sale negatively impacted the provision for loan losses which is
discussed in more detail throughout this section. In the first quarter of 2003, the Corporation sold its $11.7 million
credit card portfolio for a gain of $2.3 million. The sale of the consumer
credit card balances was a strategic decision that allows First Charter to
continue to offer a First Charter credit card through MBNA and continue to
receive ongoing fee income. In addition, the sale of the credit card portfolio
improved asset quality as these loans had a higher percentage of allocated
allowance for loan losses due to their unsecured nature and higher historical
loss experience. During 2003, the Corporation identified approximately $12.8 million of
residential rental property loans that appeared to have questionable appraisals
and collateral value. As a result, the Corporation increased the provision for
loan losses by approximately $2.4 million. During early 2003, the mortgage-backed securities portfolio produced lower
effective yields due to increased amortization of premiums resulting from
increased prepayment speeds. As a result, the Corporation restructured the
portfolio to stabilize cash flows and improve the effective yields in the
portfolio. Given the low interest rate environment in 2003, the Corporation prepaid
$131 million of longer-term, fixed-rate FHLB advances. These prepayments are
expected to lower interest expense $4.7 million or $.11 per diluted share
(after-tax) in 2004. 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 several factors. Noninterest expense increased $29.3 million primarily
due to $19.1 million of costs associated with the prepayment of FHLB advances,
increased professional fees and higher salaries and employee benefits.
Provision for loan losses increased $19.2 million due to the June Loan Sale,
adverse business conditions and increases in the loan portfolio. Historically
low interest rates have compressed the net interest margin during 2003,
resulting in a $5.4 million decline in net interest income. A $16.5 million
increase in noninterest income was due to continued gains in service 14




---



##### 



charges on
deposit accounts, financial management, brokerage, insurance, mortgage and
income from Bank Owned Life Insurance (BOLI). Income tax expense declined
$11.7 million due to a decrease in income and the effective tax rate. During 2003, the Corporation experienced strong core business fundamentals
in the areas of deposits and customer satisfaction that have created momentum
for 2004. The success of CHAMP resulted in 40,995 new checking accounts being
opened, which represents a 113 percent increase over 2002. In addition, during
2003, core retail households increased 24 percent to 79,985 primarily due to
CHAMP. The results of our customer satisfaction survey remained above 80
percent very satisfied during 2003. In addition, the customer attrition ratio
decreased 19 percent, which increased opportunities to expand relationships
with our customers. For the three months ended December 31, 2003, First Charter reported a net
loss of $0.5 million or $0.02 per diluted share, a decrease from earnings of
$10.5 million or $0.35 per diluted share for the same period in 2002. Earnings
were impacted by several factors. Noninterest expense increased $13.8 million
due to $11.7 million of costs associated with the prepayment of FHLB advances
as compared to $3.3 million in 2002, increased professional fees and higher
salaries and employee benefits. Provision for loan losses increased $1.4
million primarily due to increases in the loan portfolio. Noninterest income
declined $2.8 million. Increases in services charges, financial management
income, insurance income, brokerage income and BOLI were more than offset by
declines in gains on sales of securities and trading gains. Net income was
positively impacted by a $6.0 million decrease in income tax expense resulting
from decreases in income and the 2003 effective tax rate. Net interest income
increased $0.9 million. A decline in interest income was more than offset by a
decline in interest expense due to a shift in the deposit mix from higher-cost
certificates of deposit to low-cost core deposits and the effects of
refinancing FHLB long-term fixed rate advances. 15




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##### 



Table One
Selected Financial Data Years ended December 31,(Dollars in thousands, except per share amounts)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Income statementInterest income
    
    $
    178,292
    
    
    $
    196,388
    
    
    $
    215,276
    
    
    $
    216,143
    
    
    $
    194,271Interest expense
    
    
    70,490
    
    
    
    83,227
    
    
    
    109,912
    
    
    
    108,314
    
    
    
    90,299Net interest income
    
    
    107,802
    
    
    
    113,161
    
    
    
    105,364
    
    
    
    107,829
    
    
    
    103,972Provision for loan losses
    
    
    27,518
    
    
    
    8,270
    
    
    
    4,465
    
    
    
    7,615
    
    
    
    5,005Noninterest income
    
    
    64,180
    
    
    
    47,631
    
    
    
    38,773
    
    
    
    30,666
    
    
    
    28,795Noninterest expense
    
    
    127,032
    
    
    
    97,772
    
    
    
    87,579
    
    
    
    92,727
    
    
    
    75,991Income before income taxes
    
    
    17,432
    
    
    
    54,750
    
    
    
    52,093
    
    
    
    38,153
    
    
    
    51,771Income taxes
    
    
    3,286
    
    
    
    14,947
    
    
    
    16,768
    
    
    
    13,312
    
    
    
    16,480Net income
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    35,325
    
    
    $
    24,841
    
    
    $
    35,291Per common shareBasic net income
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.12
    
    
    $
    0.79
    
    
    $
    1.12Diluted net income
    
    
    0.47
    
    
    
    1.30
    
    
    
    1.12
    
    
    
    0.79
    
    
    
    1.11Cash dividends declared (1)
    
    
    0.74
    
    
    
    0.73
    
    
    
    0.72
    
    
    
    0.70
    
    
    
    0.68Period-end book value
    
    
    10.08
    
    
    
    10.80
    
    
    
    10.06
    
    
    
    9.79
    
    
    
    9.33Average shares outstanding - basic
    
    
    29,789,969
    
    
    
    30,520,125
    
    
    
    31,480,109
    
    
    
    31,435,342
    
    
    
    31,504,746Average shares outstanding - diluted
    
    
    30,007,435
    
    
    
    30,702,107
    
    
    
    31,660,985
    
    
    
    31,580,328
    
    
    
    31,772,060RatiosReturn on average shareholders equity
    
    
    4.56
    %
    
    
    12.13
    %
    
    
    11.03
    %
    
    
    8.29
    %
    
    
    12.08
    %Return on average assets
    
    
    0.35
    
    
    
    1.13
    
    
    
    1.14
    
    
    
    0.90
    
    
    
    1.37Net interest margin
    
    
    3.00
    
    
    
    3.52
    
    
    
    3.72
    
    
    
    4.26
    
    
    
    4.43Average loans to average deposits
    
    
    86.60
    
    
    
    94.30
    
    
    
    95.43
    
    
    
    110.52
    
    
    
    104.60Average equity to average assets
    
    
    7.75
    
    
    
    9.28
    
    
    
    10.31
    
    
    
    10.84
    
    
    
    11.31Efficiency ratio (2)
    
    
    77.49
    
    
    
    64.74
    
    
    
    60.97
    
    
    
    64.09
    
    
    
    56.85Dividend payout
    
    
    156.97
    
    
    
    56.31
    
    
    
    64.29
    
    
    
    88.61
    
    
    
    61.26Selected period end balancesSecurities available for sale
    
    $
    1,601,900
    
    
    $
    1,129,212
    
    
    $
    1,076,324
    
    
    $
    441,031
    
    
    $
    486,905Securities held to maturity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,082Loans held for sale
    
    
    5,137
    
    
    
    158,404
    
    
    
    7,334
    
    
    
    5,063
    
    
    
    1,939Loans, net
    
    
    2,227,030
    
    
    
    2,045,266
    
    
    
    1,921,718
    
    
    
    2,123,897
    
    
    
    1,940,891Allowance for loan losses
    
    
    25,607
    
    
    
    27,204
    
    
    
    25,843
    
    
    
    28,447
    
    
    
    25,002Total assets
    
    
    4,206,693
    
    
    
    3,745,949
    
    
    
    3,332,737
    
    
    
    2,932,199
    
    
    
    2,679,728Total deposits
    
    
    2,427,897
    
    
    
    2,322,647
    
    
    
    2,162,945
    
    
    
    1,998,234
    
    
    
    1,816,491Borrowings
    
    
    1,432,200
    
    
    
    1,042,440
    
    
    
    808,512
    
    
    
    570,024
    
    
    
    542,021Total liabilities
    
    
    3,907,254
    
    
    
    3,421,263
    
    
    
    3,023,396
    
    
    
    2,622,912
    
    
    
    2,389,460Total shareholders equity
    
    
    299,439
    
    
    
    324,686
    
    
    
    309,341
    
    
    
    309,287
    
    
    
    290,268Selected average balancesLoans, net
    
    
    2,152,748
    
    
    
    2,122,890
    
    
    
    1,990,406
    
    
    
    2,074,971
    
    
    
    1,878,509Earning assets
    
    
    3,662,460
    
    
    
    3,261,844
    
    
    
    2,881,295
    
    
    
    2,576,853
    
    
    
    2,418,011Total assets
    
    
    4,006,488
    
    
    
    3,535,180
    
    
    
    3,104,952
    
    
    
    2,763,920
    
    
    
    2,583,803Total deposits
    
    
    2,485,711
    
    
    
    2,251,256
    
    
    
    2,085,669
    
    
    
    1,877,426
    
    
    
    1,795,921Borrowings
    
    
    1,159,889
    
    
    
    906,263
    
    
    
    652,298
    
    
    
    556,859
    
    
    
    447,633Total shareholders equity
    
    
    310,535
    
    
    
    328,036
    
    
    
    320,215
    
    
    
    299,745
    
    
    
    292,183
  (1)
    
    First Charter Corporation historical cash dividends declared.  (2)
    
    Noninterest expense divided by the sum of taxable equivalent net interest income plus noninterest income less gain on sale of securities. 16




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##### 



Critical Accounting Policies The Corporations accounting policies are fundamental to understanding
managements discussion and analysis of financial condition and results of
operations. The Corporations significant accounting policies are discussed in
detail in Note Oneof the consolidated financial statements. Allowance for Loan Losses The Corporation considers its policy regarding the allowance for loan
losses to be one of its most critical accounting policies because it requires
managements most subjective and complex judgments. The Corporation has
developed appropriate policies and procedures for assessing the adequacy of the
allowance for loan losses, recognizing that this process requires a number of
assumptions and estimates with respect to its loan portfolio. The 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. 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. 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 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 17




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##### 



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, 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. 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 information was 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. If management of the limited
partnerships had made different assumptions about the valuation of these
investments, the Corporations financial position and results of operations
could have differed materially. At December 31, 2003 and December 31, 2002 the total book value of equity
method investments was $2.8 million and $3.8 million, respectively, and is
included in other assets on the consolidated balance sheet. Of the $2.8
million, $1.1 million represents investments in venture capital partnerships,
which invest primarily in equity securities. The remaining $1.7 million is
invested in Small Business Investment Companies (SBICs), which make debt
investments that qualify for the investment test under the Community
Reinvestment Act. At December 31, 2003, the Corporations remaining commitment
to fund the equity method investments was $2.4 million and represented
commitments to venture funds that are SBICs. These remaining commitments are
callable in 2004. Derivative Investments In the first quarter of 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 18




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##### 



change in fair
value resulting from market rate changes on designated hedged items. See Note
Twenty-Oneof the consolidated financial statements for more information on
subsequent events. The Corporation intends to account for these interest rate swaps as a
hedge of the fair value of the related FHLB advances. Accordingly, in future
periods the Corporation will record, in noninterest income, the net change in
the fair value of the interest rate swap and the related FHLB advances,
provided the criteria for hedge accounting continues to be met. In the event
such criteria 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 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. 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. 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.
The changes in net interest income (on a taxable-equivalent basis) from year to
year are analyzed in Table Three. For the year ended December 31, 2003, net interest income amounted to
$107.8 million, a decrease of approximately 4.7 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
continued effects of the declining interest rate environment. The Corporation
sold $60.9 million in nonaccruing and accruing higher risk loans in the second
quarter of 2003 and $11.7 million in credit card loans in the first quarter of
2003. The reinvestment of these proceeds was made in lower yielding securities.
In addition, the Corporation sold $70 million in bonds in the fourth quarter of
2002 and reinvested the proceeds into BOLI. This investment is classified as an
other asset on the balance sheet, and the income is recognized as other
noninterest income rather than being recognized as interest income. 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. As a result, the Corporation sold
approximately $372 million of these mortgage-backed securities in order to
stabilize cash flows and to improve effective yields in this portfolio. These
proceeds were reinvested in fixed term agency securities and mortgage-backed
securities of a shorter average life and at a lower current coupon. The BOLI
transaction, loan sales and the investment portfolio restructuring resulted in
a change in the mix of earning assets from higher yielding loans to lower
yielding securities. The decrease in interest income was partially offset by a
$12.7 million 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 million of FHLB
fixed-term advances in 2003 and $100 million of FHLB fixed-term advances late
in 2002. The net interest margin (tax adjusted net interest income divided by
average interest-earning assets) decreased 55 basis points to 3.00 percent in
2003, compared to 3.55 percent in 2002. The decrease reflects the impact of the
declining interest rate environment, which continued to compress 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. If interest rates remain stable in 2004, Management expects the
net interest margin to remain near the fourth quarter 2003 level of 3.10
percent. The primary objective of interest rate risk management is to minimize
the effect changes in interest rates have on the net interest margin while
maintaining an appropriate interest rate risk profile. 19




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##### 



Average interest earning assets increased $400.6 million to $3.7 billion
for the year ended December 31, 2003 compared to $3.26 billion for the same
2002 period. This increase was primarily due to a $338.2 million increase in
the Corporations average securities available for sale. The increase in
average securities available for sale was due to the securitization of $286.9
million of mortgage loans held for sale and the net purchases of securities
used to increase earning assets. Early in the first quarter of 2003, the
Corporation increased its securities available for sale portfolio to offset the
effects of weak loan demand. Average interest earning assets increased due to
growth in the Corporations average loans and loans held for sale portfolio,
which increased $29.9 million mainly due to fourth quarter loan growth. The
increase in average loans and loans held for sale was partially offset by the
June Loan Sale, the sale of $11.7 million of credit card loans and the mortgage
loan securitizations. In addition to the increase in average interest earning assets, the
Corporation experienced an increase in average interest bearing liabilities.
Average deposits increased $234.5 million during 2003. A major contributor to
the decrease in interest expense was a shift in average deposits from
higher-cost certificates of deposits to lower cost transaction based accounts.
While certificates of deposits declined on average $26.3 million, noninterest
bearing and other core deposit categories increased $260.8 million, primarily
due to the continued success of CHAMP. During 2003, average other borrowings
increased $253.6 million and were used to fund loan growth and securities
purchases. The following table includes for the years ended December 31, 2003, 2002
and 2001 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 Two
Average Balances and Net Interest Income Analysis 2003
    
    2002
    
    2001Interest
    
    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)
    
    $
    2,152,748
    
    
    $
    119,375
    
    
    
    5.55
    %
    
    $
    2,122,890
    
    
    $
    135,745
    
    
    
    6.39
    %
    
    $
    1,990,406
    
    
    $
    159,430
    
    
    
    8.01
    %Securities - taxable
    
    
    1,393,277
    
    
    
    55,596
    
    
    
    3.99
    
    
    
    1,044,915
    
    
    
    57,300
    
    
    
    5.48
    
    
    
    788,928
    
    
    
    51,647
    
    
    
    6.55Securities - nontaxable
    
    
    71,427
    
    
    
    5,077
    
    
    
    7.11
    
    
    
    81,579
    
    
    
    5,868
    
    
    
    7.19
    
    
    
    88,448
    
    
    
    5,629
    
    
    
    6.36Federal funds sold
    
    
    2,074
    
    
    
    20
    
    
    
    0.99
    
    
    
    1,249
    
    
    
    20
    
    
    
    1.57
    
    
    
    1,971
    
    
    
    75
    
    
    
    3.78Interest bearing bank deposits
    
    
    42,934
    
    
    
    465
    
    
    
    1.08
    
    
    
    11,209
    
    
    
    169
    
    
    
    1.51
    
    
    
    11,542
    
    
    
    399
    
    
    
    3.46Total earning assets (4)
    
    
    3,662,460
    
    
    
    180,533
    
    
    
    4.93
    
    
    
    3,261,842
    
    
    
    199,102
    
    
    
    6.10
    
    
    
    2,881,295
    
    
    
    217,180
    
    
    
    7.54Cash and due from banks
    
    
    90,941
    
    
    
    
    
    
    
    
    
    
    
    83,401
    
    
    
    
    
    
    
    
    
    
    
    67,600Other assets
    
    
    253,087
    
    
    
    
    
    
    
    
    
    
    
    189,937
    
    
    
    
    
    
    
    
    
    
    
    156,057Total assets
    
    $
    4,006,488
    
    
    
    
    
    
    
    
    
    
    $
    3,535,180
    
    
    
    
    
    
    
    
    
    
    $
    3,104,952Interest bearing liabilities:Demand deposits
    
    
    778,600
    
    
    
    6,997
    
    
    
    0.90
    
    
    
    576,111
    
    
    
    5,385
    
    
    
    0.93
    
    
    
    515,531
    
    
    
    10,129
    
    
    
    1.96Savings deposits
    
    
    118,459
    
    
    
    520
    
    
    
    0.44
    
    
    
    120,899
    
    
    
    1,287
    
    
    
    1.06
    
    
    
    115,787
    
    
    
    2,004
    
    
    
    1.73Other time deposits
    
    
    1,253,538
    
    
    
    34,027
    
    
    
    2.71
    
    
    
    1,279,879
    
    
    
    44,285
    
    
    
    3.46
    
    
    
    1,203,000
    
    
    
    66,119
    
    
    
    5.50Other borrowings
    
    
    1,159,889
    
    
    
    28,946
    
    
    
    2.50
    
    
    
    906,263
    
    
    
    32,270
    
    
    
    3.56
    
    
    
    652,298
    
    
    
    31,660
    
    
    
    4.85Total interest bearing liabilities
    
    
    3,310,486
    
    
    
    70,490
    
    
    
    2.13
    
    
    
    2,883,152
    
    
    
    83,227
    
    
    
    2.89
    
    
    
    2,486,616
    
    
    
    109,912
    
    
    
    4.42Noninterest bearing sources:Noninterest bearing deposits
    
    
    335,114
    
    
    
    
    
    
    
    
    
    
    
    274,368
    
    
    
    
    
    
    
    
    
    
    
    251,352Other liabilities
    
    
    50,353
    
    
    
    
    
    
    
    
    
    
    
    49,624
    
    
    
    
    
    
    
    
    
    
    
    46,769Shareholders equity
    
    
    310,535
    
    
    
    
    
    
    
    
    
    
    
    328,036
    
    
    
    
    
    
    
    
    
    
    
    320,215Total liabilities and
shareholders equity
    
    $
    4,006,488
    
    
    
    
    
    
    
    
    
    
    $
    3,535,180
    
    
    
    
    
    
    
    
    
    
    $
    3,104,952Net interest spread
    
    
    
    
    
    
    
    
    
    
    2.80
    
    
    
    
    
    
    
    
    
    
    
    3.21
    
    
    
    
    
    
    
    
    
    
    
    3.12Impact of noninterest
bearing sources
    
    
    
    
    
    
    
    
    
    
    0.20
    
    
    
    
    
    
    
    
    
    
    
    0.34
    
    
    
    
    
    
    
    
    
    
    
    0.60Net interest income/
yield on earning assets
    
    
    
    
    
    $
    110,043
    
    
    
    3.00
    %
    
    
    
    
    
    $
    115,875
    
    
    
    3.55
    %
    
    
    
    
    
    $
    107,268
    
    
    
    3.72
    %
 (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 $2,576, $2,187, and $3,807, for 2003, 2002 and 2001, 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 2003, 2002 and 2001. The adjustments made to convert to a taxable-equivalent basis were $2,241, $2,714, and $1,904 for 2003,
2002 and 2001, respectively. 20




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##### 



The following table presents the changes in net interest income between
the years ended December 31, 2003 and December 31, 2002 and between the years
ended December 31, 2002 and December 31, 2001. Table Three
Volume and Rate Variance Analysis Dec. 31, 2003 versus Dec. 31, 2002 versus Dec. 31, 2001Increase (Decrease) in Net Interest IncomeDue to Change in Rate and Volume (1)2003
    
    
    
    
    
    
    
    
    
    2002
    
    
    
    
    
    
    
    
    
    2001Income/
    
    
    
    
    
    
    
    
    
    Income/
    
    
    
    
    
    
    
    
    
    Income/(Dollars in thousands)
    
    Expense
    
    Rate
    
    Volume
    
    Expense
    
    Rate
    
    Volume
    
    ExpenseInterest income:Loans and loans held for sale (2)
    
    $
    119,375
    
    
    $
    (18,152
    )
    
    $
    1,782
    
    
    $
    135,745
    
    
    $
    (33,227
    )
    
    $
    9,542
    
    
    $
    159,430Securities - taxable
    
    
    55,596
    
    
    
    (18,207
    )
    
    
    16,503
    
    
    
    57,300
    
    
    
    (9,745
    )
    
    
    15,398
    
    
    
    51,647Securities - nontaxable (2)
    
    
    5,077
    
    
    
    (65
    )
    
    
    (726
    )
    
    
    5,868
    
    
    
    705
    
    
    
    (466
    )
    
    
    5,629Federal funds sold
    
    
    20
    
    
    
    (10
    )
    
    
    10
    
    
    
    20
    
    
    
    (36
    )
    
    
    (19
    )
    
