FCTR First Charter Corp (MM)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

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

(Exact Name of Registrant as Specified in Its Charter)

North Carolina (State or Other Jurisdiction of Incorporation or Organization)		56-1355866 (I.R.S. Employer Identification No.)

10200 David Taylor Drive, Charlotte, NC (Address of Principal Executive Offices)		28262-2373 (Zip Code)

Registrant’s telephone number, including area code: (704) 688-4300

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a smaller
		reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o  No  þ

As of May 1, 2008, the registrant had outstanding 35,082,601 shares of common stock, no par value.

 

 

FIRST CHARTER CORPORATION

FORM 10-Q
For the Quarter ended March 31, 2008

All reports filed electronically by First Charter Corporation (the “Corporation”) with the United States Securities and Exchange Commission (the “SEC”), including its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, as well as any amendments to those reports, are accessible at no cost on the Corporation’s website at www.firstcharter.com. These filings are also accessible on the SEC’s website at www.sec.gov.

 

TABLE OF CONTENTS

		Page
Part I – Financial Information
Item 1. Financial Statements			3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures about Market Risk			52
Item 4. Controls and Procedures			52
Part II – Other Information
Item 1. Legal Proceedings			53
Item 1A. Risk Factors			53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			53
Item 3. Defaults Upon Senior Securities			54
Item 4. Submission of Matters to a Vote of Security Holders			54
Item 5. Other Information			54
Item 6. Exhibits			55
Signature
Exhibit 12.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

First Charter Corporation

Consolidated Balance Sheets
(Unaudited)

		March 31				December 31
(Dollars in thousands, except share data)		2008				2007
Assets
Cash and due from banks		$	74,763			$	85,562
Federal funds sold			8,653				10,926
Interest-bearing bank deposits			13,335				5,710
Cash and cash equivalents			96,751				102,198
Securities available for sale (cost of $831,036 and $863,049 at March 31, 2008 and December 31, 2007, respectively)			821,518				860,671
Federal Home Loan Bank and Federal Reserve Bank stock			52,123				48,990
Loans held for sale			17,544				14,145
Portfolio loans:
Commercial and construction			2,219,719				2,254,354
Mortgage			587,240				582,398
Consumer			670,829				666,255
Total portfolio loans			3,477,788				3,503,007
Allowance for loan losses			(45,022	)			(42,414	)
Portfolio loans, net			3,432,766				3,460,593
Premises and equipment, net			110,283				110,763
Goodwill and other intangible assets			82,599				82,871
Other assets			182,277				182,186
Total Assets		$	4,795,861			$	4,862,417
Liabilities
Deposits:
Noninterest-bearing demand		$	446,623			$	438,313
Demand			510,604				478,186
Money market			532,864				564,053
Savings			104,615				101,234
Certificates of deposit			1,346,172				1,313,482
Brokered certificates of deposit			278,461				326,351
Total deposits			3,219,339				3,221,619
Federal funds purchased and securities sold under agreements to repurchase			208,816				268,232
Commercial paper and other short-term borrowings			248,827				284,180
Long-term debt			617,712				567,729
Accrued expenses and other liabilities			37,641				52,313
Total Liabilities			4,332,335				4,394,073
Shareholders’ 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 35,003,721 and 34,978,847 shares at March 31, 2008 and December 31, 2007, respectively			235,480				233,974
Common stock held in Rabbi Trust for deferred compensation			(1,720	)			(1,687	)
Deferred compensation payable in common stock			1,720				1,687
Retained earnings			233,809				235,812
Accumulated other comprehensive loss, net of tax			(5,763	)			(1,442	)
Total Shareholders’ Equity			463,526				468,344
Total Liabilities and Shareholders’ Equity		$	4,795,861			$	4,862,417

First Charter Corporation

Consolidated Statements of Income
(Unaudited)

		Three Months Ended
		March 31
(Dollars in thousands, except per share amounts)		2008				2007
Interest income
Loans		$	57,109			$	66,118
Securities			11,394				10,918
Federal funds sold			55				128
Interest-bearing bank deposits			26				50
Total interest income			68,584				77,214
Interest expense
Deposits			24,751				26,540
Borrowings			11,082				13,939
Total interest expense			35,833				40,479
Net interest income			32,751				36,735
Provision for loan losses			4,707				1,366
Net interest income after provision for loan losses			28,044				35,369
Noninterest income
Service charges on deposits			7,365				7,390
ATM, debit, and merchant fees			2,631				2,444
Wealth management			779				716
Equity method investments gains, net			627				1,127
Mortgage services			1,012				901
Gain on sale of Small Business Administration loans			98				377
Brokerage services			733				1,081
Insurance services			4,150				3,634
Bank owned life insurance			1,165				1,139
Property sale gains, net			59				63
Securities gains (losses), net			1,229				(11	)
Other			570				705
Total noninterest income			20,418				19,566
Noninterest expense
Salaries and employee benefits			18,498				19,587
Occupancy and equipment			4,725				4,612
Data processing			1,515				1,790
Marketing			454				1,351
Postage and supplies			1,096				1,172
Legal and professional services			2,700				3,586
Telecommunications			625				671
Amortization of intangibles			159				223
Foreclosed properties			(128	)			153
Other			4,219				2,775
Total noninterest expense			33,863				35,920
Income before income tax expense			14,599				19,015
Income tax expense			9,057				6,659
Net Income		$	5,542			$	12,356
Net income per common share
Basic		$	0.16			$	0.36
Diluted			0.16				0.35
Average common shares outstanding
Basic			34,739				34,770
Diluted			35,121				35,085
Dividends declared per common share		$	0.195			$	0.195

First Charter Corporation
Consolidated Statements of Shareholders’ Equity
(Unaudited)

										Common Stock
										in Rabbi				Deferred								Accumulated
										Trust for				Compensation								Other
		Common Stock								Deferred				Payable in				Retained				Comprehensive
(Dollars in thousands, except share and per share amounts)		Shares				Amount				Compensation				Common Stock				Earnings				Loss				Total
Balance, December 31, 2007			34,978,847			$	233,974			$	(1,687	)		$	1,687			$	235,812			$	(1,442	)		$	468,344
Comprehensive income:
Net income			—				—				—				—				5,542				—				5,542
Change in unrealized gains and losses on securities, net of reclassification adjustment for net losses included in net income, net of income tax			—				—				—				—				—				(4,321	)			(4,321	)
Total comprehensive income																											1,221
Adjustment to initially apply EITF 06-4			—				—				—				—				(680	)			—				(680	)
Common stock purchased by Rabbi Trust for deferred compensation			—				—				(33	)			—				—				—				(33	)
Deferred compensation payable in common stock			—				—				—				33				—				—				33
Cash dividends declared, $0.195 per share			—				—				—				—				(6,865	)			—				(6,865	)
Issuance of shares under stock-based compensation plans, including related tax effects			24,874				1,506				—				—				—				—				1,506
Balance, March 31, 2008			35,003,721			$	235,480			$	(1,720	)		$	1,720			$	233,809			$	(5,763	)		$	463,526

First Charter Corporation
Consolidated Statements of Cash Flows
(Unaudited)