    
    75Interest bearing bank deposits
    
    
    465
    
    
    
    (115
    )
    
    
    411
    
    
    
    169
    
    
    
    (222
    )
    
    
    (8
    )
    
    
    399Total interest income
    
    $
    180,533
    
    
    $
    (36,549
    )
    
    $
    17,980
    
    
    $
    199,102
    
    
    $
    (42,525
    )
    
    $
    24,447
    
    
    $
    217,179Interest expense:Demand deposits
    
    $
    6,997
    
    
    $
    (244
    )
    
    $
    1,856
    
    
    $
    5,385
    
    
    $
    (5,623
    )
    
    $
    879
    
    
    $
    10,129Savings deposits
    
    
    520
    
    
    
    (749
    )
    
    
    (18
    )
    
    
    1,287
    
    
    
    (789
    )
    
    
    72
    
    
    
    2,004Other time deposits
    
    
    34,027
    
    
    
    (9,444
    )
    
    
    (814
    )
    
    
    44,285
    
    
    
    (25,277
    )
    
    
    3,443
    
    
    
    66,119Other borrowings
    
    
    28,946
    
    
    
    (11,004
    )
    
    
    7,680
    
    
    
    32,270
    
    
    
    (10,075
    )
    
    
    10,685
    
    
    
    31,660Total interest expense
    
    
    70,490
    
    
    
    (21,441
    )
    
    
    8,704
    
    
    
    83,227
    
    
    
    (41,764
    )
    
    
    15,079
    
    
    
    109,912Net interest income
    
    $
    110,043
    
    
    $
    (15,108
    )
    
    $
    9,276
    
    
    $
    115,875
    
    
    $
    (761
    )
    
    $
    9,369
    
    
    $
    107,267
 (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
our 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 our investment in BOLI. 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. In addition, gains on the sale of bank property amounted to
$0.4 million and $0.9 million for 2003 and 2002, respectively. 21




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##### 



The following table compares noninterest income for the years ended
December 31, 2003 and 2002. Table Four
Noninterest Income Years Ended December 31
    
    Increase/(Decrease)(Dollars in thousands)
    
    2003
    
    2002
    
    Amount
    
    PercentService charges on deposit accounts
    
    $
    22,143
    
    
    $
    19,133
    
    
    $
    3,010
    
    
    
    15.7
    %Financial management income
    
    
    3,705
    
    
    
    2,396
    
    
    
    1,309
    
    
    
    54.6Gain on sale of securities
    
    
    10,287
    
    
    
    11,539
    
    
    
    (1,252
    )
    
    
    (10.9
    )Gain on sale of credit card loan portfolio
    
    
    2,262
    
    
    
    
    
    
    
    2,262
    
    
    
    N/ALoss from equity method investments
    
    
    (285
    )
    
    
    (5,801
    )
    
    
    5,516
    
    
    
    95.1Mortgage services income
    
    
    3,159
    
    
    
    2,457
    
    
    
    702
    
    
    
    28.6Brokerage services income
    
    
    3,016
    
    
    
    2,288
    
    
    
    728
    
    
    
    31.8Insurance services income
    
    
    9,408
    
    
    
    8,770
    
    
    
    638
    
    
    
    7.3Trading gains
    
    
    1,801
    
    
    
    2,078
    
    
    
    (277
    )
    
    
    (13.3
    )Bank owned life insurance
    
    
    3,888
    
    
    
    16
    
    
    
    3,872
    
    
    
    N/AGain on sale of property
    
    
    382
    
    
    
    904
    
    
    
    (522
    )
    
    
    (57.7
    )Other
    
    
    4,414
    
    
    
    3,851
    
    
    
    563
    
    
    
    14.6Total noninterest income
    
    $
    64,180
    
    
    $
    47,631
    
    
    $
    16,549
    
    
    
    34.7
    %
 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 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 million in longer-term, fixed rate
Federal Home Loan Bank advances in 2003 versus a $3.3 million cost associated
with prepaying $100 million in longer-term, fixed rate Federal Home Loan Bank
advances in 2002. In addition, noninterest expense was affected by a $5.0
million increase in professional fees primarily due to the previously mentioned
loan sale, consulting services related to the review and revision of our
procedures to comply with the Bank Secrecy Act, consulting services to ensure
compliance with Section 404 of the Sarbanes-Oxley Act, and fees related to the
investigation and collection of questionable residential rental property loans.
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 our 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. Management anticipates a decline in noninterest expense of
approximately 10 percent in 2004 because Management does not anticipate
incurring any cost on prepaying borrowings and professional fees are expected
to decline as several projects near completion. 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, increased to 77.49 percent for the year ended December 31, 2003
compared to 64.34 percent for the year-ended December 31, 2002. A significant
portion of the increase in the efficiency ratio relates to the $19.1 million of
costs associated with the prepayment of Federal Home Loan Bank advances and the
previously discussed $5.0 million increase in professional fees. Gains on sale
of securities of $10.3 million and $11.5 million are excluded from this
calculation for the years ended December 31, 2003 and 2002, respectively. 22




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##### 



The following table compares noninterest income for the years ended
December 31, 2003 and 2002. Table Five
Noninterest Expense Years Ended December 31
    
    Increase/(Decrease)(Dollars in thousands)
    
    2003
    
    2002
    
    Amount
    
    PercentSalaries and employee benefits
    
    $
    54,998
    
    
    $
    50,306
    
    
    $
    4,692
    
    
    
    9.3
    %Occupancy and equipment
    
    
    16,504
    
    
    
    16,032
    
    
    
    472
    
    
    
    2.9Data processing
    
    
    2,816
    
    
    
    2,968
    
    
    
    (152
    )
    
    
    (5.1
    )Marketing
    
    
    4,435
    
    
    
    2,562
    
    
    
    1,873
    
    
    
    73.1Postage and supplies
    
    
    4,521
    
    
    
    4,333
    
    
    
    188
    
    
    
    4.3Professional services
    
    
    11,582
    
    
    
    6,615
    
    
    
    4,967
    
    
    
    75.1Telephone
    
    
    2,267
    
    
    
    1,951
    
    
    
    316
    
    
    
    16.2Amortization of intangibles
    
    
    441
    
    
    
    367
    
    
    
    74
    
    
    
    20.2Prepayment cost on borrowings
    
    
    19,089
    
    
    
    3,284
    
    
    
    15,805
    
    
    
    N/AOther
    
    
    10,379
    
    
    
    9,354
    
    
    
    1,025
    
    
    
    11.0Total noninterest expense
    
    $
    127,032
    
    
    $
    97,772
    
    
    $
    29,260
    
    
    
    29.9
    %
 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. Management anticipates the 2004 effective
tax rate to range from 31 to 33 percent. The Corporations North Carolina tax
returns for 1999, 2000 and 2001, are currently undergoing an audit by the
North Carolina Department of Revenue. Management does not expect any
significant, adverse impact to its results of operations arising from this
examination. 23




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##### 



The following table provides certain selected quarterly financial data: Table Six
Selected Quarterly Financial Data 2003 Quarters
    
    2002 Quarters(Dollars in thousands, exceptper share amounts)
    
    Fourth
    
    Third
    
    Second
    
    First
    
    Fourth
    
    Third
    
    Second
    
    FirstIncome statementTotal interest income
    
    $
    44,550
    
    
    $
    43,233
    
    
    $
    45,141
    
    
    $
    45,368
    
    
    $
    48,133
    
    
    $
    49,782
    
    
    $
    49,433
    
    
    $
    49,040Total interest expense
    
    
    15,570
    
    
    
    17,033
    
    
    
    19,102
    
    
    
    18,785
    
    
    
    20,095
    
    
    
    20,817
    
    
    
    20,825
    
    
    
    21,490Net interest income
    
    
    28,980
    
    
    
    26,200
    
    
    
    26,039
    
    
    
    26,583
    
    
    
    28,038
    
    
    
    28,965
    
    
    
    28,608
    
    
    
    27,550Provision for loan losses
    
    
    3,575
    
    
    
    2,400
    
    
    
    19,492
    
    
    
    2,051
    
    
    
    2,175
    
    
    
    1,750
    
    
    
    2,240
    
    
    
    2,105Total noninterest income
    
    
    13,517
    
    
    
    14,844
    
    
    
    20,249
    
    
    
    15,570
    
    
    
    16,279
    
    
    
    8,730
    
    
    
    11,694
    
    
    
    10,928Total noninterest expense
    
    
    41,403
    
    
    
    26,543
    
    
    
    33,022
    
    
    
    26,064
    
    
    
    27,631
    
    
    
    21,740
    
    
    
    24,084
    
    
    
    24,317Net (loss) income before
income taxes
    
    
    (2,481
    )
    
    
    12,101
    
    
    
    (6,226
    )
    
    
    14,038
    
    
    
    14,511
    
    
    
    14,205
    
    
    
    13,978
    
    
    
    12,056Income tax (benefit) expense
    
    
    (1,991
    )
    
    
    3,207
    
    
    
    (2,022
    )
    
    
    4,092
    
    
    
    3,962
    
    
    
    3,878
    
    
    
    3,816
    
    
    
    3,291Net (loss) income
    
    $
    (490
    )
    
    $
    8,894
    
    
    $
    (4,204
    )
    
    $
    9,946
    
    
    $
    10,549
    
    
    $
    10,327
    
    
    $
    10,162
    
    
    $
    8,765Per share data:Basic (loss) income
    
    $
    (0.02
    )
    
    $
    0.30
    
    
    $
    (0.14
    )
    
    $
    0.33
    
    
    $
    0.35
    
    
    $
    0.34
    
    
    $
    0.33
    
    
    $
    0.28Diluted (loss) income
    
    
    (0.02
    )
    
    
    0.30
    
    
    
    (0.14
    )
    
    
    0.33
    
    
    
    0.35
    
    
    
    0.34
    
    
    
    0.33
    
    
    
    0.28Cash dividends declared
    
    
    0.185
    
    
    
    0.185
    
    
    
    0.185
    
    
    
    0.185
    
    
    
    0.185
    
    
    
    0.185
    
    
    
    0.180
    
    
    
    0.180Period-end book value
    
    
    10.08
    
    
    
    10.20
    
    
    
    10.55
    
    
    
    10.87
    
    
    
    10.80
    
    
    
    10.78
    
    
    
    10.52
    
    
    
    9.87Average shares
outstanding - basic
    
    
    29,685,088
    
    
    
    29,672,137
    
    
    
    29,801,059
    
    
    
    30,006,417
    
    
    
    30,081,995
    
    
    
    30,379,838
    
    
    
    30,829,356
    
    
    
    30,798,728Average shares
outstanding - diluted
    
    
    29,685,088
    
    
    
    29,904,440
    
    
    
    29,801,059
    
    
    
    30,188,853
    
    
    
    30,220,294
    
    
    
    30,506,426
    
    
    
    31,098,379
    
    
    
    30,993,981RatiosReturn on average
shareholders equity (1)
    
    
    (0.62
    )%
    
    
    11.31
    %
    
    
    (5.04
    )%
    
    
    12.06
    %
    
    
    12.57
    %
    
    
    12.30
    %
    
    
    12.64
    %
    
    
    11.04
    %Return on average assets (1)
    
    
    (0.05
    )
    
    
    0.87
    
    
    
    (0.42
    )
    
    
    1.06
    
    
    
    1.14
    
    
    
    1.14
    
    
    
    1.17
    
    
    
    1.05Net interest margin (1)
    
    
    3.10
    
    
    
    2.86
    
    
    
    2.92
    
    
    
    3.15
    
    
    
    3.32
    
    
    
    3.54
    
    
    
    3.61
    
    
    
    3.64Average loans to
average deposits
    
    
    87.66
    
    
    
    83.76
    
    
    
    86.51
    
    
    
    88.77
    
    
    
    97.55
    
    
    
    95.27
    
    
    
    93.26
    
    
    
    90.82Average equity to
average assets
    
    
    7.46
    
    
    
    7.66
    
    
    
    8.38
    
    
    
    8.77
    
    
    
    9.05
    
    
    
    9.29
    
    
    
    9.24
    
    
    
    9.53Efficiency ratio (2)
    
    
    97.41
    
    
    
    64.26
    
    
    
    85.66
    
    
    
    62.69
    
    
    
    70.17
    
    
    
    59.21
    
    
    
    60.58
    
    
    
    69.14Selected period end
balancesSecurities available for sale
    
    $
    1,601,900
    
    
    $
    1,603,262
    
    
    $
    1,518,918
    
    
    $
    1,453,827
    
    
    $
    1,129,212
    
    
    $
    1,212,742
    
    
    $
    1,104,995
    
    
    $
    1,107,939Loans held for sale
    
    
    5,137
    
    
    
    14,784
    
    
    
    45,311
    
    
    
    69,894
    
    
    
    158,404
    
    
    
    14,532
    
    
    
    1,486
    
    
    
    5,400Loans, net
    
    
    2,227,030
    
    
    
    2,085,338
    
    
    
    2,040,815
    
    
    
    2,050,943
    
    
    
    2,045,266
    
    
    
    2,199,727
    
    
    
    2,096,866
    
    
    
    1,997,484Allowance for loan losses
    
    
    25,607
    
    
    
    23,953
    
    
    
    23,644
    
    
    
    26,495
    
    
    
    27,204
    
    
    
    27,411
    
    
    
    27,213
    
    
    
    26,576Total assets
    
    
    4,206,693
    
    
    
    4,087,967
    
    
    
    3,988,534
    
    
    
    3,991,267
    
    
    
    3,745,949
    
    
    
    3,700,929
    
    
    
    3,490,732
    
    
    
    3,405,858Total deposits
    
    
    2,427,897
    
    
    
    2,481,582
    
    
    
    2,558,549
    
    
    
    2,492,929
    
    
    
    2,322,647
    
    
    
    2,313,788
    
    
    
    2,262,959
    
    
    
    2,210,308Borrowings
    
    
    1,432,200
    
    
    
    1,261,412
    
    
    
    1,076,595
    
    
    
    1,116,223
    
    
    
    1,042,440
    
    
    
    1,004,836
    
    
    
    847,752
    
    
    
    836,769Total liabilities
    
    
    3,907,254
    
    
    
    3,785,704
    
    
    
    3,674,618
    
    
    
    3,665,196
    
    
    
    3,421,263
    
    
    
    3,376,174
    
    
    
    3,166,334
    
    
    
    3,101,940Total shareholders equity
    
    
    299,439
    
    
    
    302,263
    
    
    
    313,916
    
    
    
    326,071
    
    
    
    324,686
    
    
    
    324,755
    
    
    
    324,398
    
    
    
    303,918Selected average
balancesLoans and loans held for sale
    
    
    2,188,643
    
    
    
    2,130,236
    
    
    
    2,179,291
    
    
    
    2,112,226
    
    
    
    2,253,317
    
    
    
    2,170,961
    
    
    
    2,080,227
    
    
    
    1,983,455Earning assets
    
    
    3,792,383
    
    
    
    3,730,688
    
    
    
    3,648,447
    
    
    
    3,474,071
    
    
    
    3,418,176
    
    
    
    3,311,707
    
    
    
    3,219,752
    
    
    
    3,093,516Total assets
    
    
    4,192,064
    
    
    
    4,071,214
    
    
    
    3,990,872
    
    
    
    3,814,209
    
    
    
    3,678,945
    
    
    
    3,586,969
    
    
    
    3,491,868
    
    
    
    3,377,791Total deposits
    
    
    2,496,810
    
    
    
    2,543,301
    
    
    
    2,519,240
    
    
    
    2,379,454
    
    
    
    2,309,971
    
    
    
    2,278,758
    
    
    
    2,230,620
    
    
    
    2,183,990Borrowings
    
    
    1,320,665
    
    
    
    1,180,770
    
    
    
    1,084,288
    
    
    
    1,050,637
    
    
    
    984,350
    
    
    
    923,570
    
    
    
    888,826
    
    
    
    826,381Total shareholders equity
    
    
    312,773
    
    
    
    311,962
    
    
    
    334,537
    
    
    
    334,431
    
    
    
    332,998
    
    
    
    333,165
    
    
    
    322,508
    
    
    
    321,966
 (1) Annualized (2) 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 five operating segments:
commercial banking, brokerage, insurance, mortgage and financial management.
These segments are identified based on the Corporations organizational
structure, and the Corporations chief operating decision makers review
separate results of operations of each of these operating segments. 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 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 and
assets of the Corporation, as set forth in Note Twoof the 24




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consolidated
financial statements. Included in Other are revenue, expenses and assets of
the parent company and eliminations. The following table for First Charters reportable business segment
compares total income for the years ended December 31, 2003 and 2002: Table Seven
Business Segment Net Income (Loss) Years Ended December 31(Dollars in thousands)
    
    2003
    
    2002
    
    2001FCB
    
    $
    15,033
    
    
    $
    43,974
    
    
    $
    34,146Other operating segments
    
    
    (437
    )
    
    
    (891
    )
    
    
    1,293Other
    
    
    (450
    )
    
    
    (3,280
    )
    
    
    (114
    )Total consolidated
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    35,325
 FCBs net income was $15.0 million for the year ended December 31, 2003
compared to $44.0 million for the same year ago period. The decrease was
primarily due to (i) a $26.4 million increase in noninterest expense which was
comprised of: prepayment cost associated with the refinancing of $131 million
of longer-term, fixed rate FHLB advances; increased professional fees due to
the June Loan Sale, consulting fees to ensure compliance with Section 404 of
the Sarbanes-Oxley Act, the review and revision of our procedures for
compliance with the Bank Secrecy Act, fees related to the investigation and
collection of questionable residential rental property loans and increased
marketing expense associated with the implementation of CHAMP, (ii) a $19.2
million increase in the provision for loan losses arising from the June Loan
Sale, adverse business conditions and increases in the loan portfolio and (iii)
a $5.6 million decrease in net interest income due to lower interest income on
earning assets partially offset by a decrease in interest expense resulting
from the continued effects of a declining interest rate environment. This
decrease was partially offset by a $13.0 million decrease in income tax expense
due to a decrease in taxable income and the effective tax rate and a $9.3
million increase in noninterest income resulting from the Corporations
investment in BOLI, growth in services charges on deposit accounts and from
gain on the sale of the credit card portfolio. Management anticipates a decline
in noninterest expense of approximately 10 percent in 2004 because Management
does not anticipate incurring any cost on prepaying borrowings and professional
fees are expected to decline as several projects near completion. Other operating segments reported a net loss of $0.4 million for the year
ended December 31, 2003 compared to a net loss of $0.9 million for the same
year ago period. The decrease in the net loss was primarily due to higher
noninterest income due to increases in brokerage services revenues, mortgage
fee income, insurance services revenues primarily due to the acquisition of two
insurance agencies and financial management income primarily due to the
acquisition of a third party benefits administrator. The increases were
partially offset by increased noninterest expense due to higher incentive
compensation based on the increases in noninterest income. Other reported a net loss of $0.5 million for the year ended December 31,
2003 compared to net loss of $3.3 million for the same year ago period. The
decrease in the net loss was primarily due to a $5.8 million net loss on equity
method investments for the year ended December 31, 2002 versus a net loss of
$0.3 million for the year ended December 31, 2003. In addition, gains on sale
of equity securities amounted to $0.2 million and $1.8 million for the year
ended December 31, 2003 and December 31, 2002, respectively. These changes
resulted in an income tax benefit of $0.1 million for the year ended December
31, 2003 compared to an income tax benefit of $1.2 million for the year ended
December 31, 2002. 25




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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 asset-liability management 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. 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, 2003, securities available for sale were $1.60 billion or
38.1 percent of total assets, compared to $1.13 billion, or 30.1 percent of
total assets, at December 31, 2002. The increase in securities available for
sale was primarily due to the securitization of $286.9 million of mortgage
loans held for sale during 2003, as well as the net purchase of $185.8 million
of securities used to increase earning assets. The Corporation increased its
securities available for sale portfolio early in the first quarter of 2003 to
offset the effects of weak loan demand. During 2003, the Corporation changed
the mix of the portfolio to stabilize cash flows by selling mortgage-backed
securities which had produced a lower effective yield due to increased
amortization of premiums, and reinvesting the proceeds in fixed-term agency
securities and mortgage-backed securities of a shorter average life and at a
lower coupon. The carrying value of securities available for sale was approximately
$10.1 million above their amortized cost at December 31, 2003 and $26.1 million
above their amortized cost at December 31, 2002. The weighted average life of
the portfolio was 3.66 years at December 31, 2003 compared to 3.01 years at
December 31, 2002. The following table shows, as of December 31, 2003, 2002, and 2001, the
carrying value of (i) U.S. government obligations, (ii) U.S. government agency
obligations, (iii) mortgage-backed securities, (iv) state and municipal
obligations, and (v) equity securities. Table Eight
Investment Portfolio December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001Securities Available for SaleUS government obligations
    
    $
    60,273
    
    
    $
    65,777
    
    
    $
    US government agency obligations
    
    
    635,267
    
    
    
    408,362
    
    
    
    288,253Mortgage-backed securities
    
    
    771,157
    
    
    
    529,694
    
    
    
    655,690State, county, and municipal obligations
    
    
    73,087
    
    
    
    82,964
    
    
    
    87,548Equity securities
    
    
    62,116
    
    
    
    42,415
    
    
    