		Three Months Ended
		March 31
(In thousands)		2008				2007
Operating activities
Net income		$	5,542			$	12,356
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			4,707				1,366
Depreciation			1,959				1,814
Amortization of intangibles			159				223
Amortization of servicing rights			79				81
Stock-based compensation expense			787				786
Tax benefits from stock-based compensation plans			(212	)			(116	)
Premium amortization and discount accretion, net			84				89
Securities (gains) losses, net			(1,229	)			11
Net gains on sales of other real estate owned			(80	)			(51	)
Write-downs on other real estate owned			15				74
Equity method investment gains, net			(627	)			(1,127	)
Gains on sales of loans held for sale			(691	)			(701	)
Gains on sale of Small Business Administration loans			(98	)			(377	)
Property sale gains, net			(59	)			(63	)
Origination of loans held for sale			(96,990	)			(67,080	)
Proceeds from sale of loans held for sale			94,282				66,382
Change in cash surrender value of life insurance			(1,154	)			(1,158	)
Change in other assets			4,130				7,591
Change in other liabilities			(15,184	)			1,055
Net cash provided by (used in) operating activities			(4,580	)			21,155
Investing activities
Proceeds from sales of securities available for sale			—				17,367
Proceeds from sales of FHLB and Federal Reserve Bank stock			676				7,813
Proceeds from maturities, calls and paydowns of securities available for sale			115,059				62,347
Purchases of securities available for sale			(82,752	)			(71,138	)
Purchases of FHLB and Federal Reserve Bank stock			(3,809	)			(6,863	)
Net change in loans			22,512				(45,667	)
Proceeds from sales of other real estate owned			1,248				498
Net purchases of premises and equipment			(1,420	)			(2,371	)
Net cash provided by (used in) investing activities			51,514				(38,014	)
Financing activities
Net change in deposits			(2,280	)			73,238
Net change in federal funds purchased and securities sold under repurchase agreements			(59,416	)			(23,923	)
Net change in commercial paper and other short-term borrowings			(35,353	)			(70,530	)
Proceeds from issuance of long-term debt and trust preferred securities			50,000				150,000
Retirement of long-term debt			(17	)			(110,016	)
Proceeds from issuance of common stock			1,294				2,813
Tax benefits from stock-based compensation plans			212				116
Cash dividends paid			(6,821	)			(6,811	)
Net cash provided by (used in) financing activities			(52,381	)			14,887
Net decrease in cash and cash equivalents			(5,447	)			(1,972	)
Cash and cash equivalents at beginning of period			102,198				102,827
Cash and cash equivalents at end of period		$	96,751			$	100,855
Supplemental information for continuing operations
Cash paid for:
Interest		$	40,894			$	40,561
Income taxes			14,770				3,200
Non-cash items:
Transfer of loans to other real estate owned			608				373
Unrealized gains (losses) on securities available for sale (net of tax expense (benefit) of $(2,819), and $378, respectively)			(4,321	)			578

First Charter Corporation
Notes to Consolidated Financial Statements
(Unaudited)

First Charter Corporation (“First Charter” or the “Corporation”), headquartered in Charlotte, North Carolina, is a regional financial services company with assets of $4.8 billion and is the holding company for First Charter Bank (the “Bank”). As of March 31, 2008, First Charter operated 60 financial centers, four insurance offices, and 136 ATMs throughout North Carolina and Georgia. First Charter also operates loan origination offices in Asheville, North Carolina and Reston, Virginia. First Charter provides businesses and individuals with a broad range of financial services, including banking, financial planning, wealth management, investments, insurance, and mortgages. The results of operations of the Bank constitute the substantial majority of the consolidated net income, revenue, and assets of the Corporation.

1. Accounting Policies

The consolidated financial statements include the accounts of the Corporation and its wholly-owned subsidiary, the Bank, and variable interest entities where the Corporation is the primary beneficiary. All significant intercompany transactions and balances have been eliminated.

The information contained in these interim consolidated financial statements, excluding the consolidated balance sheet as of December 31, 2007, is unaudited. The information furnished has been prepared pursuant to United States Securities and Exchange Commission (“SEC”) Rule 10-01 of Regulation S-X and does not include all the information and note disclosures required to be included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America.

The accompanying unaudited consolidated financial statements should be read in conjunction with the Corporation’s audited financial statements and accompanying notes in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007, filed with the SEC on February 29, 2008.

The unaudited results of operations for the interim periods shown in these financial statements are not necessarily indicative of operating results for the entire year. The information furnished in this report reflects all adjustments, which are, in the opinion of management, necessary to present a fair statement of the financial condition and the results of operations for interim periods. All such adjustments are of a normal and recurring nature.

The significant accounting policies followed by the Corporation are presented in Note 1 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007. With the exception of the Corporation’s adoption of certain of the accounting pronouncements discussed in Note 2 , these policies have not materially changed from the disclosure in that report.

2. Recent Accounting Pronouncements

In March 2008, the Financial Accounting Standards Board (“FASB”) issued Statement of Accounting Standard (“SFAS”) No. 161, Disclosures About Derivative Instruments and Hedging Activities – An Amendment of FASB Statement No. 133 . This standard requires companies to provide enhanced disclosures regarding derivative instruments and hedging activities. It requires companies to better convey the purpose of derivative use in terms of the risks that the company is intending to manage. SFAS 161 retains the same scope as SFAS 133 and is effective for fiscal years and interim periods beginning after November 15, 2008. The Corporation will adopt SFAS 161 beginning January 1, 2009 and is currently evaluating the impact, if any, SFAS 161 will have on the Corporation’s consolidated financial statements.

In February 2008, the FASB issued FASB Staff Position (“FSP”) 140-3, Accounting for Transfers of Financial Assets and Repurchase Financing Transactions . FSP 140-3 addresses the issue of whether or

not these transactions should be viewed as two separate transactions or as one “linked” transaction. The FSP includes a rebuttable presumption that presumes linkage of the two transactions unless the presumption can be overcome by meeting certain criteria. FSP 140-3 is effective for fiscal years beginning after November 15, 2008. The Corporation will adopt this FSP beginning January 1, 2009 and is currently evaluating the impact, if any, FSP 140-3 will have on the Corporation’s consolidated financial statements.

In February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 . This standard permits an entity to choose to measure many financial instruments and certain other items at fair value. This option is available to all entities. Most of the provisions in SFAS 159 are elective; however, the amendment to SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, applies to all entities with available-for-sale and trading securities. SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Corporation did not elect the fair value option as of January 1, 2008 for any of its financial assets or financial liabilities and, accordingly, the adoption of SFAS 159 did not have a material impact on the Corporation’s consolidated financial statements.

In September 2006, the FASB issued SFAS 157, Fair Value Measurements , which replaces the different definitions of fair value in existing accounting literature with a single definition, sets out a framework for measuring fair value, and requires additional disclosures about fair value measurements. SFAS 157 is required to be applied whenever another financial accounting standard requires or permits an asset or liability to be measured at fair value. The Corporation adopted the guidance of SFAS 157 beginning January 1, 2008, and the adoption of the statement did not have a material impact on the Corporation’s consolidated financial statements.

In September 2006, the FASB ratified the consensus reached by the Emerging Issues Task Force (“EITF”) on Issue No. 06- 4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split Dollar Life Insurance Arrangements. EITF 06-4 requires the recognition of a liability and related compensation expense for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to post-retirement periods. Under EITF 06-4, life insurance policies purchased for the purpose of providing such benefits do not effectively settle an entity’s obligation to the employee. Accordingly, the entity must recognize a liability and related compensation expense during the employee’s active service period based on the future cost of insurance to be incurred during the employee’s retirement. If the entity has agreed to provide the employee with a death benefit, then the liability for the future death benefit should be recognized by following the guidance in SFAS 106, Employer’s Accounting for Postretirement Benefits Other Than Pensions . The Corporation adopted EITF 06-4 effective as of January 1, 2008 as a change in accounting principle, and reduced retained earnings by $0.7 million through a cumulative-effect adjustment.

In November 2007, the SEC issued Staff Accounting Bulletin No. 109, Written Loan Commitments Recorded at Fair Value Through Earnings, (“SAB 109”). SAB 109 supersedes guidance provided by SAB 105, Loan Commitments Accounted for as Derivative Instruments, (“SAB 105”) and provides guidance on written loan commitments accounted for at fair value through earnings. Specifically, SAB 109 addresses the inclusion of expected net future cash flows related to the associated servicing of a loan in the measurement of all written loan commitments accounted for at fair value through earnings. In addition, SAB 109 retains the SEC’s position on the exclusion of internally-developed intangible assets as part of the fair value of a derivative loan commitment originally established in SAB 105. The Corporation adopted SAB 109 as of January 1, 2008 and the adoption of SAB 109 did not have a material impact on the Corporation’s consolidated financial statements.

3. Proposed Merger with Fifth Third

On August 15, 2007, First Charter and Fifth Third Bancorp (“Fifth Third”) entered into an Agreement and Plan of Merger, as amended by the Amended and Restated Agreement and Plan of Merger, dated September 14, 2007, (“Merger Agreement”) by and among First Charter, Fifth Third, and Fifth Third

Financial Corporation (“Fifth Third Financial”). Under the terms of the Merger Agreement, First Charter will be merged with and into Fifth Third Financial. The Merger Agreement has been approved by the Board of Directors of First Charter, Fifth Third and Fifth Third Financial. First Charter’s shareholders have approved the Merger Agreement and the merger has been approved by all necessary state and federal regulatory agencies. The Merger Agreement is subject to customary closing conditions. The merger is currently anticipated to close on Friday, June 6, 2008.