    44,833Total
    
    $
    1,601,900
    
    
    $
    1,129,212
    
    
    $
    1,076,324
 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. Loans held
for sale decreased to $5.1 million at December 31, 2003 as compared to $158.4
million at December 31, 2002. The decrease was due to the securitization and
sale of mortgage loans during the year. 26




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##### 



Loan Portfolio The Corporations loan portfolio at December 31, 2003 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 our 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, both
participations and syndications, from key strategic partner financial
institutions, with which the Corporation has established relationships. 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 US 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 US 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.
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 sold into the secondary market; however, from time to
time a portion of this production is retained and are serviced by the
Corporation. 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 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. 27




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##### 



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 9 percent to $2.25 billion at December 31, 2003
compared to $2.07 billion at December 31, 2002. The growth in loans was
primarily due to a $142.4 million increase in construction loans, which
includes approximately $76 million of 1-4 family construction loans purchased
in the third and fourth quarters of 2003 through a correspondent relationship.
In addition, home equity loans increased $75.3 million and mortgage loans
(primarily adjustable rate loans) increased $43.7 million driven by
refinancings and the low interest rate environment. These increases were
partially offset by the June Loan Sale and the sale of the Corporations $11.7
million credit card portfolio. The table below summarizes loans in the classifications indicated as of
December 31, 2003, 2002, 2001, 2000, and 1999. Table Nine
Loan Portfolio Composition December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Commercial real estate
    
    $
    724,340
    
    
    $
    798,664
    
    
    $
    631,814
    
    
    $
    723,644
    
    
    $
    638,522Commercial non real estate
    
    
    212,010
    
    
    
    223,178
    
    
    
    222,497
    
    
    
    297,728
    
    
    
    201,639Construction
    
    
    358,217
    
    
    
    215,859
    
    
    
    321,716
    
    
    
    246,136
    
    
    
    316,794Mortgage
    
    
    280,748
    
    
    
    237,085
    
    
    
    289,953
    
    
    
    496,892
    
    
    
    562,942Consumer
    
    
    284,448
    
    
    
    280,201
    
    
    
    253,603
    
    
    
    209,131
    
    
    
    109,630Home equity
    
    
    393,041
    
    
    
    317,730
    
    
    
    228,169
    
    
    
    179,028
    
    
    
    136,569Total loans
    
    
    2,252,804
    
    
    
    2,072,717
    
    
    
    1,947,752
    
    
    
    2,152,559
    
    
    
    1,966,096Less - allowance for loan
losses
    
    
    (25,607
    )
    
    
    (27,204
    )
    
    
    (25,843
    )
    
    
    (28,447
    )
    
    
    (25,002
    )Unearned income
    
    
    (167
    )
    
    
    (247
    )
    
    
    (191
    )
    
    
    (215
    )
    
    
    (203
    )Loans, net
    
    $
    2,227,030
    
    
    $
    2,045,266
    
    
    $
    1,921,718
    
    
    $
    2,123,897
    
    
    $
    1,940,891
 Deposits The ability to generate deposits has been enhanced by the introduction of
CHAMP for individuals during the fourth quarter of 2002 and Business CHAMP
during the first quarter of 2003. As a result, the Corporation opened 40,995
new checking accounts in 2003, more than twice the number in 2002. In addition,
during the first quarter of 2003 the Corporation introduced a new money
market account, the Money Market Max Account. This product has been very
successful with total balances at December 31, 2003 of $279.6 million. The
emphasis of these programs is to shift our funding mix towards lower-cost
funding sources, and to develop new customer relationships to generate
additional fee income opportunities. Table Twoprovides information on the average amounts of deposits and
illustrates the shift in deposits as lower-cost money market, checking, savings
and noninterest bearing deposits increased $260.8 million and higher-cost other
time deposits decreased $26.3 million. Other Borrowings Other borrowings increased $389.8 million during the year, to $1.43
billion at December 31, 2003, from $1.04 billion at December 31, 2002. These
borrowings were principally used to fund loan growth and securities purchases.
During 2003, the Corporation incurred $19.1 million in prepayment penalties
associated with the refinancing of $131 million in fixed-term FHLB advances. 28




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##### 



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, 2003, 2002
and 2001. Table Ten
Other Borrowings (Dollars in thousands)
    
    2003
    
    2002
    
    2001Federal funds purchased, securities
sold under agreements to repurchase,
FHLB and other borrowings:Balance as of December 31
    
    $
    1,432,200
    
    
    $
    1,042,440
    
    
    $
    808,512Average balance
    
    
    1,159,889
    
    
    
    906,263
    
    
    
    652,298Maximum outstanding at
any month end
    
    
    1,432,200
    
    
    
    1,042,440
    
    
    
    808,512Interest rate as of December 31
    
    
    1.83
    %
    
    
    2.99
    %
    
    
    3.84
    %Average interest rate
    
    
    2.50
    %
    
    
    3.56
    %
    
    
    4.85
    %
 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. Lastly, 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. Loan Administration and Underwriting The Banks Chief Credit 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 loans less than $500,000 may
be approved by experienced loan officers, within their loan authority.
Commercial and commercial real estate loans are approved by signature authority
requiring at least two experienced lenders for any relationships greater than $500,000 and
an independent Risk Manager whenever the relationship is greater than $1
million. All relationships greater than $2.0 million receive a comprehensive
annual review by the senior lending officers of the Bank, which is then
reviewed by the independent Risk Management Officers and 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 Credit
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 million per
relationship; however, at times some loans may exceed that limit. As of
December 31, 2003, the Corporation had eight relationships with exposure
greater than the $10 million lending limit. At December 31, 2003, the total
loan balance of these relationships was $78.7 million, all of which were
current, with unfunded commitments totaling $15.2 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. 29




---



##### 



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, 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,
2003, 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 our primary market
area could adversely affect our 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. 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. As of December 31,
2003, the Corporation had no such derivative financial instruments outstanding. In the first quarter of 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. As a result of the June Loan Sale and the $11.7 million credit card
portfolio sale, the Corporations credit risk profile improved significantly as
nonaccrual loans decreased to $14.9 million at December 31, 2003 as compared to
$26.5 million at December 31, 2002. In addition, classified assets at December
31, 2003 decreased to $43.3 million compared to $89.5 million at December 31,
2002. OREO decreased to $6.8 million at December 31, 2003 from $10.3 million at
December 31, 2002. The sale of the two largest properties in the OREO portfolio
during the second quarter of 2003 resulted in the decrease in OREO. 30




---



##### 



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 Eleven
Nonperforming and Problem Assets December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Nonaccrual loans
    
    $
    14,910
    
    
    $
    26,467
    
    
    $
    23,824
    
    
    $
    26,587
    
    
    $
    10,353Restructured loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37Total nonperforming loans
    
    
    14,910
    
    
    
    26,467
    
    
    
    23,824
    
    
    
    26,587
    
    
    
    10,390Other real estate
    
    
    6,836
    
    
    
    10,278
    
    
    
    8,049
    
    
    
    2,989
    
    
    
    2,262Total nonperforming assets
    
    
    21,746
    
    
    
    36,745
    
    
    
    31,873
    
    
    
    29,576
    
    
    
    12,652Loans 90 days or more past due and
still accruing interest
    
    
    21
    
    
    
    
    
    
    
    152
    
    
    
    430
    
    
    
    3,638Total nonperforming assets and loans 90 days or
more past due and still accruing interest
    
    $
    21,767
    
    
    $
    36,745
    
    
    $
    32,025
    
    
    $
    30,006
    
    
    $
    16,290
 The June Loan Sale also significantly improved the Corporations asset
quality ratios as evidenced in the following table; however, third and fourth
quarter of 2003 asset quality ratios were impacted by an increase in nonaccrual
loans. The increase in the past due ratio during the fourth quarter of 2003,
was mainly attributable to one commercial relationship which is now current and
is not reflective of a trend in the overall portfolio. The table below summarizes the Corporations asset quality ratios over the
past five quarters. Table Twelve
Asset Quality Ratios December 31
    
    September 30
    
    June 30
    
    March 31
    
    December 312003
    
    2003
    
    2003
    
    2003
    
    2002Past Due RatioPast due loans over 30 days as a percentage
of loans
    
    
    1.04
    %
    
    
    0.71
    %
    
    
    0.67
    %
    
    
    1.03
    %
    
    
    1.20
    %Problem AssetsClassified assets as a percentage of loans
    
    
    1.92
    %
    
    
    1.86
    %
    
    
    1.99
    %
    
    
    4.71
    %
    
    
    4.32
    %Nonaccrual LoansNonaccrual loans as a percentage of loans
    
    
    0.66
    %
    
    
    0.64
    %
    
    
    0.54
    %
    
    
    1.44
    %
    
    
    1.28
    %Nonperforming AssetsNonperforming assets as a percentage of loans
and other real estate owned
    
    
    0.96
    %
    
    
    0.95
    %
    
    
    0.87
    %
    
    
    1.97
    %
    
    
    1.76
    %Charge-offsNet charge-offs as a percentage of average
loans-annualized
    
    
    0.35
    %
    
    
    0.40
    %
    
    
    0.39
    %
    
    
    0.43
    %
    
    
    0.37
    %Allowance for Loan LossesAllowance for loan losses as a percentage of loans
    
    
    1.14
    %
    
    
    1.14
    %
    
    
    1.15
    %
    
    
    1.28
    %
    
    
    1.31
    %Allowance for loan losses as a percentage of
nonaccrual loans
    
    
    172
    %
    
    
    179
    %
    
    
    212
    %
    
    
    88
    %
    
    
    103
    %
 31




---



##### 



Nonaccrual loans at December 31, 2003 were not concentrated in any one
industry and primarily consisted of several large credits secured by real
estate. Management anticipates that nonaccrual loans 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
considered 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. 32




---



##### 



The table below presents certain data for the years ended December 31,
2003, 2002, 2001, 2000, and 1999, including the following: (i) the average
amount of net loans outstanding during the year, (ii) the allowance for loan
losses at the beginning of the year, (iii) the provision for loan losses, (iv)
loans charged off and recovered (v) loan charge-offs, net, (vi) the allowance
for loan losses at the end of the year, (vii) the ratio of net charge-offs to
average loans and (viii) the ratio of the allowance for loan losses to loans
at year-end. Table Thirteen
Allowance For Credit Losses Years Ended December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001
    
    2000
    
    1999Balance, January 1
    
    $
    27,204
    
    
    $
    25,843
    
    
    $
    28,447
    
    
    $
    25,002
    
    
    $
    22,278Loan charge-offs:Commercial, financial and agricultural
    
    
    5,382
    
    
    
    3,056
    
    
    
    4,280
    
    
    
    2,532
    
    
    
    951Real estate - construction
    
    
    
    
    
    
    641
    
    
    
    50
    
    
    
    351
    
    
    
    36Real estate - mortgage
    
    
    716
    
    
    
    304
    
    
    
    564
    
    
    
    519
    
    
    
    138Installment
    
    
    3,382
    
    
    
    2,989
    
    
    
    2,512
    
    
    
    1,661
    
    
    
    1,648Total loans charged-off
    
    
    9,480
    
    
    
    6,990
    
    
    
    7,406
    
    
    
    5,063
    
    
    
    2,773Recoveries of loans previously charged-off:Commercial, financial and agricultural
    
    
    455
    
    
    
    223
    
    
    
    243
    
    
    
    623
    
    
    
    295Real estate - construction
    
    
    24
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Real estate - mortgage
    
    
    
    
    
    
    36
    
    
    
    169
    
    
    
    49
    
    
    
    72Installment
    
    
    635
    
    
    
    337
    
    
    
    285
    
    
    
    334
    
    
    
    494Other
    
    
    34
    
    
    
    132
    
    
    
    57
    
    
    
    
    
    
    
    Total recoveries of loans previously charged-off
    
    
    1,148
    
    
    
    728
    
    
    
    754
    
    
    
    1,006
    
    
    
    861Net charge-offs
    
    
    8,332
    
    
    
    6,262
    
    
    
    6,652
    
    
    
    4,057
    
    
    
    1,912Provision for loan losses
    
    
    27,518
    
    
    
    8,270
    
    
    
    4,465
    
    
    
    7,615
    
    
    
    5,005Adjustment for loans sold, securitized or
transferred to held for sale
    
    
    (20,783
    )
    
    
    (647
    )
    
    
    (417
    )
    
    
    (113
    )
    
    
    (369
    )Balance, December 31
    
    $
    25,607
    
    
    $
    27,204
    
    
    $
    25,843
    
    
    $
    28,447
    
    
    $
    25,002Average loans
    
    $
    2,126,821
    
    
    $
    2,112,855
    
    
    $
    1,980,080
    
    
    $
    2,074,685
    
    
    $
    1,875,910Net charge-offs to average loans
    
    
    0.39
    %
    
    
    0.30
    %
    
    
    0.34
    %
    
    
    0.20
    %
    
    
    0.10
    %Allowance for loan losses to
gross loans at year-end
    
    
    1.14
    
    
    
    1.31
    
    
    
    1.33
    
    
    
    1.32
    
    
    
    1.27
 33




---



##### 



Table Fourteenpresents the categories of charge-offs and recoveries for
the years ended December 31, 2003 and 2002 and are based upon the loan
categories discussed in the Loan Portfoliosection. Due to the restatement of
historical financial information for the years ended December 31, 2000 and
1999, as the result of poolings-of-interests mergers, it is not possible to
provide information for these years in the categories of loans used below. Table Fourteen
Allowance For Credit Losses Years Ended December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001Balance, January 1
    
    $
    27,204
    
    
    $
    25,843
    
    
    $
    28,447Loan charge-offs:Commercial non real estate
    
    
    3,484
    
    
    
    2,397
    
    
    
    2,387Commercial real estate
    
    
    1,898
    
    
    
    659
    
    
    
    1,892Construction
    
    
    
    
    
    
    641
    
    
    
    50Mortgage
    
    
    31
    
    
    
    111
    
    
    
    125Consumer
    
    
    3,382
    
    
    
    2,989
    
    
    
    2,513Home equity
    
    
    685
    
    
    
    193
    
    
    
    439Total loans charged-off
    
    
    9,480
    
    
    
    6,990
    
    
    
    7,406Recoveries of loans previously charged-off:Commercial non real estate
    
    
    451
    
    
    
    20
    
    
    
    227Commercial real estate
    
    
    4
    
    
    
    228
    
    
    
    181Construction
    
    
    24
    
    
    
    
    
    
    
    Mortgage
    
    
    
    
    
    
    11
    
    
    
    Consumer
    
    
    635
    
    
    
    337
    
    
    
    289Other
    
    
    34
    
    
    
    132
    
    
    
    57Total recoveries of loans previously charged-off
    
    
    1,148
    
    
    
    728
    
    
    
    754Net charge-offs
    
    
    8,332
    
    
    
    6,262
    
    
    
    6,652Provision for loan losses
    
    
    27,518
    
    
    
    8,270
    
    
    
    4,465Adjustment for loans sold, securitized or
transferred to held for sale
    
    
    (20,783
    )
    
    
    (647
    )
    
    
    (417
    )Balance, December 31
    
    $
    25,607
    
    
    $
    27,204
    
    
    $
    25,843Average loans
    
    $
    2,126,821
    
    
    $
    2,112,855
    
    
    $
    1,980,080Net charge-offs to average loans
    
    
    0.39
    %
    
    
    0.30
    %
    
    
    0.34
    %Allowance for loan losses to
gross loans at year-end
    
    
    1.14
    
    
    
    1.31
    
    
    
    1.33
 The allowance for loan losses was $25.6 million at December 31, 2003
compared to $27.2 million at December 31, 2002. The June Loan Sale reduced the
allowance for loan losses $20.2 million. Prior to the loan sale, these loans
had approximately $8.7 million of allowance allocated to them. During the
second quarter of 2003, an additional provision of $7.5 million was recorded
due to the deteriorating financial results of these relationships and
independent appraisals of collateral. An additional provision of $4.0 million
was recorded for the credit-related discount taken in the June Loan Sale. Also,
included in the allowance for loan losses was an allocation of $2.4 million
related to the previously discussed residential rental properties which have
questionable appraisals and collateral values. Due to charge-offs and
foreclosures on these properties, the allocation has been reduced to $1.9
million. The allowance for loan losses was also reduced $0.5 million due to the
sale of the Corporations credit card portfolio and by net charge-offs of $8.3
million. These reductions were partially offset by additional provision expense
of $27.5 million. At December 31, 2003 the allowance for loan losses was 1.14 percent of
gross loans compared to 1.31 percent at December 31, 2002. The reduction in the
ratio of allowance for loan losses to loans was due to the Corporations
improved credit risk profile which is reflected in the changes in allocation of
loan losses to various loan types. 34




---



##### 



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, 2003, 2002, 2001, 2000 and
1999. Table Fifteen
Allocation of the Allowance for Loan Losses (1) December 31,2003
    
    2002
    
    2001
    
    2000
    
    1999Loan/
    
    
    
    
    
    Loan/
    
    
    
    
    
    Loan/
    
    
    
    
    
    Loan/
    
    
    
    
    
    Loan/(Dollars in thousands)
    
    Amount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total Loans
    
    Amount
    
    Total LoansCommercial real estate
    
    $
    12,011
    
    
    
    32
    %
    
    $
    12,166
    
    
    
    39
    %
    
    $
    9,532
    
    
    
    32
    %
    
    $
    11,637
    
    
    
    34
    %
    
    $
    10,210
    
    
    
    32
    %Commercial non real estate
    
    
    4,368
    
    
    
    9
    
    
    
    4,529
    
    
    
    11
    
    
    
    4,779
    
    
    
    11
    
    
    
    7,372
    
    
    
    14
    
    
    
    5,089
    
    
    
    10Construction
    
    
    3,584
    
    
    
    16
    
    
    
    3,384
    
    
    
    10
    
    
    
    4,608
    
    
    
    17
    
    
    
    3,749
    
    
    
    11
    
    
    
    3,621
    
    
    
    16Mortgage
    
    
    812
    
    
    
    13
    
    
    
    845
    
    
    
    11
    
    
    
    1,420
    
    
    
    15
    
    
    
    2,049
    
    
    
    23
    
    
    
    1,317
    
    
    
    29Consumer
    
    
    3,569
    
    
    
    13
    
    
    
    4,560
    
    
    
    14
    
    
    
    4,124
    
    
    
    13
    
    
    
    2,661
    
    
    
    10
    
    
    
    3,506
    
    
    
    6Home equity
    
    
    1,263
    
    
    
    17
    
    
    
    1,720
    
    
    
    15
    
    
    
    1,380
    
    
    
    12
    
    
    
    979
    
    
    
    8
    
    
    
    1,259
    
    
    
    7Total
    
    $
    25,607
    
    
    
    100
    %
    
    $
    27,204
    
    
    
    100
    %
    
    $
    25,843
    
    
    
    100
    %
    
    $
    28,447
    
    
    
    100
    %
    
    $
    25,002
    
    
    
    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 remained
relatively flat in 2003. Commercial allowance allocations were affected by
increases in the historical loss factors and were partially offset by a
decrease in substandard and nonaccrual commercial loan balances. Both of these
factors were impacted by the June Loan Sale. Management anticipates these
historical loss factors will trend lower over time, as the allowance model will
be impacted by lower historical losses. Mortgage loans allocation of allowance
for loan losses decreased slightly in 2003 over 2002. Higher mortgage loan
balances were offset by lower historical loss factors. Lower allocations of
allowance for loan losses were required for consumer loans in 2003 over 2002
due to the sale of the credit card portfolio as these loans had a higher
historical loss experience due to their unsecured nature. 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. 35




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##### 



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 an additional
provision of $4.0 million related to the discount taken in the previously
mentioned loan sale, the addition of $3.5 million to the provision for loan
losses as a result of the impact of the previously mentioned loan sale on the
historical loss ratios used in the allowance model and managements continuous
evaluation of the current economic environment and operational risks, and the
addition of $7.5 million to the provision for loan losses as a result of
deteriorating financial performance of several large commercial relationships
and independent appraisals of collateral. These relationships were subsequently
sold as a part of the previously mentioned loan sale. In addition, during the second quarter of 2003, the Corporation identified
up to 165 residential rental property loans totaling approximately $12.8
million, some of which appeared to have questionable appraisals and collateral
value. These loans were made by one loan officer who is no longer employed by
the Corporation. The appraisals received by the Corporation were completed by
appraisers who were not employees of the Corporation. This matter was reported
by management to authorities and is under continuing investigation by
management and by those authorities. As a result of managements investigation,
the Corporation increased the provision for loan losses in the second quarter
of 2003 by approximately $2.4 million. At December 31, 2003, there were 135
loans remaining in this portfolio totaling approximately $10.4 million with an
allocated allowance of $1.9 million. As managements investigation continues,
it is possible that an additional provision for loan losses may be required
with respect to these loans. The provision for loan losses was also impacted by an increase in net
charge-offs of $2.1 million compared to 2002 and increases in the loan
portfolio in 2003 compared to 2002. 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 continued weak economic environment and $1.1 million of
residential rental property loans charged-off. During 2003, 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, 2003, the
Corporation noted that economic conditions continue to be weak; 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 also continuously reviews its portfolio for any
concentrations of loans to any one borrower or industry in the area. 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. Additional reserves
have been set-aside in the allowance model for operational risk due to the
differences in underwriting methodologies underlying the loans inherited
through mergers. With the implementation of one central loan policy and
procedure, this risk appears to be stable. As a result, the percent of
additional allocation for the operational reserve has not changed in recent
periods. 36