In connection with the proposed merger with Fifth Third, the Corporation has incurred expenses of approximately $0.6 million of merger-related costs, principally legal and professional services, for the three months ended March 31, 2008.

4. Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of shares of the Corporation’s common stock outstanding for the three months ended March 31, 2008 and 2007, respectively. Diluted net income per share reflects the potential dilution that could occur if the Corporation’s potential common stock equivalents and contingently issuable shares, which consist of dilutive stock options, restricted stock, and performance shares, were issued.

A reconciliation of the basic average common shares outstanding to the diluted average common shares outstanding follows:

		Three Months Ended
		March 31
		2008				2007
Basic weighted-average number of common shares outstanding			34,739,407				34,770,106
Dilutive effect arising from potential common stock issuances			381,660				314,534
Diluted weighted-average number of common shares outstanding			35,121,067				35,084,640

The effects of outstanding anti-dilutive stock options are excluded from the computation of diluted net income per share. These amounts were 500 and 424,024 shares for the three months ended March 31, 2008 and 2007, respectively.

The Corporation declared dividends of $0.195 per share for the three months ended March 31, 2008 and 2007.

5. 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:

		March 31, 2008												December 31, 2007
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
(In thousands)		Amount				Amortization				Amount				Amount				Amortization				Amount
Amortized intangible assets:
Core deposits		$	3,560			$	968			$	2,592			$	3,560			$	808			$	2,752
Noncompete agreements			90				90				—				90				90				—
Customer lists			2,615				1,752				863				2,615				1,640				975
Total amortized intangible assets			6,265				2,810				3,455				6,265				2,538				3,727
Goodwill			79,144				N/A				79,144				79,144				N/A				79,144
Total goodwill and amortized intangible assets		$	85,409			$	2,810			$	82,599			$	85,409			$	2,538			$	82,871

Amortization expense for the three months ended March 31, 2008 and 2007 was $0.3 million and $0.2 million, respectively.

As of March 31, 2008, expected future amortization expense for intangible assets follows:
 

		Core				Customer
(In thousands)		Deposits				Lists				Total
April - December 2008		$	449			$	279			$	728
2009			531				263				794
2010			453				142				595
2011			375				83				458
2012			297				48				345
2013 and after			487				48				535
Total expected future intangible asset amortization		$	2,592			$	863			$	3,455

6. Comprehensive Income

Comprehensive income is defined as the change in equity from all transactions other than those with shareholders, and it includes net income and other comprehensive income (loss). The Corporation’s only component of other comprehensive income is the change in unrealized gains and losses on available-for-sale securities.

The components of comprehensive income follow:

		Three Months Ended
		March 31
(In thousands)		2008				2007
Comprehensive income
Net income		$	5,542			$	12,356
Other comprehensive income (loss)
Unrealized gains (losses) on available-for-sale securities, net			(5,911	)			945
Reclassification adjustment for gains (losses) included in net income			1,229				(11	)
Income tax effect, net			2,819				(378	)
Other comprehensive income (loss)			(4,321	)			578
Total comprehensive income		$	1,221			$	12,934

7. Securities Available for Sale

Securities available for sale are summarized as follows:

		March 31, 2008
		Amortized				Unrealized				Unrealized				Fair
(In thousands)		Cost				Gains				Losses				Value
U.S. government agency obligations		$	97,257			$	560			$	5			$	97,812
Mortgage-backed securities			583,797				4,325				7,881				580,241
State, county, and municipal obligations			90,959				1,024				2				91,981
Asset-backed securities			57,661				—				7,613				50,048
Equity securities			1,362				129				55				1,436
Total securities		$	831,036			$	6,038			$	15,556			$	821,518
		December 31, 2007
		Amortized				Unrealized				Unrealized				Fair
(In thousands)		Cost				Gains				Losses				Value
U.S. government agency obligations		$	145,810			$	814			$	70			$	146,554
Mortgage-backed securities			565,872				4,399				4,837				565,434
State, county, and municipal obligations			92,324				692				78				92,938
Asset-backed securities			57,681				—				3,452				54,229
Equity securities			1,362				193				39				1,516
Total securities		$	863,049			$	6,098			$	8,476			$	860,671

The contractual maturity distribution and yields (computed on a taxable-equivalent basis) of the Corporation’s securities portfolio at March 31, 2008, are summarized below. Actual maturities may differ from contractual maturities shown below since borrowers may have the right to pre-pay these obligations without pre-payment penalties.

										Due after 1								Due after 5
		Due in 1 year								through 5								through 10								Due after
		or less								years								years								10 years								Total
(Dollars in thousands)		Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield				Amount				Yield
Fair value of securities available for sale
U.S. government agency obligations		$	96,772				3.71	%		$	—				—	%		$	1,040				5.20	%		$	—				—	%		$	97,812				3.72	%
Mortgage-backed securities (1)			8,952				5.65				274,670				4.82				244,123				5.46				52,496				5.67				580,241				5.18
State and municipal obligations (2)			32,826				6.76				20,399				5.01				4,110				5.99				34,646				2.62				91,981				4.78
Asset-backed securities			—				—				13,136				6.99				17,520				5.03				19,392				5.46				50,048				5.70
Equity securities (3)			—				—				—				—				—				—				1,436				6.10				1,436				6.10
Total		$	138,550				4.56	%		$	308,205				4.93	%		$	266,793				5.43	%		$	107,970				4.65	%		$	821,518				4.99	%
Amortized cost of securities available for sale		$	137,446							$	309,100							$	271,953							$	112,537							$	831,036

(1)		Maturities estimated based on average life of security.
(2)		Yields on tax-exempt securities are calculated on a tax-equivalent basis using the marginal Federal income tax rate of 35 percent.
(3)		Although equity securities have no stated maturity, they are presented for illustrative purposes only. The 6.10% yield represents the expected dividend yield to be earned on equity securities.

Securities with an aggregate carrying value of $671.4 million and $655.0 million at March 31, 2008 and December 31, 2007, respectively, were pledged to secure public deposits, trust account deposits, securities sold under agreements to repurchase, and Federal Home Loan Bank (“FHLB”) borrowings.

Gross gains and losses recognized on the sale of securities are summarized as follows:

		Three Months Ended
		March 31
(In thousands)		2008				2007
Gross gains		$	1,229			$	94
Gross losses			—				(105	)
Securities gains (losses), net		$	1,229			$	(11	)

In March 2008, the Corporation received 51,457 Class B common shares in connection with Visa Inc.’s (“Visa”) initial public offering (“IPO”), of which 19,894 shares were redeemed as part of Visa’s mandatory redemption of its Class B stock. The Corporation recognized a gain of $0.9 million related to this redemption. The Corporation did not recognize any gain on the remaining 31,563 unredeemed Visa Class B common shares. The unredeemed Visa Class B common shares are not reflected on the Corporation’s consolidated balance sheet at March 31, 2008 as the Corporation has no historical basis in these shares.

As of March 31, 2008, 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.

The unrealized losses at March 31, 2008, shown in the following table, resulted primarily from an increase in interest rate spreads among the various types of bond investments, market illiquidity and macro-economic recession fears.

		Less than 12 months								12 months or longer								Total
		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(In thousands)		Value				Losses				Value				Losses				Value				Losses
AAA/AA-RATED SECURITIES
U.S. government agency obligations		$	29,963			$	5			$	—			$	—			$	29,963			$	5
Mortgage-backed securities			156,880				4,433				107,428				3,448				264,308				7,881
Total AAA/AA-rated securities			186,843				4,438				107,428				3,448				294,271				7,886
A/BBB-RATED SECURITIES
Asset-backed securities			41,833				5,826				8,215				1,787				50,048				7,613
State, county, and municipal obligations			1,168				2				—				—				1,168				2
Total A/BBB-rated securities			43,001				5,828				8,215				1,787				51,216				7,615
UNRATED SECURITIES
Equity securities			397				55				—				—				397				55
Total unrated securities			397				55				—				—				397				55
Total temporarily impaired securities		$	230,241			$	10,321			$	115,643			$	5,235			$	345,884			$	15,556