---



##### 



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 5.40 percent of net interest income at
December 31, 2003. Assuming a 100 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 1.06
percent of net interest income at December 31, 2003. 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 the decreased interest
rate shock scenario is equal to the Fed Funds rate of 100 basis points. Both of
the rate shock scenarios are within Managements acceptable range. In the first quarter of 2004, the Corporation entered into a series of
interest rate swap agreements. The interest rate swap agreements allow the
Corporation to swap higher fixed rate interest payments on long-term FHLB
advances for lower variable rate payments. The interest rate swaps will result
in the Corporation receiving interest at an average fixed rate of 5.15 percent
and paying interest at an average variable rate of 3.27 percent, for an average
period of 5.1 years with a notional amount of approximately $142 million. This
is expected to result in lower interest expense of approximately $2.6 million
for 2004. The Corporation intends to account for these interest rate swaps as a
hedge of the fair value of the related FHLB advances. Accordingly, in future
periods the Corporation will record, in earnings, the net change in the fair
value of the interest rate swap and the related FHLB advances, provided the
criteria for hedge accounting continue to be met. In the event such criteria
are not met in a future period, the Corporation will only record changes in the
fair value on the interest rate swap. As a result of swapping $142 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 asset/liability management
strategy of preserving the asset sensitive nature of the Corporations balance
sheet, the Corporation replaced approximately $165 million of existing FHLB
floating rate overnight borrowings with fixed rate FHLB advances with
maturities of one to three years. This is expected to increase interest expense
$1.5 million for 2004. The Corporation expects to enter into additional interest rate swap
transactions during 2004 to the extent business conditions warrant. Should the
Corporation enter into additional interest rate swap transactions, it is
anticipated that the Corporation would also replace additional FHLB floating
rate overnight borrowings with fixed rate FHLB advances to preserve the asset
sensitive nature of the Corporations balance sheet. Interest rate swaps will 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 significantly adversely affect 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. See Note
Twenty-Oneof consolidated financial statements. 37




---



##### 



Interest rate contracts, which are generally non-leveraged interest rate
swaps, will 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 Sixteensummarizes 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
Sixteenas 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 Eighteenof 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, 2003. 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. Table Sixteen
Market Risk
December 31, 2003 Expected MaturityAfter(Dollars in thousands)
    
    Total
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    2008AssetsDebt securitiesFixed rateBook value
    
    $
    1,618,267
    
    
    $
    603,460
    
    
    $
    313,288
    
    
    $
    175,277
    
    
    $
    117,671
    
    
    $
    328,734
    
    
    $
    79,837Weighted average effective yield
    
    
    3.88
    %Fair value
    
    $
    1,539,784Loans and loans held for saleFixed rateBook value
    
    $
    688,928
    
    
    
    164,584
    
    
    
    131,629
    
    
    
    106,159
    
    
    
    67,498
    
    
    
    40,709
    
    
    
    178,349Weighted average effective yield
    
    
    6.49
    %Fair value
    
    $
    711,191Variable rateBook value
    
    $
    1,543,239
    
    
    
    555,428
    
    
    
    215,353
    
    
    
    155,619
    
    
    
    145,691
    
    
    
    114,959
    
    
    
    356,189Weighted average effective yield
    
    
    4.49
    %Fair value
    
    $
    1,537,947LiabilitiesDepositsFixed rateBook value
    
    $
    1,190,171
    
    
    
    902,473
    
    
    
    180,340
    
    
    
    55,319
    
    
    
    42,763
    
    
    
    4,046
    
    
    
    5,230Weighted average effective yield
    
    
    2.25
    %Fair value
    
    $
    1,191,200Variable rateBook value
    
    $
    911,047
    
    
    
    905,917
    
    
    
    5,073
    
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    Weighted average effective yield
    
    
    0.42
    %Fair value
    
    $
    911,033Other borrowingsFixed rateBook value
    
    $
    523,106
    
    
    
    50,052
    
    
    
    100,058
    
    
    
    165,061
    
    
    
    64
    
    
    
    68
    
    
    
    207,803Weighted average effective yield
    
    
    3.22
    %Fair value
    
    $
    539,987Variable rateBook value
    
    $
    909,094
    
    
    
    909,094
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average effective yield
    
    
    1.12
    %Fair value
    
    $
    909,105
 38




---



##### 



Table Seventeenpresents the contractual maturity distribution and
interest sensitivity of selected loan categories at December 31, 2003. This
table excludes non-accrual loans. Table Seventeen
Maturity and Sensitivity to Changes in Interest Rates December 31, 2003CommercialCommercial
    
    Non Real(Dollars in thousands)
    
    Real Estate
    
    Estate
    
    Construction
    
    TotalFixed rate:1 year or less
    
    $
    24,563
    
    
    $
    5,018
    
    
    $
    14,414
    
    
    $
    43,9951-5 years
    
    
    135,229
    
    
    
    43,402
    
    
    
    9,635
    
    
    
    188,266After 5 years
    
    
    40,253
    
    
    
    32,074
    
    
    
    1,203
    
    
    
    73,530Total fixed rate
    
    
    200,045
    
    
    
    80,494
    
    
    
    25,252
    
    
    
    305,791Variable rate:1 year or less
    
    
    87,606
    
    
    
    56,205
    
    
    
    213,661
    
    
    
    357,4721-5 years
    
    
    386,170
    
    
    
    67,020
    
    
    
    107,125
    
    
    
    560,315After 5 years
    
    
    44,849
    
    
    
    6,126
    
    
    
    12,179
    
    
    
    63,154Total variable rate
    
    
    518,625
    
    
    
    129,351
    
    
    
    332,965
    
    
    
    980,941Total selected loans
    
    $
    718,670
    
    
    $
    209,845
    
    
    $
    358,217
    
    
    $
    1,286,732
 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
Sixteenof 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 Eighteen
Commitments
As of December 31, 2003 Amount 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
    
    $
    29,011
    
    
    $
    1,860
    
    
    $
    4,344
    
    
    $
    298,600
    
    
    $
    333,815Standby Letters of Credit
    
    
    6,053
    
    
    
    2,071
    
    
    
    
    
    
    
    
    
    
    
    8,124Loan Commitments
    
    
    318,077
    
    
    
    49,020
    
    
    
    11,688
    
    
    
    4,187
    
    
    
    382,972Total Commitments
    
    $
    353,141
    
    
    $
    52,951
    
    
    $
    16,032
    
    
    $
    302,787
    
    
    $
    724,911
 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 39




---



##### 



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 sets liquidity management guidelines for both the consolidated
balance sheet, as well as for the Corporation, specifically to ensure that the
Corporation is a source of strength for its regulated, deposit-taking banking
subsidiary. The Corporations primary source of funding is 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 declined
in 2003 mainly due to greater funding needs for originations of mortgage loans
held for sale than proceeds received from the sale of such loans. Cash flows
from investing activities declined in 2003 as the purchases of securities
available for sale and loan originations exceeded the sale and maturities of
securities available for sale. These decreases in cash flows were partially
offset by cash flows from financing activities. Cash flows from financing
activities increased mainly due to increases in deposits and borrowings to fund
the purchase of securities available for sale and loan originations. 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, 2003, the Bank had an available line of credit with the FHLB
totaling $1.1 billion with $1.06 billion outstanding. At December 31, 2003, the
Bank also had federal funds back-up lines of credit totaling $70.0 million, of
which there were no amounts outstanding. At December 31, 2003, the Corporation
had lines of credit with SunTrust Bank totaling $25.0 million with $15.0
million outstanding and commercial paper outstandings of $35.1 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 2004, any contractual obligations that are due in less than
one year. Table Nineteen
Contractual Obligations
As of December 31, 2003 Payments Due by PeriodLess than(Dollars in thousands)
    
    1 year
    
    1-3 Years
    
    4-5 Years
    
    Over 5 Years
    
    TotalOther
borrowings - Long-term debt
    
    $
    959,094
    
    
    $
    165,000
    
    
    $
    100,000
    
    
    $
    208,106
    
    
    $
    1,432,200Operating lease obligations
    
    
    2,036
    
    
    
    4,065
    
    
    
    1,682
    
    
    
    10,465
    
    
    
    18,248Purchase obligations (1)
    
    
    2,394
    
    
    
    1,209
    

    
    
    237
    
    
    
    
    
    
    
    3,840Equity method investees funding
    
    
    2,425
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,425Deposits (2)
    
    
    2,135,069
    
    
    
    240,789
    
    
    
    46,809
    
    
    
    5,230
    
    
    
    2,427,897Other obligations (3)
    
    
    1,214
    
    
    
    2,414
    
    
    
    898
    
    
    
    3,726
    
    
    
    8,252Total Contractual Cash Obligations
    
    $
    3,102,232
    
    
    $
    413,477
    
    
    $
    149,626
    
    
    $
    227,527
    
    
    $
    3,892,862
 (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. 40




---



##### 



Capital Management The objective of effective capital management is to generate above market
returns on equity to our 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, 2003 decreased to $299.4 million,
representing 7.12 percent of period-end assets compared to $324.7 million or
8.67 percent of period-end assets at December 31, 2002. The decrease was due
mainly to the payment of $10.6 million for the purchase and retirement of
common stock, a $9.8 million decrease in the after-tax unrealized gain on
available for sale securities resulting from an increase in rates across the
yield curve and the previously mentioned restructuring of the securities
portfolio, and cash dividend payments of $22.0 million. These decreases were
partially offset by net income of $14.2 million. During 2003, 565,000 shares of First Charter Corporation common stock were
repurchased and retired under the January 24, 2002 authorization of the
Corporations Board of Directors to repurchase 1.5 million shares. A total of
1.4 million shares have been repurchased and retired under this authorization.
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. 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 Nineteenof 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 Nineteenof notes to
consolidated financial statements for additional discussion of these
requirements. At December 31, 2003, 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
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: 41




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Table Twenty
Capital Ratios Risk-Based CapitalLeverage Capital
    
    Tier 1 Capital
    
    Total Capital(Dollars in thousands)
    
    Amount
    
    Percentage (1)
    
    Amount
    
    Percentage (2)
    
    Amount
    
    Percentage (2)Actual
    
    $
    272,417
    
    
    
    6.53
    %
    
    $
    272,417
    
    
    
    10.00
    %
    
    $
    298,709
    
    
    
    10.97
    %Required
    
    
    166,844
    
    
    
    4.00
    
    
    
    108,953
    
    
    
    4.00
    
    
    
    217,905
    
    
    
    8.00Excess
    
    
    105,573
    
    
    
    2.53
    
    
    
    163,464
    
    
    
    6.00
    
    
    
    80,804
    
    
    
    2.97
  (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. 2002 VERSUS 2001 Overview Net income amounted to $39.8 million, or $1.30 diluted net income per
share for the year ended December 31, 2002, compared to $35.3 million or $1.12
diluted net income per share for the year ended December 31, 2001, representing
an increase of $4.5 million. The increase in net income was primarily due to
(i) a $7.8 million increase in net interest income resulting from decreased
interest expense, increased loan growth and higher levels of securities
outstanding, (ii) an $8.9 million increase in noninterest income resulting from
growth in service charges on deposit accounts, gains on sale of securities,
increased brokerage income and growth in First Charter Insurance Services and
(iii) a $1.8 million decrease in income taxes due to a decrease in the
effective tax rate. These increases were partially offset by (i) a $3.8 million
increase in the provision for loan losses due to increased loan growth and
higher levels of nonaccrual loans and (ii) a $10.2 million increase in
noninterest expense which was due to the following factors: prepayment costs
associated with refinancing $100 million in fixed-term advances, a reserve for
a contingent liability, expenses associated with the implementation of a new
computer operating system in the fourth quarter of 2001, increased occupancy
and equipment depreciation expense attributable to the First Charter Center
which was placed into service during April of 2001, additional personnel, and
increased incentive compensation based on increases in certain noninterest
income categories under established incentive plans. Net income for 2002 was
also favorably impacted by the adoption of two new accounting standards. On
January 1, 2002 the Corporation adopted Statement of Financial Accounting
Standards No. 142 (SFAS No. 142), which eliminated goodwill amortization. The
impact of goodwill amortization related to SFAS No. 142 for the year ended
December 31, 2001 was $441,000 ($417,000 or $0.01 diluted earnings per share,
after-tax). In addition, during the fourth quarter of 2002 the Corporation
adopted Statement of Financial Accounting Standards No. 147 (SFAS No. 147),
which eliminated goodwill amortization for 2002 on certain acquisition of
branches. The impact of goodwill amortization related to SFAS No. 147 for the
year ended December 31, 2001 was $955,000 ($649,000 or $0.02 diluted earnings
per share, after-tax). Net Interest Income For the year ended December 31, 2002, net interest income was $113.2
million, an increase of 7.4 percent from net interest income of $105.4 million
in 2001. The increase in net interest income was driven by decreased interest
expense, increased loan growth and higher levels of securities outstanding. The
reduced interest expense for 2002 was due to the lower cost of funding in a
declining interest rate environment. The increased securities interest income
was due to the higher levels of securities outstanding. The Corporation began
to increase its securities available for sale portfolio late in the first
quarter of 2001 to offset the effects of the dampened loan growth. 42




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Average interest earning assets increased approximately $380.5 million to
$3.26 billion for the year ended December 31, 2002, compared to $2.88 billion
for the same 2001 period. This increase was partially due to a $249.1 million
increase in the Corporations average securities available for sale. The
Corporation began to increase its securities available for sale portfolio late
in the first quarter of 2001, which continued through the end of 2001 (as
described above). Average interest earning assets also increased due to growth
in the Corporations average loan portfolio, which increased $132.5 million. In addition to the increase in average interest earning assets, the
Corporation experienced an increase in average interest bearing liabilities of
$396.5 million to $2.88 billion during 2002 due to increases in deposits and
the use of FHLB advances to fund loan growth and securities purchases. The net interest margin (tax adjusted net interest income divided by
average interest-earning assets) decreased 17 basis points to 3.55 percent in
2002, compared to 3.72 percent in 2001. The decrease reflects the impact of the
declining interest rate environment in 2001 and 2002, which had a negative
impact on the net interest margin as assets repriced faster than liabilities.
The addition of lower yielding securities, higher levels of borrowings and
competitive forces related to loan and deposit pricing also had a negative
impact on the net interest margin. Provision for Loan Losses The provision for loan losses for the year ended December 31, 2002
amounted to $8.2 million compared to the provision for loan losses of $4.5
million for the comparable 2001 period. The increase in the provision for loan
losses was due to higher levels of nonaccrual loans during 2002 and $125.0
million in gross loan growth for the year ended December 31, 2002 compared to a
decrease of $204.8 million in gross loans for the year ended December 31, 2001.
The loan growth experienced during 2002 was primarily in commercial real
estate, home equity lines and other secured retail credit. Noninterest Income Noninterest income increased $8.9 million to $47.6 million for the year
ended December 31, 2002, compared to $38.8 million for the same period in 2001.
The increase was primarily due to (i) a $9.1 million increase in gains on sale
of securities (ii) a $4.4 million increase in service charges on deposit
accounts resulting from increased overdraft fees due to the implementation of a
new automatic overdraft product in late 2001 and increased NSF fees, (iii) a
$0.5 million increase in brokerage income, (iv) a $1.1 million increase in
First Charter Insurance Services income, and (v) a $0.5 million increase in
gains on sale of property. The effects of these increases were partially offset
by $5.8 million of net losses on equity method investments, a $0.5 million
decrease in trading gains and a $0.2 million decrease in mortgage fee income. Noninterest Expense Noninterest expense increased $10.2 million to $97.8 million for the year
ended December 31, 2002 from $87.6 million in the comparable 2001 period. The
major contributing factors to this increase were $3.3 million in prepayment
penalties associated with the refinancing of $100 million of the Corporations
fixed-term advances, a reserve for a contingent liability of $840,000,
additional personnel, increased incentive compensation based on increases in
certain noninterest income categories and increased occupancy and equipment
depreciation expense attributable to the First Charter Center which was placed
into service during April of 2001. In addition, 2002 results reflect the
depreciation and data processing costs associated with the implementation of a
new operating system placed into service during the fourth quarter of 2001.
Noninterest expense was positively impacted $441,000 due to the adoption of
SFAS No. 142 and positively impacted $955,000 due to the adoption of SFAS No.
147 in 2002. Income Tax Expense Total income tax expense for the year ended December 31, 2002 was $14.9
million, for an effective tax rate of 27.3 percent, compared to $16.8 million
for an effective tax rate of 32.2 percent for the year 43




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##### 



ended December 31, 2001.
The decrease in the tax expense for the year ended December 31, 2002, was due
to the implementation of tax-planning initiatives. 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 with the Federal Reserve Bank of Richmond and the Office of the North
Carolina Commissioner of Banks, the Banks primary federal and state regulatory
agencies. The agreement arises out of certain previously disclosed regulatory
examinations and requires 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
has subsequently taken substantial actions, and adopted and implemented a
number of policies and procedures, to address the concerns of the regulatory
agencies. Accounting Matters In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 (SFAS No. 141), Business Combinations, and Statement of Financial
Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible
Assets. SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS 141 also
specifies criteria which must be met for intangible assets acquired in a
purchase method business combination to be recognized and reported apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead tested for impairment at least
annually in accordance with the provisions of SFAS 142. SFAS 142 also requires
that identifiable intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. SFAS No. 121 was subsequently superseded by Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. The Corporation adopted the provisions of SFAS
No. 141 as of June 30, 2001 and fully adopted SFAS No. 142 as of January 1,
2002. Accordingly, goodwill acquired in business combinations initiated after
July 1, 2001 are not amortized, and all other goodwill ceased being amortized
on January 1, 2002. SFAS No. 141 requires, upon adoption of SFAS No. 142, that the Corporation
evaluate its existing intangible assets and goodwill that were acquired in
prior purchase business combinations, and to make any necessary
reclassifications in order to conform with the new criteria in SFAS No. 141 for
recognition apart from goodwill. Upon adoption of SFAS No. 142, the Corporation
reassessed the useful lives and residual values of all identifiable intangible
assets acquired in purchase business combinations, and as a result was not
required to make any necessary amortization period adjustments. In addition,
any intangible assets classified as goodwill under SFAS No. 142 were subjected
to a transitional impairment test during the first six months of 2002 based on
the level of goodwill as of January 1, 2002. Goodwill as of January 1, 2002 was
tested during the first six months of 2002. As a result of this testing, no
impairment charges were recorded. In 2003, goodwill was tested for impairment
and no impairment charges were recorded. In May 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, (SFAS No. 145) Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections. This Statement
rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. This Statement also rescinds SFAS No.
44, Accounting for Intangible Assets of Motor Carriers and amends SFAS No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required 44




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##### 



accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. This
statement is effective for fiscal years beginning after May 15, 2002, with
early application encouraged. The Corporation early adopted the provisions of
SFAS No. 145 on October 1, 2002. As a result, the prepayment costs of $19.1
million associated with the refinancing of $131 million in longer-term fixed
rate FHLB advances in 2003 and $3.3 million associated with the refinancing of
$100 million in fixed-term advances in 2002, were classified in the operating
section of the income statement rather than as an extraordinary item, as
previously required by SFAS No. 4. In August 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (SFAS No. 146), Accounting for Costs Associated with Exit or
Disposal Activities, which addresses financial accounting and reporting costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). Under EITF Issue No. 94-3, an entity
recognized a liability for an exit cost on the date that the entity committed
itself to an exit plan. In SFAS No. 146, the FASB acknowledges that an entitys
commitment to a plan does not, by itself, create a present obligation to other
parties that meets the definition of a liability. An obligation becomes a
present obligation when a transaction or event occurs that leaves an entity
little or no discretion to avoid the future transfer or use of assets to settle
the liability. SFAS No. 146 also establishes that fair value is the objective
for the initial measurement of the liability. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002. There
was no impact to the Corporation upon adoption. In October 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 (SFAS No. 147), Acquisitions of Certain Financial
Institutions, which addresses the financial accounting and reporting for the
acquisition of all or part of a financial institution. This standard removes
certain acquisitions of financial institutions from the scope of Statement of
Financial Accounting Standards No. 72 (SFAS No. 72). This statement requires
financial institutions to reclassify goodwill, which was created from a
qualified business acquisition, from SFAS No. 72 goodwill to goodwill subject
to the provisions of SFAS No. 142. The reclassified goodwill will no longer be
amortized but will be subject to an annual impairment test, pursuant to SFAS
No. 142. SFAS No. 147 required the Corporation to retroactively restate its
previously issued 2002 interim financial statements, to reverse SFAS No. 72
goodwill amortization expense recorded in the first three quarters of the 2002
fiscal year, the year in which the Corporation adopted SFAS No. 142. The
Corporation adopted SFAS No. 147 on October 1, 2002. The Corporation had $12.1
million of SFAS No. 72 goodwill which was reclassified and will no longer be
amortized. This resulted in the reversal of $716,000 ($520,000 or $0.02 diluted
earnings per share, after-tax) of amortization expense for the nine months
ended September 30, 2002. In accordance with SFAS No. 147, the Corporation
performed a transitional impairment test of this goodwill in the fourth quarter
of 2002. As a result of this testing, no impairment charges were recorded. The
Corporation will continue to test this goodwill, along with all other goodwill,
annually. In 2003, goodwill was tested for impairment and no impairment charges
were recorded. In October 2002, the 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 45