At March 31, 2008, investments in a gross unrealized loss position included one U.S. agency security, 38 mortgage-backed securities, one municipal obligation, and eight other asset-backed securities. The unrealized losses associated with these securities were not considered to be other-than-temporary because they were primarily related to changes in interest rates and interest rate spreads, and did not affect the expected cash flows of the underlying collateral or the issuer. At March 31, 2008, the Corporation had the ability and the intent to hold these investments to the recovery of par value. The Corporation’s available-for-sale securities portfolio also contains one equity security in an unrealized loss

position. This equity security began trading publicly in the first quarter of 2007 and the stock price has decreased, resulting in an unrealized loss of approximately 12.2 percent as of March 31, 2008.

8. Loans and Allowance for Loan Losses

The Bank primarily makes commercial and installment loans to customers throughout its market areas. The Corporation’s primary market area includes the states of North Carolina, South Carolina, and Georgia, and predominately centers on the metropolitan regions of Charlotte and Raleigh, North Carolina, and Atlanta, Georgia. At March 31, 2008, the majority of the total loan portfolio was to borrowers within these regions. The real estate loan portfolio can be affected by the condition of the local real estate markets. 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 bases in the regions.

Total portfolio loans are categorized as follows:

		March 31, 2008								December 31, 2007
(Dollars in thousands)		Amount				Percent				Amount				Percent
Commercial real estate		$	1,058,197				30.4	%		$	1,073,983				30.7	%
Commercial non real estate			299,555				8.6				308,792				8.8
Construction			861,967				24.8				871,579				24.9
Mortgage			587,240				16.9				582,398				16.6
Home equity			430,781				12.4				413,873				11.8
Consumer			240,048				6.9				252,382				7.2
Total portfolio loans		$	3,477,788				100.0	%		$	3,503,007				100.0	%

The following is a summary of the changes in the allowance for loan losses:

		Three Months Ended March 31
(In thousands)		2008				2007
Balance, beginning of period		$	42,414			$	34,966
Charge-offs			(2,458	)			(786	)
Recoveries			359				308
Net charge-offs			(2,099	)			(478	)
Provision for loan losses			4,707				1,366
Balance, March 31		$	45,022			$	35,854

The table below summarizes the Corporation’s nonperforming assets.

		March 31				December 31
(In thousands)		2008				2007
Nonaccrual loans		$	62,058			$	28,695
Loans 90 days or more past due and accruing interest			—				—
Total nonperforming loans			62,058				28,695
Other real estate			9,481				10,056
Total nonperforming assets		$	71,539			$	38,751

At March 31, 2008 and December 31, 2007, impaired loans amounted to $55.8 million and $23.2 million, respectively. Included in the allowance for loan losses was $7.6 million and $4.4 million related to the impaired loans at March 31, 2008 and December 31, 2007, respectively.

9. Servicing Rights

As of March 31, 2008, the Corporation serviced $171.3 million of mortgage loans for other parties. The carrying value and aggregate estimated fair value of mortgage servicing rights (“MSR”) at March 31, 2008 were $0.6 million and $1.5 million, respectively, compared to a carrying value and estimated fair value of $0.6 million and $1.8 million, respectively, at December 31, 2007.

As of March 31, 2008, the Corporation serviced $34.0 million of Small Business Administration (“SBA”) loans that were originated by and sold by the Bank. The carrying value and aggregate estimated fair value of the SBA loan servicing rights (“SSR”) at March 31, 2008 were $0.8 million, compared to the carrying value and estimated fair value of $0.8 million and $0.9 million, respectively, at December 31, 2007.

Servicing rights are periodically evaluated for impairment based on their fair value. Impairment would be recognized as a reduction to the carrying value of the asset. 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 following is an analysis of capitalized servicing rights included in other assets in the consolidated balance sheets for the three months ending March 31, 2008 and 2007:

		2008								2007
(In thousands)		MSR				SSR				MSR				SSR
Balance, beginning of period		$	591			$	792			$	756			$	1,137
Servicing rights capitalized or acquired			—				10				—				13
Amortization expense			(34	)			(48	)			(41	)			(40	)
Purchase accounting adjustment			—				—				—				(238	)
Valuation allowance			—				—				—				—
Balance, March 31		$	557			$	754			$	715			$	872

Assumptions used to value the MSR included an average conditional prepayment rate (“CPR”) of 15.4 percent, an average discount rate of 12.2 percent, and a weighted-average life of 3.3 years. An increase in the prepayment rates of 10 percent and 20 percent may result in a decline in fair value of $57,000 and $110,000, respectively. An increase in the discount rate of 10 percent and 20 percent may result in a decline in fair value of $38,000 and $74,000, respectively. Changes in fair value based on a 10 percent variation in assumptions generally cannot be extrapolated because the relationship of the change in the assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of the MSR is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the discount rates), which may magnify or counteract the sensitivities.