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provisions
of FASB Interpretation No. 45 on January 1, 2003. The impact to the Corporation
upon adoption was immaterial. See Note Sixteenfor 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 Corporation currently has no
plans to change its accounting for stock-based employee compensation. 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 the notes to the consolidated financial
statements. 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, (FASB Interpretation No. 46), Consolidation of Variable
Interest Entities, which addresses consolidation of variable interest entities
by business enterprises. Variable interest entities are 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 FASB
Interpretation No. 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 will adopt the provisions of Fin 46 and Fin 46 R effective
March 2004 with no expected material effect on its consolidated financial
statements. At December 31, 2003, the Corporation did not have any significant
investments in variable interest entities and had no involvement with special
purpose entities. 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. 46




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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. It is to be implemented by reporting the cumulative effect of a change in
accounting principle for financial instruments created before the issuance date
of the Statement and still existing at the beginning of the interim period of
adoption. Accordingly, the Corporation adopted SFAS No. 150 on July 1, 2003,
with no 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. 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 37 and is incorporated herein by
reference. 47




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Item 8.Financial Statements and Supplementary Data Independent Auditors Report The Board of Directors
First Charter Corporation We have audited the accompanying consolidated balance sheets of First Charter
Corporation and subsidiaries (the Corporation) as of December 31, 2003 and
2002, 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, 2003. 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 auditing standards generally
accepted in the United States of America. 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, 2003 and 2002, and the results
of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America. As discussed in Note One to the Consolidated Financial Statements, on January
1, 2002, the Corporation adopted Statement of Financial Accounting Standards
No. 142 Goodwill and Other Intangible Assets, and on October 1, 2002, the
Corporation adopted Statement of Financial Accounting Standards No. 145
Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement
No. 13, and Technical Corrections and Statement of Financial Accounting
Standards No. 147 Acquisitions of Certain Financial Institutions. KPMG LLP Charlotte, North Carolina
February 25, 2004 48




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First Charter Corporation and Subsidiaries
Consolidated Balance Sheets December 31
    
    December 31(Dollars in thousands, except share data)
    
    2003
    
    2002Assets:Cash and due from banks
    
    $
    88,564
    
    
    $
    162,087Federal funds sold
    
    
    1,311
    
    
    
    1,154Interest bearing bank deposits
    
    
    23,631
    
    
    
    6,609Cash and cash equivalents
    
    
    113,506
    
    
    
    169,850Securities available for sale (cost of $1,591,803 at December 31, 2003 and
$1,103,107 at December 31, 2002; carrying amount of pledged collateral
at December 31, 2003, $1,129,474)
    
    
    1,601,900
    
    
    
    1,129,212Loans held for sale
    
    
    5,137
    
    
    
    158,404Loans
    
    
    2,252,804
    
    
    
    2,072,717Less: Unearned income
    
    
    (167
    )
    
    
    (247
    )Allowance for loan losses
    
    
    (25,607
    )
    
    
    (27,204
    )Loans, net
    
    
    2,227,030
    
    
    
    2,045,266Premises and equipment, net
    
    
    95,756
    
    
    
    94,647Other assets
    
    
    163,364
    
    
    
    148,570Total assets
    
    $
    4,206,693
    
    
    $
    3,745,949Liabilities:Deposits, domestic:Noninterest bearing demand
    
    $
    326,679
    
    
    $
    305,924Interest bearing
    
    
    2,101,218
    
    
    
    2,016,723Total deposits
    
    
    2,427,897
    
    
    
    2,322,647Other borrowings
    
    
    1,432,200
    
    
    
    1,042,440Other liabilities
    
    
    47,157
    
    
    
    56,176Total liabilities
    
    
    3,907,254
    
    
    
    3,421,263Shareholders 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 29,720,163 and 30,069,147 shares
    
    
    115,270
    
    
    
    122,870Common stock held in Rabbi Trust for deferred compensation
    
    
    (636
    )
    
    
    (476
    )Deferred compensation payable in common stock
    
    
    636
    
    
    
    476Retained earnings
    
    
    178,008
    
    
    
    185,900Accumulated other comprehensive income:Unrealized gains on securities available for sale, net
    
    
    6,161
    
    
    
    15,916Total shareholders equity
    
    
    299,439
    
    
    
    324,686Total liabilities and shareholders equity
    
    $
    4,206,693
    
    
    $
    3,745,949
 See accompanying notes to consolidated financial statements. 49




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##### 



First Charter Corporation and Subsidiaries
Consolidated Statements of Income Years Ended December 31(Dollars in thousands, except share and per share data)
    
    2003
    
    2002
    
    2001Interest income:Loans
    
    $
    118,911
    
    
    $
    135,085
    
    
    $
    158,985Federal funds sold
    
    
    20
    
    
    
    20
    
    
    
    75Interest bearing bank deposits
    
    
    465
    
    
    
    169
    
    
    
    399Securities
    
    
    58,896
    
    
    
    61,114
    
    
    
    55,817Total interest income
    
    
    178,292
    
    
    
    196,388
    
    
    
    215,276Interest expense:Deposits
    
    
    41,544
    
    
    
    50,957
    
    
    
    78,252Federal funds purchased and securities
sold under agreements to repurchase
    
    
    2,288
    
    
    
    2,492
    
    
    
    5,034Federal Home Loan Bank and other borrowings
    
    
    26,658
    
    
    
    29,778
    
    
    
    26,626Total interest expense
    
    
    70,490
    
    
    
    83,227
    
    
    
    109,912Net interest income
    
    
    107,802
    
    
    
    113,161
    
    
    
    105,364Provision for loan losses
    
    
    27,518
    
    
    
    8,270
    
    
    
    4,465Net interest income after provision for loan losses
    
    
    80,284
    
    
    
    104,891
    
    
    
    100,899Noninterest income:Service charges on deposit accounts
    
    
    22,143
    
    
    
    19,133
    
    
    
    13,848Financial management income
    
    
    3,705
    
    
    
    2,396
    
    
    
    2,323Gain on sale of securities
    
    
    10,287
    
    
    
    11,539
    
    
    
    2,399Gain on sale of credit card loan portfolio
    
    
    2,262
    
    
    
    
    
    
    
    Loss from equity method investees
    
    
    (285
    )
    
    
    (5,801
    )
    
    
    (442
    )Mortgage services income
    
    
    3,159
    
    
    
    2,457
    
    
    
    2,643Brokerage services income
    
    
    3,016
    
    
    
    2,288
    
    
    
    1,746Insurance services income
    
    
    9,408
    
    
    
    8,770
    
    
    
    7,681Trading gains
    
    
    1,801
    
    
    
    2,078
    
    
    
    2,592Bank owned life insurance
    
    
    3,888
    
    
    
    16
    
    
    
    Gain on sale of property
    
    
    382
    
    
    
    904
    
    
    
    416Other
    
    
    4,414
    
    
    
    3,851
    
    
    
    5,567Total noninterest income
    
    
    64,180
    
    
    
    47,631
    
    
    
    38,773Noninterest expense:Salaries and employee benefits
    
    
    54,998
    
    
    
    50,306
    
    
    
    44,719Occupancy and equipment
    
    
    16,504
    
    
    
    16,032
    
    
    
    14,607Data processing
    
    
    2,816
    
    
    
    2,968
    
    
    
    2,956Marketing
    
    
    4,435
    
    
    
    2,562
    
    
    
    2,363Postage and supplies
    
    
    4,521
    
    
    
    4,333
    
    
    
    4,820Professional services
    
    
    11,582
    
    
    
    6,615
    
    
    
    6,727Telephone
    
    
    2,267
    
    
    
    1,951
    
    
    
    1,396Amortization of intangibles
    
    
    441
    
    
    
    367
    
    
    
    1,875Prepayment costs on borrowings
    
    
    19,089
    
    
    
    3,284
    
    
    
    Other
    
    
    10,379
    
    
    
    9,354
    
    
    
    8,116Total noninterest expense
    
    
    127,032
    
    
    
    97,772
    
    
    
    87,579Income before income taxes
    
    
    17,432
    
    
    
    54,750
    
    
    
    52,093Income taxes
    
    
    3,286
    
    
    
    14,947
    
    
    
    16,768Net income
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    35,325Net income per share:Basic
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.12Diluted
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.12Weighted average shares:Basic
    
    
    29,789,969
    
    
    
    30,520,125
    
    
    
    31,480,109Diluted
    
    
    30,007,435
    
    
    
    30,702,107
    
    
    
    31,660,985
 See accompanying notes to consolidated financial statements. 50




---



##### 



First Charter Corporation and Subsidiaries
Consolidated Statements of Shareholders Equity Common Stockheld in Rabbi
    
    Deferred
    
    
    
    
    
    AccumulatedCommon Stock
    
    Trust for
    
    Compensation
    
    
    
    
    
    OtherDeferred
    
    Payable in
    
    Retained
    
    Comprehensive(Dollars in thousands, except share data)
    
    Shares
    
    Amount
    
    Compensation
    
    Common Stock
    
    Earnings
    
    Income
    
    TotalBalance, December 31, 2000
    
    
    31,601,263
    
    
    $
    151,486
    
    
    $
    
    
    
    $
    
    
    
    $
    155,762
    
    
    $
    2,039
    
    
    $
    309,287Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35,325
    
    
    
    
    
    
    
    35,325Unrealized gain on securities available
for sale, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,801
    
    
    
    3,801Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39,126Common stock purchased by Rabbi Trust
for deferred compensation
    
    
    
    
    
    
    
    
    
    
    (388
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (388
    )Deferred compensation payable
in common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    388
    
    
    
    
    
    
    
    
    
    
    
    388Cash dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (22,753
    )
    
    
    
    
    
    
    (22,753
    )Stock options exercised and Dividend
Reinvestment Plan stock issued
    
    
    141,269
    
    
    
    1,643
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,643Purchase and retirement of common stock
    
    
    (1,000,000
    )
    
    
    (17,962
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (17,962
    )Balance, 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
    
    
    $
    299,439
 See accompanying notes to consolidated financial statements. 51




---



##### 



First Charter Corporation and Subsidiaries
Consolidated Statements of Cash Flows Years Ended December 31(Dollars in thousands)
    
    2003
    
    2002
    
    2001Cash flows from operating activities:Net income
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    35,325Adjustments to reconcile net income to net cash (used in) provided by operating activities:Provision for loan losses
    
    
    27,518
    
    
    
    8,270
    
    
    
    4,465Depreciation
    
    
    8,952
    
    
    
    9,535
    
    
    
    8,025Amortization of intangibles
    
    
    441
    
    
    
    367
    
    
    
    1,875Premium amortization and discount accretion, net
    
    
    6,867
    
    
    
    1,466
    
    
    
    (615
    )Net gain on securities available for sale transactions
    
    
    (10,287
    )
    
    
    (11,539
    )
    
    
    (2,399
    )Net loss (gain) on foreclosed assets
    
    
    265
    
    
    
    211
    
    
    
    (10
    )Net loss from equity method investments
    
    
    285
    
    
    
    5,801
    
    
    
    442Net gain on sale of property
    
    
    (382
    )
    
    
    (904
    )
    
    
    (416
    )Net loss (gain) on sale of equipment
    
    
    5
    
    
    
    (39
    )
    
    
    (11
    )Gain on sale of credit card loan portfolio
    
    
    (2,262
    )
    
    
    
    
    
    
    Origination of mortgage loans held for sale
    
    
    (278,165
    )
    
    
    (159,049
    )
    
    
    (203,231
    )Proceeds from sale of mortgage loans held for sale
    
    
    144,510
    
    
    
    137,736
    

    
    
    200,961(Increase) in cash surrender value of bank owned life insurance
    
    
    (3,888
    )
    
    
    
    
    
    
    (Increase) decrease in other assets
    
    
    (5,954
    )
    
    
    865
    
    
    
    5,220(Decrease) increase in other liabilities
    
    
    (9,642
    )
    
    
    4,238
    
    
    
    (3,778
    )Net cash (used in) provided by operating activities
    
    
    (107,591
    )
    
    
    36,761
    
    
    
    45,853Cash flows from investing activities:Proceeds from sales of securities available for sale
    
    
    1,004,264
    
    
    
    746,886
    
    
    
    549,402Proceeds from maturities of securities available for sale
    
    
    551,072
    
    
    
    275,298
    
    
    
    245,081Purchase of securities available for sale
    
    
    (1,753,691
    )
    
    
    (1,048,473
    )
    
    
    (1,254,580
    )Purchase of bank owned life insurance
    
    
    
    
    
    
    (70,000
    )
    
    
    Net (increase) decrease in loans and loans held for sale
    
    
    (267,843
    )
    
    
    (267,168
    )
    
    
    22,466Proceeds from sale of loans
    
    
    40,220
    
    
    
    
    
    
    
    Proceeds from sales of other real estate
    
    
    10,452
    
    
    
    3,153
    
    
    
    3,205Net purchases of premises and equipment
    
    
    (9,528
    )
    
    
    (7,166
    )
    
    
    (28,323
    )Proceeds from sale of credit card portfolio
    
    
    13,242
    
    
    
    
    
    
    
    Acquisition of businesses, net of cash paid
    
    
    (991
    )
    
    
    
    
    
    
    (439
    )Net cash used in investing activities
    
    
    (412,803
    )
    
    
    (367,470
    )
    
    
    (463,188
    )Cash flows from financing activities:Net increase in demand, money market and savings accounts
    
    
    210,268
    
    
    
    85,765
    
    
    
    77,311Net (decrease) increase in certificates of deposit
    
    
    (105,016
    )
    
    
    73,936
    
    
    
    87,400Net increase in securities sold under repurchase
agreements and other borrowings
    
    
    389,759
    
    
    
    233,928
    
    
    
    238,489Purchase and retirement of common stock
    
    
    (10,623
    )
    
    
    (13,894
    )
    
    
    (17,962
    )Proceeds from issuance of common stock
    
    
    1,700
    
    
    
    1,596
    
    
    
    1,643Dividends paid
    
    
    (22,038
    )
    
    
    (22,237
    )
    
    
    (22,753
    )Net cash provided by financing activities
    
    
    464,050
    
    
    
    359,094
    
    
    
    364,128Net (decrease) increase in cash and cash equivalents
    
    
    (56,344
    )
    
    
    28,385
    
    
    
    (53,207
    )Cash and cash equivalents at beginning of period
    
    
    169,850
    
    
    
    141,465
    
    
    
    194,672Cash and cash equivalents at end of period
    
    $
    113,506
    
    
    $
    169,850
    
    
    $
    141,465Supplemental disclosures of cash flow information:Cash paid for interest
    
    $
    72,699
    
    
    $
    85,070
    
    
    $
    110,860Cash paid for income taxes
    
    
    12,619
    
    
    
    4,352
    
    
    
    4,254Supplemental disclosure of non-cash transactions:Transfer of loans and premises and equipment to other real estate owned
    
    
    7,272
    
    
    
    5,593
    
    
    
    8,255Unrealized (loss) gain on securities available for sale
(net of tax effect of ($6,254), $6,451, and $2,430 for the years ended
December 31, 2003, 2002, and 2001, respectively)
    
    
    (9,755
    )
    
    
    10,076
    
    
    
    3,801Issuance of common stock for business acquisitions
    
    
    1,323
    
    
    
    
    
    
    
    Loans held for sale securitized and transferred to the securities
available for sale portfolio
    
    
    286,922
    
    
    
    130,084
    
    
    
    166,992Allowance related to loans sold, securitized or transferred
to held for sale
    
    
    20,783
    
    
    
    647
    
    
    
    417
 See accompanying notes to consolidated financial statements. 52




---



##### 



First Charter Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2003, 2002 and 2001 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 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 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 2003. 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 54 financial centers, five insurance
offices and 93 ATMs located in 17 counties throughout North Carolina. FCB also
operates an additional mortgage origination office in Virginia. 53




---



##### 



Recently Adopted Accounting Pronouncements In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 (SFAS No. 141), Business Combinations, and Statement of Financial
Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible
Assets. SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS 141 also
specifies criteria which must be met for intangible assets acquired in a purchase method business
combination to be recognized and reported apart from goodwill. SFAS 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires that
identifiable intangible assets with definite useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
SFAS No. 121 was subsequently superseded by Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. The Corporation adopted the provisions of SFAS No. 141 as of June 30,
2001 and fully adopted SFAS No. 142 as of January 1, 2002. Accordingly,
goodwill acquired in business combinations initiated after July 1, 2001 are not
amortized, and all other goodwill ceased being amortized on January 1, 2002. SFAS No. 141 requires, upon adoption of SFAS No. 142, that the Corporation
evaluate its existing intangible assets and goodwill that were acquired in
prior purchase business combinations, and to make any necessary
reclassifications in order to conform with the new criteria in SFAS No. 141 for
recognition apart from goodwill. Upon adoption of SFAS No. 142, the Corporation
reassessed the useful lives and residual values of all identifiable intangible
assets acquired in purchase business combinations, and as a result was not
required to make any necessary amortization period adjustments. In addition,
any intangible assets classified as goodwill under SFAS No. 142 were subjected
to a transitional impairment test during the first six months of 2002 based on
the level of goodwill as of January 1, 2002. Goodwill as of January 1, 2002 was
tested during the first six months of 2002. As a result of this testing, no
impairment charges were recorded. In 2003, goodwill was tested for impairment
and no impairment charges were recorded. In May 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, (SFAS No. 145) Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections. This Statement
rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt,
and an amendment of that Statement, SFAS No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. This Statement also rescinds SFAS No.
44, Accounting for Intangible Assets of Motor Carriers and amends SFAS No.
13, Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. This Statement also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. This
statement is effective for fiscal years beginning after May 15, 2002, with
early application encouraged. The Corporation early adopted the provisions of
SFAS No. 145 on October 1, 2002. As a result, the prepayment costs of $19.1
million associated with the refinancing of $131 million in longer-term fixed
rate FHLB advances in 2003 and $3.3 million associated with the refinancing of
$100 million in fixed-term advances in 2002, were classified in the operating
section of the income statement rather than as an extraordinary item, as
previously required by SFAS No. 4. In August 2002, the FASB issued Statement of Financial Accounting
Standards No. 146 (SFAS No. 146), Accounting for Costs Associated with Exit or
Disposal Activities, which addresses financial accounting and reporting costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). Under EITF Issue No. 94-3, an entity
recognized a liability for an exit cost on the date that the entity committed
itself to an exit plan. In SFAS No. 146, the FASB acknowledges that an entitys
commitment to a plan does not, by itself, create a present obligation to other
parties that meets the definition of a liability. An obligation becomes a
present obligation when a transaction or event occurs that leaves an entity
little or no discretion to avoid the future transfer or use of assets to settle
the liability. SFAS No. 146 also establishes 54




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##### 



that fair value is the objective
for the initial measurement of the liability. SFAS No. 146 is effective for
exit or disposal activities that are initiated after December 31, 2002. There
was no impact to the Corporation upon adoption. In October 2002, the FASB issued Statement of Financial Accounting
Standards No. 147 (SFAS No. 147), Acquisitions of Certain Financial
Institutions, which addresses the financial accounting and reporting for the
acquisition of all or part of a financial institution. This standard removes
certain acquisitions of financial institutions from the scope of Statement of
Financial Accounting Standards No. 72 (SFAS No. 72). This statement requires
financial institutions to reclassify goodwill, which was created from a
qualified business acquisition, from SFAS No. 72 goodwill to goodwill subject
to the provisions of SFAS No. 142. The reclassified goodwill will no longer be
amortized but will be subject to an annual impairment test, pursuant to SFAS
No. 142. SFAS No. 147 required the Corporation to retroactively restate its
previously issued 2002 interim financial statements, to reverse SFAS No. 72
goodwill amortization expense recorded in the first three quarters of the 2002
fiscal year, the year in which the Corporation adopted SFAS No. 142. The
Corporation adopted SFAS No. 147 on October 1, 2002. The Corporation had $12.1
million of SFAS No. 72 goodwill which was reclassified and will no longer be
amortized. This resulted in the reversal of $716,000 ($520,000 or $0.02 diluted
earnings per share, after-tax) of amortization expense for the nine months
ended September 30, 2002. In accordance with SFAS No. 147, the Corporation
performed a transitional impairment test of this goodwill in the fourth quarter
of 2002. As a result of this testing, no impairment charges were recorded. The
Corporation will continue to test this goodwill, along with all other goodwill,
annually. In 2003, goodwill was tested for impairment and no impairment charges
were recorded. In October 2002, the 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 Sixteenfor 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 Corporation currently has no
plans to change its accounting for stock-based employee compensation. 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 the notes to the consolidated financial
statements. 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. 55




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##### 



In January 2003, the FASB issued Financial Accounting Standards Board
Interpretation No. 46, (FASB Interpretation No. 46), Consolidation of Variable
Interest Entities, which addresses consolidation of variable interest entities
by business enterprises. Variable interest entities are 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 FASB Interpretation No. 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 will adopt the provisions of Fin 46 and Fin 46 R
effective March 2004 with no expected material effect on its consolidated
financial statements. At December 31, 2003, the Corporation did not have any
significant investments in variable interest entities and had no involvement
with special purpose entities. 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. It is to be implemented by reporting the cumulative effect of a change
in accounting principle for financial instruments created before the issuance
date of the Statement and still existing at the beginning of the interim period
of adoption. Accordingly, the Corporation adopted SFAS No. 150 on July 1, 2003,
with no 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. 56




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##### 



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, 2003, 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-temporary are written down to fair value with the write-down treated
as a component of securities available for sale transactions, net in the
consolidated statement of 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, 2003, the Corporation held no securities in this
category. As more fully discussed in Note Fourteen, the Corporation had a
nominal amount of trading assets at December 31, 2003, which are carried at
fair value. These trading assets are held for possible 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 and Loans Held for Sale 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. 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. 57




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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. 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. Derivative Instruments The Corporation evaluates the impact of SFAS No. 133 on all new products
introduced, contracts negotiated, and transactions contemplated to determine
whether a derivative exists and its financial impact. As of December 31, 2003,
the Corporation had no significant derivative instruments outstanding that are
required to be accounted for in accordance with SFAS No. 133. During 2003 and
2002, the Corporation recognized income of $1.8 million and $2.1 million,
respectively, on premiums on written over-the-counter covered call options on
fixed income securities. In the first quarter of 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 Note
Twenty-Onefor subsequent events. 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 carrying value and aggregate estimated fair value of mortgage
servicing rights at December 31, 2003 was $2.1 million and $2.7 million,
respectively, compared to a carrying value and estimated fair value of $1.5
million and $1.8 million at December 31, 2002. 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 a valuation allowance related to its servicing rights
of $1.2 million, $693,000 and $263,000 for the years ended December 31, 2003,
December 31, 2002 and December 31, 2001, 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)
    
    2003
    
    2002
    
    2001Balance, January 1,
    
    $
    1,478
    
    
    $
    3,028
    
    
    $
    1,659Servicing rights capitalized
    
    
    2,440
    
    
    
    
    
    
    
    2,472Amortization expense
    
    
    (1,282
    )
    
    
    (1,120
    )
    
    
    (840
    )Change in valuation allowance
    
    
    (530
    )
    
    
    (430
    )
    
    
    (263
    )Balance, December 31,
    
    $
    2,106
    
    
    $
    1,478
    
    
    $
    3,028
 58




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##### 



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 at the date of acquisition, and therefore, the historical cost basis
of individual assets and liabilities are adjusted to reflect their fair value.
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 at the reporting unit level. An impairment loss is recorded to the
extent that the carrying amount of goodwill exceeds its implied fair value. In
2003, goodwill was tested for impairment and no impairment charges were
recorded. 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 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. Equity Method Investments The Corporations equity method investments represent investments in
venture capital limited partnerships. 59




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##### 



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 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: 2003
    
    2002
    
    2001Basic weighted average number of common shares outstanding
    
    
    29,789,969
    
    
    
    30,520,125
    
    
    
    31,480,109Dilutive effect arising from
potential common stock issuances
    
    
    217,466
    
    
    
    181,982
    
    
    
    180,876Diluted weighted average number of common shares outstanding
    
    
    30,007,435
    
    
    
    30,702,107
    
    
    
    31,660,985
 The effects of outstanding antidilutive stock options are excluded from
the computation of diluted earnings per share. These amounts were 723,000
shares at December 31, 2003 and 1.3 million shares at both December 31, 2002
and 2001. Dividends Per Share Dividends declared by the Corporation were $0.74 per share, $0.73 per
share and $0.72 per share for the years ended December 31, 2003, 2002 and 2001,
respectively. 60




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##### 



Stock-Based Compensation 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 and 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 of FASB Statement No. 123, is disclosed as follows and
in Note Fifteen. Years Ended December 31,(Dollars in thousands, except per share data)
    
    2003
    
    2002
    
    2001Net income, as reported
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    35,325Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (2,293
    )
    
    
    (2,755
    )
    
    
    (2,193
    )Pro forma net income
    
    $
    11,853
    
    
    $
    37,048
    
    
    $
    33,132Earnings per share:Basic-as reported
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.12Basic-pro forma
    
    $
    0.40
    
    
    $
    1.21
    
    
    $
    1.05Diluted-as reported
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.12Diluted-pro forma
    
    $
    0.40
    
    
    $
    1.21
    
    
    $
    1.05
 Note Two - Business Segment Information For 2003, 2002, and 2001 the Corporation only had one reportable segment,
FCB. FCB provides businesses and individuals with commercial loans, retail
loans, and deposit banking services. Other operating segments include
brokerage, insurance, mortgage and financial management which provides
comprehensive financial planning, funds management, and investments. 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. 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. 61




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##### 



Information regarding the reportable segments separate results of
operations and segment assets is illustrated in the following tables: 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
    
    
    
    19,466
    
    
    
    37
    
    
    
    64,180Total noninterest expense
    
    
    106,420
    
    
    
    20,545
    
    
    
    67
    
    
    
    127,032Income (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, net
    
    $
    2,225,776
    
    
    $
    1,254
    
    
    $
    
    
    
    $
    2,227,030Total 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
    
    
    
    16,126
    
    
    
    (3,914
    )
    
    
    47,631Total noninterest expense
    
    
    80,036
    
    
    
    17,650
    
    
    
    86
    
    
    
    97,772Income (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
    )
    
    $
    39,803Total loans, net
    
    $
    2,043,056
    
    
    $
    2,210
    
    
    $
    
    
    
    $
    2,045,266Total assets
    
    
    3,546,893
    
    
    
    172,833
    
    
    
    26,223
    
    
    
    3,745,949
 2001Other Operating(Dollars in thousands)
    
    FCB
    
    Segments (1)
    
    Other (2)
    
    TotalsTotal interest income
    
    $
    214,570
    
    
    $
    490
    
    
    $
    216
    
    
    $
    215,276Total interest expense
    
    
    109,719
    
    
    
    
    
    
    
    193
    
    
    
    109,912Net interest income
    
    
    104,851
    
    
    
    490
    
    
    
    23
    
    
    
    105,364Provision for loan losses
    
    
    4,465
    
    
    
    
    
    
    
    
    
    
    
    4,465Total noninterest income
    
    
    23,936
    
    
    
    15,053
    
    
    
    (216
    )
    
    
    38,773Total noninterest expense
    
    
    74,010
    
    
    
    13,593
    
    
    
    (24
    )
    
    
    87,579Income (loss) before income taxes
    
    
    50,312
    
    
    
    1,950
    
    
    
    (169
    )
    
    
    52,093Income taxes
    
    
    16,166
    
    
    
    657
    
    
    
    (55
    )
    
    
    16,768Net income (loss)
    
    $
    34,146
    
    
    $
    1,293
    
    
    $
    (114
    )
    
    $
    35,325
  (1)
    
    Included in other operating segments are revenues, expenses and assets of insurance services, brokerage,
mortgage and financial management.  (2)
    
    Included in other are revenues, expenses and assets of the parent company and eliminations. 62




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##### 



Note Three - Mergers and Acquisitions (a) Insurance Agencies. Since the beginning of 2001, the Corporation has
acquired four insurance agencies. The year over year increases in insurance
services income is due to the organic growth from our insurance agencies as
well as the insurance agencies and customer lists acquired. The insurance
agencies acquired were Hoffman & Young, Inc., Piedmont Insurance Agency, Inc.,
Banner and Greene Agency, Inc. and Robertson Insurance Agency, Inc. 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. On July 7, 2003, the Corporation,
through a subsidiary of FCB, purchased a third party benefits administrator in
a stock transaction. 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. The value of such additional payments, if earned, is expected to
total approximately $880,000. This acquisition was accounted for as a purchase.
Accordingly, 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.
Intangible assets amounted to $1.1 million from the acquisition. 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, 2003 and December 31, 2002: December 31,
    
    December 312003
    
    2002Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    Accumulated(Dollars in thousands)
    
    Amount
    
    Amortization
    
    Amount
    
    AmortizationAmortized intangible assets:Noncompete agreements (1)
    
    $
    946
    
    
    $
    861
    
    
    $
    946
    
    
    $
    744Customer lists (1)
    
    
    1,471
    
    
    
    236
    
    
    
    417
    
    
    
    106Mortgage servicing rights (1)
    
    
    7,083
    
    
    
    4,977
    
    
    
    4,643
    
    
    
    3,165Branch acquisitions (2)
    
    
    1,111
    
    
    
    1,097
    
    
    
    1,110
    
    
    
    925Other intangibles (1) (3)
    
    
    232
    
    
    
    22
    
    
    
    
    
    
    
    Total
    
    $
    10,843
    
    
    $
    7,193
    
    
    $
    7,116
    
    
    $
    4,940Unamortized intangible assets:Goodwill (4)
    
    $
    19,222
    
    
    $
    
    
    
    $
    18,093
    
    
    $
    
 (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 $6,278 is recorded in the Other Operating Segments and $12,944 is recorded on FCB as described in Note Two. The gross carrying amount of goodwill increased to $19.2 million at
December 31, 2003 from $18.1 million at December 31, 2002 primarily due to
goodwill of $870,000 associated with the acquisition of a third party benefits
administrator in July 2003 and goodwill of $385,000 associated with the
acquisition of Piedmont Insurance Agency in July 2003. There was no impairment
of goodwill for the years ended December 31, 2003 and 2002. Amortization expense, excluding amortization of mortgage servicing rights,
totaled $441,000 and $367,000 for the years ended December 31, 2003 and 2002,
respectively. 63




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##### 



The following table presents the estimated amortization expense for
intangible assets for the years ended December 31, 2004, 2005, 2006, 2007, 2008
and 2009 and thereafter: Noncompete
    
    Customer
    
    Mortgage
    
    Branch
    
    Other(Dollars in thousands)
    
    Agreements
    
    Lists
    
    Servicing Rights
    
    Acquisitions
    
    Intangibles
    
    Total2004
    
    $
    85
    
    
    $
    260
    
    
    $
    872
    
    
    $
    14
    
    
    $
    42
    
    
    $
    1,2732005
    
    
    
    
    
    
    226
    
    
    
    442
    
    
    
    
    
    
    
    37
    
    
    
    7052006
    
    
    
    
    
    
    193
    
    
    
    305
    
    
    
    
    
    
    
    32
    
    
    
    5302007
    
    
    
    
    
    
    160
    
    
    
    211
    
    
    
    
    
    
    
    28
    
    
    
    3992008
    
    
    
    
    
    
    126
    
    
    
    118
    
    
    
    
    
    
    
    23
    
    
    
    2672009 and after
    
    
    
    
    
    
    270
    
    
    
    158
    
    
    
    
    
    
    
    48
    
    
    
    476Total
    
    $
    85
    
    
    $
    1,235
    
    
    $
    2,106
    
    
    $
    14
    
    
    $
    210
    
    
    $
    3,650
 The following table presents the adjusted effect of goodwill amortization
on net income and on basic and diluted earnings per share for years ended
December 31, 2003, 2002 and 2001: For the Years Ended December 31(Dollars in thousands, exceptearnings per share amounts)
    
    2003
    
    2002
    
    2001Net income
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    35,325Add back: Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    1,065Adjusted net income
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    36,390Basic earnings per share:As reported
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.12Goodwill amortization
    
    
    
    
    
    
    
    
    
    
    0.04Adjusted net income
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.16Diluted earnings per share:As reported
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.12Goodwill amortization
    
    
    
    
    
    
    
    

    
    
    0.03Adjusted net income
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.15
 Note Five - Comprehensive Income Comprehensive income includes net income and all non-owner changes to the
Corporations equity. 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, 2003, 2002 and 2001 was $4.4 million, $49.9 million and $39.1 million,
respectively. Information concerning the Corporations other comprehensive
income for the years ended December 31, 2003, 2002 and 2001 is as follows: 2003
    
    2002
    
    2001Before Tax
    
    
    
    
    
    After Tax
    
    Before Tax
    
    
    
    
    
    After Tax
    
    Before Tax
    
    
    
    
    
    After TaxAmount
    
    Tax Effect
    
    Amount
    
    Amount
    
    Tax Effect
    
    Amount
    
    Amount
    
    Tax Effect
    
    Amount(Dollars in thousands)

    Lists

    Lists

    Lists

    Lists

    Lists

    Lists

    Lists

    Lists

    ListsUnrealized (losses) gains
on securities:Unrealized (losses) gains
arising during period
    
    $
    (5,722
    )
    
    $
    (2,242
    )
    
    $
    (3,480
    )
    
    $
    28,066
    
    
    $
    10,951
    
    
    $
    17,115
    
    
    $
    8,630
    
    
    $
    3,366
    
    
    $
    5,264Less: Reclassification for
realized gains
    
    
    10,287
    
    
    
    4,012
    
    
    
    6,275
    
    
    
    11,539
    
    
    
    4,500
    
    
    
    7,039
    
    
    
    2,399
    
    
    
    936
    
    
    
    1,463Unrealized (losses) gains,
net of reclassification
    
    $
    (16,009
    )
    
    $
    (6,254
    )
    
    $
    (9,755
    )
    
    $
    16,527
    
    
    $
    6,451
    
    
    $
    10,076
    
    
    $
    6,231
    
    
    $
    2,430
    
    
    $
    3,801Other comprehensive
(loss) income
    
    $
    (16,009
    )
    
    $
    (6,254
    )
    
    $
    (9,755
    )
    
    $
    16,527
    
    
    $
    6,451
    
    
    $
    10,076
    
    
    $
    6,231
    
    
    $
    2,430
    
    
    $
    3,801
 64




---



##### 



Note Six - Securities Available for Sale Securities available for sale at December 31, 2003 and 2002 are summarized
as follows: 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
 2002Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    Fair(Dollars in thousands)
    
    Cost
    
    Gains
    
    Losses
    
    ValueUS government obligations
    
    $
    64,253
    
    
    $
    1,528
    
    
    $
    4
    
    
    
    65,777US government agency obligations
    
    
    399,648
    
    
    
    8,715
    
    
    
    1
    
    
    
    408,362Mortgage-backed securities
    
    
    518,969
    
    
    
    10,922
    
    
    
    197
    
    
    
    529,694State, county, and municipal obligations
    
    
    78,998
    
    
    
    3,966
    
    
    
    
    
    
    
    82,964Equity securities
    
    
    41,239
    
    
    
    1,197
    
    
    
    21
    
    
    
    42,415Total
    
    $
    1,103,107
    
    
    $
    26,328
    
    
    $
    223
    
    
    $
    1,129,212
 The expected maturity distribution and yields (computed on a
taxable-equivalent basis) of the Corporations securities portfolio at December
31, 2003 are summarized below. Actual 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
    
    $
    15,040
    
    
    
    3.12
    %
    
    $
    45,233
    
    
    
    3.20
    %
    
    $
    
    
    
    
    
    %
    
    $
    
    
    
    
    
    %
    
    
    $
    60,273
    
    
    3.18
    %U.S. government
agency obligations
    
    
    32,320
    
    
    
    5.15
    
    
    
    548,524
    
    
    
    3.78
    
    
    
    54,423
    
    
    
    3.84
    
    
    
    
    
    
    
    
    
    
    
    
    635,267
    
    
    3.85Mortgage-backed
securities (1)
    
    
    2,454
    
    
    
    2.49
    
    
    
    518,389
    
    
    
    4.02
    
    
    
    250,314
    
    
    
    4.22
    
    
    
    
    
    
    
    
    
    
    
    
    771,157
    
    
    4.08State and municipal
obligations
    
    
    7,042
    
    
    
    6.59
    
    
    
    31,973
    
    
    
    6.78
    
    
    
    26,521
    
    
    
    6.70
    
    
    
    7,551
    
    
    
    6.66
    
    
    
    
    73,087
    
    
    6.72Equity securities (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,116
    
    
    
    3.79
    
    
    
    
    62,116
    
    
    3.79Total
    
    $
    56,856
    
    
    
    4.68
    %
    
    $
    1,144,119
    
    
    
    3.95
    %
    
    $
    331,258
    
    
    
    4.36
    %
    
    $
    69,667
    
    
    
    4.10
    %
    
    
    $
    1,601,900
    
    
    4.07
    %Amortized cost of securities
available for sale
    
    $
    55,954
    
    
    
    
    
    
    $
    1,135,078
    
    
    
    
    
    
    $
    333,052
    
    
    
    
    
    
    $
    67,719
    
    
    
    
    
    
    
    $
    1,591,803
 (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, 2003 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 $1.0 billion in
2003, $746.9 million in 2002, and $549.4 million in 2001. Gross gains of $10.4
million and gross losses of $0.1 million were realized in 2003. Gross gains of
$15.0 million and gross losses of $3.5 million were realized in 2002. Gross
gains of $2.7 million and gross losses of $0.3 million were realized in 2001. 65




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##### 



At December 31, 2003 and 2002, the Bank owned stock in the Federal Home
Loan Bank of Atlanta with a cost basis (par value) of $53.8 million and $34.1
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. Other-than-temporary declines in the fair value of certain equity
securities held in the Corporations available for sale portfolio resulted in
no write downs for 2003 and 2002, respectively, and $144,000 for 2001. As of December 31, 2003, 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, 2003, US government agency securities of $182.9 million
were considered temporarily impaired. US government agency securities are
interest-bearing debt securities of US departments and agencies.
Mortgage-backed securities of $417.4 million were considered temporarily
impaired at December 31, 2003. 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. Income 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. State,
county and municipal obligations of $24.7 million were considered temporarily
impaired at December 31, 2003. These obligations are debt instruments that are
obligations of a state, county or municipality, and also political subdivisions
and agencies of these governments. The unrealized losses shown in the following table resulted primarily from
an increase in rates across the yield curve. As of December 31, 2003 Less than 12 months
    
    12 months or longer
    
    TotalGross
    
    
    
    
    
    GrossGross Unrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    Unrealized(Dollars in thousands)
    
    Fair Value
    
    Losses
    
    Fair Value
    
    Losses
    
    Fair Value
    
    LossesDescription of Securities:US government agency securities
    
    $
    182,932
    
    
    $
    1,842
    
    
    $
    
    
    
    $
    
    
    
    $
    182,932
    
    
    $
    1,842Mortgage-backed securities
    
    
    417,430
    
    
    
    6,896
    
    
    
    
    
    
    
    
    
    
    
    417,430
    
    
    
    6,896US government obligations
    
    
    24,688
    
    
    
    317
    
    
    
    
    
    
    
    
    
    
    
    24,688
    
    
    
    317Total temporarily impaired securities
    
    $
    625,050
    
    
    $
    9,055
    
    
    $
    
    
    
    $
    
    
    
    $
    625,050
    
    
    $
    9,055
 Investments that are in a gross unrealized loss position include two US
agency securities, eighteen mortgage-backed securities and three municipal
obligations. The majority of these investments have been impaired for at least
six months. Note Seven - Trading Activity During 2003, 2002 and 2001, the Corporation engaged in writing
over-the-counter covered call options, in order to enhance returns, 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. The Corporation
recognized income of $1.8 million, $2.1 million and $2.6 million from writing
covered call options in 2003, 2002 and 2001, respectively. There were no
written covered call options outstanding at December 31, 2003, December 31,
2002 and December 31, 2001. The highest written covered call options
outstanding at any time during 2003, 2002 and 2001 were $125.2 million, $194.0
million and $200.5 million, respectively. 66




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##### 



Note Eight - Loans The Corporations primary market area includes North Carolina, and
predominately centers around the Metro region of Charlotte, North Carolina. At
December 31, 2003, 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. Loans at December 31, 2003 and 2002 were: 2003
    
    2002(Dollars in thousands)
    
    Amount
    
    Percent
    
    Amount
    
    PercentCommercial real estate
    
    $
    724,340
    
    
    
    32.2
    %
    
    $
    798,664
    
    
    
    38.6
    %Commercial non real estate
    
    
    212,010
    
    
    
    9.4
    
    
    
    223,178
    
    
    
    10.8Construction
    
    
    358,217
    
    
    
    15.9
    
    
    
    215,859
    
    
    
    10.4Mortgage
    
    
    280,748
    
    
    
    12.5
    
    
    
    237,085
    
    
    
    11.4Consumer
    
    
    284,448
    
    
    
    12.6
    
    
    
    280,201
    
    
    
    13.5Home equity
    
    
    393,041
    
    
    
    17.4
    
    
    
    317,730
    
    
    
    15.3Total
    
    $
    2,252,804
    
    
    
    100.0
    %
    
    $
    2,072,717
    
    
    
    100.0
    %
 Loans held for sale are carried at the lower of aggregate cost or market.
Loans held for sale were $5.1 million and $158.4 million at December 31, 2003
and December 31, 2002, respectively. Loans held for sale was impacted by
originations, sales activity and securitizations, which is reflected in the
Consolidated Statement of Cash Flows. Loans held for sale consists primarily of
15 and 30 year mortgages which the Corporation intends to sell as whole loans.
No valuation allowance to reduce these loans to lower of cost or market was
required at December 31, 2003 and December 31, 2002. Residential real estate loans are presented net of loans serviced for
others, which totaled $317.5 million and $178.1 million at December 31, 2003
and 2002, respectively. 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. (Dollars in thousands)
    
    2003
    
    2002Nonaccrual loans
    
    $
    14,910
    
    
    $
    26,467Restructured loans
    
    
    
    
    
    
    Total nonperforming loans
    
    
    14,910
    
    
    
    26,467Other real estate
    
    
    6,836
    
    
    
    10,278Total nonperforming assets
    
    
    21,746
    
    
    
    36,745Loans 90 days or more past due and still accruing
    
    
    21
    
    
    
    Total nonperforming assets and loans 90 days
or more past due and still accruing
    
    $
    21,767
    
    
    $
    36,745
 Interest income that would have been recorded on nonaccrual loans and
restructured loans for the years ended December 31, 2003, 2002, and 2001, had
they performed in accordance with their original terms, amounted to
approximately $1.0 million, $2.5 million, and $2.2 million,
respectively. Interest income on all such loans included in the results of
operations for 2003, 2002 and 2001 amounted to approximately $0.3 million, $0.5
million, and $1.0 million, respectively. The recorded investment in individually impaired loans was $4.7 million
(all of which were on nonaccrual status) and $17.9 million (all of which were
on nonaccrual status) at December 31, 2003 and 2002, respectively. The related
allowance for loan losses on these loans was $0.9 million and $4.8 million at
December 31, 2003 and 2002, respectively. 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 average recorded 67




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##### 



investment in
individually impaired loans for 2001 was $17.1 million, and the income
recognized during 2001 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, 2003: (Dollars in thousands)Balance at December 31, 2002
    
    $
    2,497New loans
    
    
    428Principal repayments
    
    
    (341
    )Balance at December 31, 2003
    
    $
    2,584
 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 Nine - 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, 2003, 2002
and 2001: (Dollars in thousands)
    
    2003
    
    2002
    
    2001Beginning balance
    
    $
    27,204
    
    
    $
    25,843
    
    
    $
    28,447Provision for loan losses
    
    
    27,518
    
    
    
    8,270
    
    
    
    4,465Allowance related to loans sold, securitized
or transferred to held for sale
    
    
    (20,783
    )
    
    
    (647
    )
    
    
    (417
    )Charge-offs
    
    
    (9,480
    )
    
    
    (6,990
    )
    
    
    (7,406
    )Recoveries
    
    
    1,148
    
    
    
    728
    
    
    
    754Net loan charge-offs
    
    
    (8,332
    )
    
    
    (6,262
    )
    
    
    (6,652
    )Ending balance
    
    $
    25,607
    
    
    $
    27,204
    
    
    $
    25,843
 During the second quarter of 2003, $60.9 million in nonaccruing and
accruing higher risk loans were sold to investors, which reduced the allowance
for loan losses $20.2 million. In addition, the Corporations $11.7 million
credit card portfolio was sold during the first quarter of 2003, which reduced
the allowance for loan losses $0.5 million. Note Ten  Premises and Equipment Premises and equipment at December 31, 2003 and 2002 are summarized as
follows: (Dollars in thousands)
    
    2003
    
    2002Land
    
    $
    22,692
    
    
    $
    22,831Buildings
    
    
    69,291
    
    
    
    66,459Furniture and equipment
    
    
    50,157
    
    
    
    47,734Leasehold improvements
    
    
    2,600
    
    
    
    2,345Construction in progress
    
    
    1,572
    
    
    
    336Total premises and equipment
    
    
    146,312
    
    
    
    139,705Less accumulated depreciation and amortization
    
    
    50,556
    
    
    
    45,058Premises and equipment, net
    
    $
    95,756
    
    
    $
    94,647
 68




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##### 



Note Eleven - Deposits A summary of deposit balances at December 31, 2003 and 2002 is as follows: (Dollars in thousands)
    
    2003
    
    2002Noninterest bearing demand
    
    $
    326,679
    
    
    $
    305,924Interest bearing demand
    
    
    322,471
    
    
    
    301,329Money market accounts
    
    
    470,551
    
    
    
    305,530Savings deposits
    
    
    118,025
    
    
    
    114,676Certificates of deposit
    
    
    1,190,171
    
    
    
    1,295,188Total deposits
    
    $
    2,427,897
    
    
    $
    2,322,647
 At December 31, 2003, the aggregate amount of certificates of deposit with
denominations of $100,000 or more was $702.7 million, with $208.9 million
maturing within three months, $145.9 million maturing within three to six
months, $215.1 million maturing within six to twelve months and $132.8 million
maturing after twelve months. At December 31, 2003, the scheduled maturities of all certificates of
deposit are as follows: (Dollars in thousands)2004
    
    $
    902,4732005
    
    
    180,3402006
    
    
    55,3192007
    
    
    42,7632008
    
    
    4,0462009 and after
    
    
    5,230Total
    
    $
    1,190,171
 Note Twelve - Other Borrowings The following is a schedule of other borrowings: Interest
    
    
    
    
    
    
    
    
    
    MaximumBalance
    
    Rate
    
    
    
    
    
    Average
    
    Outstandingas of
    
    as of
    
    Average
    
    Interest
    
    at Any(Dollars in thousands)
    
    December 31,
    
    December 31,
    
    Balance
    
    Rate
    
    Month-end2003Federal funds purchased and securities
sold under agreements
to repurchase
    
    $
    319,018
    
    
    
    1.03
    %
    
    $
    214,499
    
    
    
    1.06
    %
    
    $
    319,018FHLB borrowings
    
    
    1,063,106
    
    
    
    2.09
    
    
    
    906,627
    
    
    
    2.88
    
    
    
    1,063,106Other
    
    
    50,076
    
    
    
    1.46
    
    
    
    38,763
    
    
    
    1.55
    
    
    
    50,076Total
    
    $
    1,432,200
    
    
    
    
    
    
    $
    1,159,889
    
    
    
    
    
    
    $
    1,432,200
 Interest
    
    
    
    
    
    
    
    
    
    MaximumBalance
    
    Rate
    
    
    
    
    
    Average
    
    Outstandingas of
    
    as of
    
    Average
    
    Interest
    
    at Any(Dollars in thousands)
    
    December 31,
    
    December 31,
    
    Balance
    
    Rate
    
    Month-end2002Federal funds purchased and securities
sold under agreements
to repurchase
    
    $
    326,745
    
    
    
    1.21
    %
    
    $
    151,572
    
    
    
    1.62
    %
    
    $
    326,745FHLB borrowings
    
    
    682,330
    
    
    
    3.60
    
    
    
    726,016
    
    
    
    4.01
    
    
    
    833,340Other
    
    
    33,365
    
    
    
    1.89
    
    
    
    28,675
    
    
    
    2.39
    
    
    
    40,604Total
    
    $
    1,042,440
    
    
    
    
    
    
    $
    906,263
    
    
    
    
    
    
    $
    1,200,689
 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 of
the United States government or its agencies, which have been delivered to a
third party custodian for safekeeping. 69




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##### 



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 $482.0 million at December 31, 2003, 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. FHLB advances with balances of $522.0 million were subject to prepayment
penalties at December 31, 2003, which approximate the difference in the book
value and the fair value of the debt. In the event the Corporation exercised
these prepayment options at December 31, 2003, the Corporation would have had
to pay penalties of approximately $23.3 million. At December 31, 2003, FCB also had federal funds lines of credit totaling
$70.0 million, of which there were no amounts outstanding. In addition, at
December 31, 2003, the Corporation had commercial paper outstandings of $35.1
million, which are included in Other in the table in Note Twelveabove. The following is a schedule of annual maturities of lines of credit: As of December 31, 2003 (Dollars in thousands)
    
    2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    Thereafter
    
    TotalFCB-Lines of Credit
    
    $
    590,000
    
    
    $
    
    
    
    $
    165,000
    
    
    $
    
    
    
    $
    100,000
    
    
    $
    208,106
    
    
    $
    1,063,106Parent Company-Lines of Credit
    
    
    15,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,000Total Lines of Credit
    
    $
    605,000
    
    
    $
    
    
    
    $
    165,000
    
    
    $
    
    
    
    $
    100,000
    
    
    $
    208,106
    
    
    $
    1,078,106
 During 2003, the Corporation incurred $19.1 million in prepayment
penalties associated with the refinancing of $131 million in longer-term fixed
rate FHLB advances. Please see Note Twenty-Onefor subsequent event. Note Thirteen - Income Tax Total income taxes for the years ended December 31, 2003, 2002 and 2001
were allocated as follows: Years ended December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001Net income
    
    $
    3,286
    
    
    $
    14,947
    
    
    $
    16,768Shareholders equity, for unrealized gains
on securities available for sale
    
    
    (6,254
    )
    
    
    6,451
    
    
    
    2,430Total
    
    $
    (2,968
    )
    
    $
    21,398
    
    
    $
    19,198
 Income tax expense (benefit) attributable to income consists of: Years ended December 31,(Dollars in thousands)
    
    2003
    
    2002
    
    2001Current:Federal
    
    $
    (473
    )
    
    $
    24,621
    
    
    $
    14,679State
    
    
    94
    
    
    
    440
    
    
    
    125Total current
    
    $
    (379
    )
    
    $
    25,061
    
    
    $
    14,804Deferred:Federal
    
    $
    3,565
    
    
    $
    (9,566
    )
    
    $
    1,704State
    
    
    100
    
    
    
    (548
    )
    
    
    260Total deferred
    
    $
    3,665
    
    
    $
    (10,114
    )
    
    $
    1,964Total income taxes:Federal
    
    $
    3,092
    
    
    $
    15,055
    
    
    $
    16,383State
    
    
    194
    
    
    
    (108
    )
    
    
    385Total income taxes
    
    $
    3,286
    
    
    $
    14,947
    
    
    $
    16,768
 70




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##### 



Income tax expense attributable to net income was $3.3 million, $14.9
million and $16.8 million for the years ended December 31, 2003, 2002 and 2001,
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)
    
    2003
    
    2002
    
    2001Computed expected tax expense
    
    $
    6,101
    
    
    
    35.00
    %
    
    $
    19,163
    
    
    
    35.00
    %
    
    $
    18,233
    
    
    
    35.00
    %Increase (reduction) in income taxes
resulting from:Tax exempt income
    
    
    (1,058
    )
    
    
    (6.07
    )
    
    
    (1,467
    )
    
    
    (2.68
    )
    
    
    (1,526
    )
    
    
    (2.93
    )Bank owned life insurance
    
    
    (1,361
    )
    
    
    (7.81
    )
    
    
    (16
    )
    
    
    (0.03
    )
    
    
    
    
    
    
    State income tax, net of
federal benefits
    
    
    126
    
    
    
    0.72
    
    
    
    (71
    )
    
    
    (0.12
    )
    
    
    250
    
    
    
    0.46Subsidiary stock, recognition of
basis difference
    
    
    
    
    
    
    
    
    
    
    (3,313
    )
    
    
    (6.05
    )
    
    
    
    
    
    
    Change in valuation allowance
    
    
    63
    
    
    
    0.36
    
    
    
    773
    
    
    
    1.41
    
    
    
    
    
    
    
    Other, net
    
    
    (585
    )
    
    
    (3.35
    )
    
    
    (122
    )
    
    
    (0.22
    )
    
    
    (189
    )
    
    
    (0.34
    )Total
    
    $
    3,286
    
    
    
    18.85
    %
    
    $
    14,947
    
    
    
    27.31
    %
    
    $
    16,768
    
    
    
    32.19
    %
 The significant components of deferred income tax expense for the years
ended December 31, 2003, 2002 and 2001 are as follows: (Dollars in thousands)
    
    2003
    
    2002
    
    2001Deferred tax expense (benefit) (exclusive of the
effects of other components below)
    
    $
    3,665
    
    
    $
    (10,114
    )
    
    $
    1,964Shareholders equity, for unrealized gains
(losses) on securities available for sale
    
    
    (6,254
    )
    
    
    6,451
    
    
    
    2,430Purchase accounting adjustment
    
    
    (269
    )
    
    
    
    
    
    
    Total
    
    $
    (2,858
    )
    
    $
    (3,663
    )
    
    $
    4,394
 The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 2003 and 2002 are presented below. (Dollars in thousands)
    
    2003
    
    2002Deferred tax assets:Allowance for loan loss
    
    $
    10,177
    
    
    $
    10,786Deferred compensation
    
    
    2,711
    
    
    
    2,817Market adjustment for investments
    
    
    674
    
    
    
    872Basis difference in depreciable assets
    
    
    7,737
    
    
    
    9,305Other
    
    
    825
    
    
    
    809Total gross deferred tax assets
    
    
    22,124
    
    
    
    24,589Less valuation allowance
    
    
    836
    
    
    
    773Net deferred tax assets
    
    
    21,288
    
    
    
    23,816Deferred tax liabilities:Unrealized gains on securities available for sale
    
    
    (4,067
    )
    
    
    (10,321
    )Federal Home Loan Bank of Atlanta stock
    
    
    (1,052
    )
    
    
    (1,052
    )Mortgage Servicing Rights
    
    
    (832
    )
    
    
    Intangibles
    
    
    (637
    )
    
    
    (20
    )Other
    
    
    (176
    )
    
    
    (757
    )Total gross deferred tax liabilities
    
    
    (6,764
    )
    
    
    (12,150
    )Net deferred tax liabilies
    
    $
    14,524
    
    
    $
    11,666
 71




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##### 



The valuation allowance for deferred tax assets was $773,000 as of January
1, 2003 and $0 as of January 1, 2002. The total valuation allowance relative to
capital loss carryforwards increased $63,000 during 2003 and $773,000 during
2002. 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, 2003. 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. At December 31, 2003, the Company did not have any operating loss
carryforwards for federal income tax purposes. Federal tax returns for 2000 and subsequent years are subject to
examination by taxing authorities. The Corporations North Carolina tax
returns for 1999, 2000 and 2001, are currently undergoing an audit by the
North Carolina Department of Revenue. Management does not expect any
significant, adverse impact to its results of operations arising from this
examination. Retained earnings at December 31, 2003 and 2002 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 Fourteen - 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. The Corporation adopted a
qualified Money Purchase Pension Plan effective January 1, 1997 for all
eligible employees of the Corporation. Pursuant to the Money Purchase Pension
Plan, the Corporation contributed annually to each participants Plan account
an amount equal to three percent of the participants compensation. Effective
December 31, 2001 the Corporation merged the Money Purchase Pension Plan into
the Savings Plan. The Corporations aggregate contributions to the Savings Plan
and the Money Purchase Pension Plan amounted to $1.8 million, $2.5 million and
$2.6 million for 2003, 2002 and 2001, respectively. 72




---



##### 



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 aggregate deferred compensation
obligation pursuant to this plan amounted to $1.2 million at December 31, 2003.
Plan assets, which are held in a Rabbi Trust, totaled $989,000 and $833,000 at
December 31, 2003 and 2002, 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 aggregate deferred compensation obligation pursuant to the
Plan amounted to $167,000 at December 31, 2003. Plan assets, which are held in
a Rabbi Trust, totaled $148,000 and $119,000 at December 31, 2003 and 2002,
respectively, and are classified as trading assets, which is included in other
assets on the consolidated balance sheet. Note Fifteen  Shareholders Equity, Stock Plans and Stock Awards Stock Repurchase Programs. On April 27, 2001, the Corporations Board of
Directors authorized the repurchase of up to 1 million shares of the
Corporations common stock. At December 31, 2001, the Corporation had
repurchased all shares of its common stock under this authorization at an
average per-share price of approximately $17.96, which reduced shareholders
equity by $18.0 million. On January 23, 2002, the Corporations Board of Directors authorized the
repurchase of up to 1.5 million additional shares of the Corporations common
stock. During 2002, the Corporation repurchased 809,600 shares of its common
stock at an average per-share price of $16.83, which reduced shareholders
equity by $13.9 million. During 2003, the Corporation repurchased 565,000
shares of its common stock, under this authorization at an average per-share
price of $17.52, which reduced shareholders equity by $10.6 million. 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, 2003, 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. 73




---



##### 



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 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. During 2001, the Corporation issued 67,648
shares and the administrator of the DRIP purchased 162,007 shares in the open
market. 74




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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
$60,000 and $75,000 was recognized during 2003 and 2002, respectively, in
connection with the Restricted Stock Plan. The following table presents the
status of the Restricted Stock Plan as of December 31, 2003 and 2002 and
changes during the years then ended: Weighted Average GrantShares
    
    PriceOutstanding at December 31, 2001
    
    
    10,173
    
    
    $
    17.8778Granted
    
    
    
    
    
    
    Vested
    
    
    (4,173
    )
    
    
    19.1099Forfeited
    
    
    (2,000
    )
    
    
    19.5000Outstanding at December 31, 2002
    
    
    4,000
    
    
    $
    15.7813Granted
    
    
    
    
    
    
    Vested
    
    
    (3,000
    )
    
    
    19.1099Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2003
    
    
    1,000
    
    
    $
    15.7813
 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, 2003, 109,827 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, 2003, 4,260 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, 2003, 601,862 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 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 75




---



##### 



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, 2003, 154,192 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 ESPPs during the
periods indicated. 2003
    
    2002
    
    2001Weighted-
    
    
    
    
    
    Weighted-
    
    
    
    
    
    Weighted-Average
    
    
    
    
    
    Average
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    Exercise
    
    
    
    
    
    Exercise(Option)
    
    
    
    
    
    (Option)
    
    
    
    
    
    (Option)Shares
    
    Price
    
    Shares
    
    Price
    
    Shares
    
    PriceOutstanding at January 1
    
    
    2,402,081
    
    
    $
    19.43
    
    
    
    2,172,787
    
    
    $
    19.25
    
    
    
    1,824,899
    
    
    $
    19.74Granted
    
    
    555,827
    
    
    
    18.19
    
    
    
    548,915
    
    
    
    17.12
    
    
    
    540,265
    
    
    
    15.41Exercised
    
    
    (113,019
    )
    
    
    11.57
    
    
    
    (134,608
    )
    
    
    11.73
    
    
    
    (73,011
    )
    
    
    8.75Forfeited
    
    
    (328,329
    )
    
    
    22.44
    
    
    
    (185,013
    )
    
    
    16.05
    
    
    
    (119,366
    )
    
    
    15.88Outstanding at December 31
    
    
    2,516,560
    
    
    
    19.11
    
    
    
    2,402,081
    
    
    
    19.43
    
    
    
    2,172,787
    
    
    
    19.25Options exercisable at December 31
    
    
    1,598,810
    
    
    
    20.01
    
    
    
    1,689,253
    
    
    
    20.61
    
    
    
    1,553,623
    
    
    
    20.48Weighted-average Black-Scholes fair value
of options granted during the year
    
    
    
    
    
    $
    4.81
    
    
    
    
    
    
    $
    5.38
    
    
    
    
    
    
    $
    5.00
 The weighted average remaining contractual lives of stock options were 5.8
years at December 31, 2003. The following table summarizes information about stock options outstanding
at December 31, 2003: 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
    
    
    2.2 years
    
    $
    4.9700
    
    
    
    12,468
    
    
    $
    4.9700$5.0100 - $10.0000
    
    
    3,400
    
    
    5.7 years
    
    
    9.0400
    
    
    
    3,400
    
    
    
    9.0400$10.0100 - $15.0000
    
    
    255,198
    
    
    5.5 years
    
    
    13.9198
    
    
    
    208,809
    
    
    
    13.8134$15.0100 - $17.5000
    
    
    745,312
    
    
    7.6 years
    
    
    16.6285
    
    
    
    368,190
    
    
    
    16.4823$17.5100 - $20.0000
    
    
    769,019
    
    
    7.4 years
    
    
    18.3432
    
    
    
    274,780
    
    
    
    18.1298$20.0100 - $22.5000
    
    
    7,000
    
    
    5.4 years
    
    
    22.2500
    
    
    
    7,000
    
    
    
    22.2500$22.5100 - $25.0000
    
    
    507,175
    
    
    2.4 years
    
    
    23.9825
    
    
    
    507,175
    
    
    
    23.9825$25.0100 - $27.5000
    
    
    216,988
    
    
    2.3 years
    
    
    25.9980
    
    
    
    216,988
    
    
    
    25.9980Total
    
    
    2,516,560
    
    
    5.8 years
    
    $
    19.1146
    
    
    
    1,598,810
    
    
    $
    20.0070
 76




---



##### 



Pro-Forma Impact of Stock Compensation Programs.At December 31, 2003, as
described above, the Corporation has 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)
    
    2003
    
    2002
    
    2001Net income, as reported
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    35,325Deduct: Total stock-based employee
compensation expense determined under fair
value based method for all awards, net of
related tax effects
    
    
    (2,293
    )
    
    
    (2,755
    )
    
    
    (2,193
    )Pro forma net income
    
    $
    11,853
    
    
    $
    37,048
    
    
    $
    33,132Earnings per share:Basic-as reported
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.12Basic-pro forma
    
    $
    0.40
    
    
    $
    1.21
    
    
    $
    1.05Diluted-as reported
    
    $
    0.47
    
    
    $
    1.30
    
    
    $
    1.12Diluted-pro forma
    
    $
    0.40
    
    
    $
    1.21
    
    
    $
    1.05
 The fair value of each option granted during 2003, 2002 and 2001 was
estimated using the Black-Scholes option-pricing model with the following
weighted average assumptions: Years Ended December 31,2003
    
    2002
    
    20012000 Omnibus Stock Option and Award PlanDividend yield
    
    
    3.79
    %
    
    
    4.03
    %
    
    
    4.26
    %Risk free interest rates
    
    
    4.09
    %
    
    
    4.90
    %
    
    
    5.15
    %Expected lives
    
    8 years
    
    10 years
    
    10 yearsVolatility
    
    
    33
    %
    
    
    38
    %
    
    
    41
    %Director PlanDividend yield
    
    
    3.79
    %
    
    
    4.03
    %
    
    
    4.26
    %Risk free interest rates
    
    
    3.95
    %
    
    
    4.88
    %
    
    
    5.19
    %Expected lives
    
    9 years
    
    10 years
    
    10 yearsVolatility
    
    
    33
    %
    
    
    38
    %
    
    
    41
    %1999 Employee Stock Purchase PlanDividend yield
    
    
    3.79
    %
    
    
    4.03
    %
    
    
    4.26
    %Risk free interest rates
    
    
    4.07
    %
    
    
    5.20
    %
    
    
    4.92
    %Expected lives
    
    1 year
    
    1 year
    
    1 yearVolatility
    
    
    33
    %
    

    
    38
    %
    
    
    41
    %
 Note Sixteen - 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 77




---



##### 



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. 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, 2003, the Corporations exposure to credit risk was
represented by preapproved but unused lines of credit totaling $333.8 million,
loan commitments totaling $383.0 million and standby letters of credit
aggregating $8.1 million. Of the $333.8 million of preapproved unused lines of
credit, $30.6 million were at fixed rates and $303.2 million were at floating
rates. Of the $383.0 million of loan commitments, $58.0 million were at fixed
rates and $325.0 million were at floating rates. Of the $8.1 million of standby
letters of credit, $6.0 million expire in 2004 and $2.1 million expire in 2005
and 2006. The fair value and carrying value at December 31, 2003 of standby
letters of credit issued or modified during the year ended December 31, 2003
were less than $100,000. 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 may not be 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, 2003 are as follows: 2004, $2.0 million; 2005, $1.8 million;
2006, $1.3 million; 2007, $1.0 million; 2008, $0.9 million and subsequent years
$11.3 million. Rental expense for all operating leases for the three years
ended December 31, 2003, 2002 and 2001 was $2.0 million, $1.7 million and $1.8
million, respectively. Average daily Federal Reserve balance requirements for the year ended
December 31, 2003 amounted to $23.2 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. Note Seventeen - 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 decided to upgrade its service offerings to
include 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 will receive 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 78




---



##### 



Mr.
Godbold will receive
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. 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. See Note Eightfor related party loans information. Note Eighteen - 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 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 and residential mortgage loans. In these cases, an open market
exists in which those financial instruments are 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.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. 79




---



##### 



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.Commitments to extend credit and standby letters of credit- the large
majority of commitments to extend credit and standby letters of credit are
at variable rates and/or have relatively short terms to maturity.
Therefore, the fair value of these financial instruments is considered to
approximate their carrying value. 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, 2003 and 2002: December2003
    
    2002Estimated
    
    EstimatedCarrying
    
    Fair
    
    Carrying Fair(Dollars in thousands)
    
    Amount
    
    Value
    
    Amount
    
    ValueFinancial assets:Securities available for sale
    
    $
    1,601,900
    
    
    $
    1,601,900
    
    
    $
    1,129,212
    
    
    $
    1,129,212Loans held for sale
    
    
    5,137
    
    
    
    5,147
    
    
    
    158,404
    
    
    
    163,463Loans, net of allowance for loan losses
    
    
    2,227,030
    
    
    
    2,243,991
    
    
    
    2,045,266
    
    
    
    2,112,361Financial liabilities:Deposits
    
    
    2,427,897
    
    
    
    2,428,913
    
    
    
    2,322,647
    
    
    
    2,334,453Other borrowings
    
    
    1,432,200
    
    
    
    1,449,092
    
    
    
    1,042,440
    
    
    
    1,088,446
 Note Nineteen - 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, 2003, that the Corporation and the Bank meet all capital adequacy
requirements to which they are subject. As of December 31, 2003, the most recent notifications from the
Corporations various regulators categorized the Corporation and FCB as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, FCB must maintain minimum Total risk-based,
Tier I risk-based, and Tier I leverage ratios as set forth in the table. 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. 80




---



##### 



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 PromptActual
    
    Adequacy Purposes
    
    Corrective Action ProvisionsMinimum
    
    
    
    
    
    Minimum(Dollars in thousands)
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioAt 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
    %At December 31, 2002:Total Capital (to Risk Weighted Assets)First Charter Corporation
    
    $
    317,700
    
    
    
    12.62
    %
    
    $
    201,424
    
    
    
    8.00
    %
    
    None
    
    NoneFirst Charter Bank
    
    
    306,202
    
    
    
    12.25
    
    
    
    199,938
    
    
    
    8.00
    
    
    $
    249,923
    
    
    
    10.00
    %Tier I Capital (to Risk Weighted Assets)First Charter Corporation
    
    $
    290,031
    
    
    
    11.52
    %
    
    $
    100,712
    
    
    
    4.00
    %
    
    None
    
    NoneFirst Charter Bank
    
    
    278,998
    
    
    
    11.16
    
    
    
    99,969
    
    
    
    4.00
    
    
    $
    149,954
    
    
    
    6.00
    %Tier I Capital (to Adjusted Average Assets)First Charter Corporation
    
    $
    290,031
    
    
    
    7.92
    %
    
    $
    146,404
    
    
    
    4.00
    %
    
    None
    
    NoneFirst Charter Bank
    
    
    278,998
    
    
    
    7.72
    
    
    
    144,552
    
    
    
    4.00
    
    
    $
    180,690
    
    
    
    5.00
    %
 During the third quarter of 2003, the Bank entered into a written
agreement with the Federal Reserve Bank of Richmond and the Office of the North
Carolina Commissioner of Banks, the Banks primary federal and state regulatory
agencies. The agreement arises out of certain previously disclosed regulatory
examinations and requires 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
has subsequently taken substantial actions, and adopted and implemented a
number of policies and procedures, to address the concerns of the regulatory
agencies. Note Twenty - 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. At December 31, 2003, the Parent Companys bank subsidiary had available
retained earnings of $10.2 million for the payment of dividends to the Parent
Company without regulatory or other restrictions. Subsidiary net assets of
$301.9 million were restricted from being transferred to the Parent Company at
December 31, 2003, under regulatory or other restrictions. 81




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##### 



The Parent Companys condensed balance sheet data as of December 31, 2003
and 2002 and related condensed statements of income and cash flow data for each
of the years in the three-year period ended December 31, 2003 are as follows: (Dollars in thousands)
    
    2003
    
    2002Balance sheet data:Cash
    
    $
    38,656
    
    
    $
    24,246Securities available for sale
    
    
    3,831
    
    
    
    3,848Investment in subsidiaries
    
    
    301,874
    
    
    
    322,893Receivable from subsidiaries
    
    
    5,500
    
    
    
    7,000Other assets
    
    
    4,819
    
    
    
    5,414Total assets
    
    $
    354,680
    
    
    $
    363,401Accrued liabilities
    
    $
    5,165
    
    
    $
    5,350Borrowed funds
    
    
    50,076
    
    
    
    33,365Shareholders equity
    
    
    299,439
    
    
    
    324,686Total liabilities and shareholders equity
    
    $
    354,680
    
    
    $
    363,401
 (Dollars in thousands)
    
    2003
    
    2002
    
    2001Income statement data:Dividends from subsidiaries
    
    $
    28,484
    
    
    $
    33,083
    
    
    $
    17,300Other operating expense
    
    
    (450
    )
    
    
    (3,280
    )
    
    
    (114
    )Income before equity in undistributed (excess of
dividends over) net income of subsidiaries
    
    
    28,034
    
    
    
    29,803
    
    
    
    17,186(Excess of dividends over) equity in undistributed
net income of subsidiaries
    
    
    (13,888
    )
    
    
    10,000
    
    
    
    18,139Net income
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    35,325
 (Dollars in thousands)
    
    2003
    
    2002
    
    2001Cash flow statement data:Cash flows from operating activities:Net income
    
    $
    14,146
    
    
    $
    39,803
    
    
    $
    35,325Net gain on securities available for sale
    
    
    (226
    )
    
    
    (1,806
    )
    
    
    (124
    )Decrease in accrued liabilities
    
    
    (185
    )
    
    
    (222
    )
    
    
    (115
    )Decrease in other assets
    
    
    469
    
    
    
    4,980
    
    
    
    1,342Decrease (increase) in receivable from subsidiaries
    
    
    1,500
    
    
    
    1,000
    
    
    
    (8,000
    )Excess of dividends paid over (equity in
undistributed) net income of subsidiaries
    
    
    12,388
    
    
    
    (11,000
    )
    
    
    (10,139
    )Net cash provided by operating activities
    
    
    28,092
    
    
    
    32,755
    
    
    
    18,289Cash flows from investing activities:Purchase of securities available for sale
    
    
    
    
    
    
    (6
    )
    
    
    (27
    )Proceeds from sale of securities available for sale
    
    
    577
    
    
    
    5,954
    
    
    
    715Proceeds from sale of property
    
    
    
    
    
    
    95
    
    
    
    Other investing activities
    
    
    (9
    )
    
    
    
    
    
    
    Net cash provided by investing activities
    
    
    568
    
    
    
    6,043
    
    
    
    688Cash flows from financing activities:Purchase and retirement of common stock
    
    
    (10,623
    )
    
    
    (13,894
    )
    
    
    (17,962
    )Proceeds from issuance of common stock
    
    
    1,700
    
    
    
    1,596
    
    
    
    1,643Net increase in other borrowings
    
    
    16,711
    
    
    
    1,505
    
    
    
    31,860Dividends paid
    
    
    (22,038
    )
    
    
    (22,237
    )
    
    
    (22,753
    )Net cash used in financing activities
    
    
    (14,250
    )
    
    
    (33,030
    )
    
    
    (7,212
    )Net increase in cash
    
    
    14,410
    
    
    
    5,768
    
    
    
    11,765Cash at beginning of year
    
    
    24,246
    
    
    
    18,478
    
    
    
    6,713Cash at end of year
    
    $
    38,656
    
    
    $
    24,246
    
    
    $
    18,478
 82




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##### 



Note Twenty One - Subsequent Events In the first quarter of 2004, the Corporation entered into a series of
interest rate swap agreements. The interest rate swap agreements allow the
Corporation to swap higher fixed rate interest payments on long-term FHLB
advances for lower variable rate payments. The interest rate swaps will result
in the Corporation receiving interest at an average fixed rate of 5.15 percent
and paying interest at an average variable rate of 3.27 percent, for an average
period of 5.1 years with a notional amount of approximately $142 million. The Corporation intends to account for these interest rate swaps as a
hedge of the fair value of the related FHLB advances. Accordingly, in future
periods the Corporation will record, in noninterest income, the net change in
the fair value of the interest rate swap and the related FHLB advances,
provided the criteria for hedge accounting continues to be met. In the event
such criteria 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 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
133. 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. As a result of swapping $142 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 asset/liability management
strategy of preserving the asset sensitive nature of the
Corporations balance sheet, the Corporation replaced approximately $165
million of existing FHLB floating rate overnight borrowings with fixed rate
FHLB advances with maturities of one to three years. 83




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##### 



Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None Item 9A.Controls and Procedures (a) 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 are 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. (b) Changes 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. 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
2004 Annual Meeting of Shareholders under the captions Election of Directors,
and Section 16(a) Beneficial Ownership Reporting Compliance, respectively,
and is hereby incorporated by reference. The information called for by Item 10
with respect to executive officers is set forth in Part I, Item 4A hereof. 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 2004 Annual Meeting of
Shareholders under the captions Committees of the Board of Directors and
Corporate Governance Matters, and is hereby incorporated by reference. Item 11.Executive Compensation The information called for by Item 11 is set forth in the Registrants
Proxy Statement for its 2004 Annual Meeting of Shareholders under the captions
Election of Directors - Compensation 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 hereby incorporated by reference. 84




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##### 



Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The following table provides information as of December 31, 2003 regarding
the number of shares of Common Stock that may be issued under the Registrants
equity compensation plans. As of December 31, 2003 Number of securities to beissued upon exercise of
    
    Weighted average exercise price
    
    Number of securitiesoutstanding options, warrants
    
    of outstanding options, warrants
    
    remaining available forPlan category:
    
    and rights (1)
    
    and rights
    
    future issuanceEquity compensation plans
approved by security holders (2)
    
    
    1,831,369
    
    
    $
    17.38
    
    
    
    1,206,308Equity compensation plans not
approved by security holders
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    1,831,369
    
    
    $
    17.38
    
    
    
    1,206,308
 (1) The table does not include outstanding options to purchase 686,191 shares of Common Stock assumed
through various mergers and acquisitions. As of December 31, 2003, these assumed options had a
weighted average exercise price of $23.57 per share. (2) The table includes 1,000 restricted shares of Common Stock which are not yet vested and were granted
pursuant to the Restricted Stock Plan, which was approved by shareholders. 336,147 shares remain
available for grant pursuant to such plan. In addition, the information in the Registrants Proxy Statement for its
2004 Annual Meeting of Shareholders under the caption Ownership of Common
Stock 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 2004 Annual Meeting of Shareholders under the captions
Compensation Committee Interlocks and Insider Participation in Compensation
Decisions and Certain Relationships and Related Transactions and is hereby
incorporated 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 2004 Annual Meeting of Shareholders under the caption
Ratification of Independent Certified Public Accountants,  and is hereby
incorporated by reference. 85




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##### 



PART IV Item 15.Exhibits, Financial Statement Schedules, and Reports on Form 8-K a. The following documents are filed as part of this report: (1) Financial Statements: PageIndependent Auditors Report
    
    
    48Consolidated Balance Sheets, December 31, 2003 and 2002
    
    
    49Consolidated Statements of Income for the years ended December 31, 2003, 2002 and 2001
    
    
    50Consolidated Statements of Shareholders Equity for the years ended December 31, 2003, 2002 and 2001
    
    
    51Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001
    
    
    52Notes to Consolidated Financial Statements
    
    
    53
 (2) Financial Statement Schedules: None 86




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##### 



(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 Annual
Report on Form 10-K for the year ended December 31, 2000 (Commission File
No. 0-15829).3.2
    
    By-laws of the Registrant, as amended, incorporated herein by reference
to Exhibit 3.2 of the Registrants Annual Report on Form 10-K for the year
ended December 31, 1995 (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 Employment Agreement dated December 19, 2001
for Carl T. McFarland, incorporated herein by reference to Exhibit
10.7 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 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).
 87




---



##### 



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 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).*10.10
    
    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).*10.11
    
    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.)*10.12
    
    Amended and Restated Employment Agreement between First Charter
National Bank and John J. Godbold, Jr. dated as of December 22,
1997, incorporated herein by reference to Exhibit 10.8 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 1997 (Commission File No. 0-15829.)*10.13
    
    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.*10.14
    
    The 1999 Employee Stock Purchase Plan, incorporated herein by
reference to the Registrants Registration Statement No. 333-54019,
dated May 29, 1998.*10.15
    
    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.*10.16
    
    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.*10.17
    
    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.*10.18
    
    The HFNC Financial Corp. Stock Option Plan, incorporated herein by
reference to the Registrants Registration Statement No. 333-71497,
dated February 1, 1999.10.19
    
    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.*10.20
    
    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).*10.21
    
    Amended and Restated Salary Continuation Agreement between First
Charter National Bank and John J. Godbold, Jr. dated as of December
22, 1997, incorporated herein by reference to Exhibit 10.16 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 1997 (Commission File No. 0-15829.)
 88




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##### 



Exhibit No.(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits*10.22
    
    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).*10.23
    
    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).*10.24
    
    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).*10.25
    
    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).*10.26
    
    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).*10.27
    
    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).*10.28
    
    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).*10.29
    
    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).*10.30
    
    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).*10.31
    
    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).*10.32
    
    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).*10.33
    
    Supplemental Agreement dated December 19, 2001 for Carl T.
McFarland, incorporated herein by reference to Exhibit 10.36 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 2001 (Commission File No. 0-15829).
 89




---



##### 



Exhibit No.(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits*10.34
    
    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).10.35
    
    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, 2000.11.1
    
    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 planb.
    
    The following reports on Form 8-K were filed by the registrant during
the quarter ended December 31, 2003:Current Report on Form 8-K dated October 3, 2003 and
filed October 3, 2003, Item 5 and 7.Current Report on Form 8-K dated December 18, 2003 and filed December 18,
2003, Item 5 and 7.The following reports on Form 8-K were furnished by the registrant
during the quarter ended December 31, 2003:Current Report on Form 8-K dated October 14, 2003 and filed October 14,
2003, Item 9 and 12. 90




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left blank]





















91



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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, PresidentDate: March 10, 2004
 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 and Director
(Principal Executive Officer)
    
    March 10, 2004/s/ J. Roy Davis, Jr.

(J. Roy Davis, Jr.)
    
    Chairman of the Board
and Director
    
    March 10, 2004/s/ Michael R. Coltrane

(Michael R. Coltrane)
    
    Vice Chairman of the
Board and Director
    
    March 10, 2004/s/ Robert O. Bratton

(Robert O. Bratton)
    
    Executive Vice President
(Principal Financial and
Principal Accounting Officer)
    
    March 10, 2004/s/ Harold D. Alexander

(Harold D. Alexander)
    
    Director
    
    March 10, 2004/s/ William R. Black

(William R. Black)
    
    Director
    
    March 10, 2004/s/ James E. Burt, III

(James E. Burt, III)
    
    Director
    
    March 10, 2004/s/ John J. Godbold, Jr.

(John J. Godbold, Jr.)
    
    Director
    
    March 10, 2004/s/ H. Clark Goodwin

(H. Clark Goodwin)
    
    Director
    
    March 10, 2004/s/ Frank H. Hawfield, Jr.

(Frank H. Hawfield, Jr.)
    
    Director
    
    March 10, 2004/s/ Charles A. James

(Charles A. James)
    
    Director
    
    March 10, 2004
 92




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##### 



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

(Walter H. Jones, Jr.)
    
    Director
    
    March 10, 2004/s/ Samuel C. King, Jr.

(Samuel C. King, Jr.)
    
    Director
    
    March 10, 2004/s/ Jerry E. McGee

(Jerry E. McGee)
    
    Director
    
    March 10, 2004/s/ Ellen L. Messinger

(Ellen L. Messinger)
    
    Director
    
    March 10, 2004/s/ Hugh H. Morrison

(Hugh H. Morrison)
    
    Director
    
    March 10, 2004/s/ Thomas R. Revels

(Thomas R. Revels)
    
    Director
    
    March 10, 2004/s/ L. D. Warlick, Jr.

(L. D. Warlick, Jr.)
    
    Director
    
    March 10, 2004/s/ William W. Waters

(William W. Waters)
    
    Director
    
    March 10, 2004
 93




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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 Annual
Report on Form 10-K for the year ended December 31, 2000 (Commission File
No. 0-15829).3.2
    
    By-laws of the Registrant, as amended, incorporated herein by reference
to Exhibit 3.2 of the Registrants Annual Report on Form 10-K for
the year ended December 31, 1995 (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 Employment Agreement dated December 19, 2001
for Carl T. McFarland, incorporated herein by reference to Exhibit
10.7 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 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).
 94




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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 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).*10.10
    
    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).*10.11
    
    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.)*10.12
    
    Amended and Restated Employment Agreement between First Charter
National Bank and John J. Godbold, Jr. dated as of December 22,
1997, incorporated herein by reference to Exhibit 10.8 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 1997 (Commission File No. 0-15829.)*10.13
    
    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.*10.14
    
    The 1999 Employee Stock Purchase Plan, incorporated herein by
reference to the Registrants Registration Statement No. 333-54019,
dated May 29, 1998.*10.15
    
    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.*10.16
    
    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.*10.17
    
    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.*10.18
    
    The HFNC Financial Corp. Stock Option Plan, incorporated herein by
reference to the Registrants Registration Statement No. 333-71497,
dated February 1, 1999.10.19
    
    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.*10.20
    
    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).*10.21
    
    Amended and Restated Salary Continuation Agreement between First
Charter National Bank and John J. Godbold, Jr. dated as of December
22, 1997, incorporated herein by reference to Exhibit 10.16 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 1997 (Commission File No. 0-15829.)
 95




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##### 



(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits*10.22
    
    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).*10.23
    
    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).*10.24
    
    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).*10.25
    
    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).*10.26
    
    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).*10.27
    
    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).*10.28
    
    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).*10.29
    
    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).*10.30
    
    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).*10.31
    
    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).*10.32
    
    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).*10.33
    
    Supplemental Agreement dated December 19, 2001 for Carl T.
McFarland, incorporated herein by reference to Exhibit 10.36 of the
Registrants Annual Report on Form 10-K for the year ended December
31, 2001 (Commission File No. 0-15829).
 96




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##### 



(per ExhibitTable inItem 601 ofRegulation S-K)
    
    Description of Exhibits*10.34
    
    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).10.35
    
    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, 2000.11.1
    
    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 97