Assumptions used to value the SSR included a CPR of 13.0 percent, a discount rate of 10.3 percent, and a weighted-average life of 4.1 years. An increase in the prepayment rates of 10 percent and 20 percent may result in a decline in fair value of $38,000 and $73,000, respectively. An increase in the discount rate of 10 percent and 20 percent may result in a decline in fair value of $20,000 and $40,000, respectively.

The MSR and SSR are expected to be amortized against other noninterest income over a weighted-average period of 3.0 years and 2.9 years, respectively. Expected future amortization expense for these capitalized servicing rights follows:

(In thousands)		MSR				SSR				Total
April 1 - December 31, 2008		$	101			$	132			$	233
2009			111				152				263
2010			92				126				218
2011			74				104				178
2012			61				85				146
2013 and after			118				155				273
Total amortization		$	557			$	754			$	1,311

For the three months ended March 31, 2008 and 2007, contractual servicing fee revenue was $0.3 million and $0.4 million, respectively, and was included in the mortgage services line item of other noninterest income.

10. Other Borrowings

The following is a schedule of other borrowings:

		March 31, 2008								December 31, 2007
						Weighted-								Weighted-
						Average								Average
						Contractual								Contractual
(Dollars in thousands)		Balance				Rate				Balance				Rate
Federal funds purchased and securities sold under agreements to repurchase		$	208,816				3.18	%		$	268,232				4.59	%
Commercial paper			28,827				2.94				64,180				2.91
Other short-term borrowings			220,000				3.65				220,000				5.27
Long-term debt			617,712				4.77				567,729				5.26
Total other borrowings		$	1,075,355				4.18	%		$	1,120,141				4.97	%

Securities sold under agreements to repurchase represent short-term borrowings by the banking subsidiaries with maturities less than one year collateralized by a portion of the Corporation’s securities of the United States government or its agencies, which have been delivered to a third-party custodian for safekeeping. Securities with an aggregate carrying value of $114.1 million and $124.8 million at March 31, 2008 and December 31, 2007, respectively, were pledged to secure securities sold under agreements to repurchase.

Federal funds purchased represent unsecured overnight borrowings from other financial institutions. At March 31, 2008, the Bank had available federal funds lines of credit totaling $648.0 million, with $168.0 million outstanding, compared to similar lines of credit totaling $648.0 million, with $233.0 million outstanding at December 31, 2007.

First Charter Corporation issues commercial paper as another source of short-term funding. It is purchased primarily by the Bank’s commercial clients. Commercial paper outstanding at March 31, 2008 was $28.8 million, compared to $64.2 million at December 31, 2007.

Other short-term borrowings consist of the FHLB borrowings with an original maturity of one year or less. 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. At March 31, 2008 and December 31, 2007, the Bank had $220.0 million of short-term FHLB borrowings.

Long-term borrowings represent FHLB borrowings with original maturities greater than one year and subordinated debentures related to trust preferred securities. At March 31, 2008, the Bank had $555.8 million of long-term FHLB borrowings, compared to $505.8 million at December 31, 2007. In addition, the Corporation had $61.9 million of subordinated outstanding debentures at March 31, 2008 and December 31, 2007.

The Corporation formed First Charter Capital Trust I and First Charter Capital Trust II, in June 2005 and September 2005, respectively; both are wholly-owned business trusts. First Charter Capital Trust I and First Charter Capital Trust II issued $35.0 million and $25.0 million, respectively, of trust preferred securities that were sold to third parties. The proceeds of the sale of the trust preferred securities were used to purchase subordinated debentures (“Notes”) from the Corporation, which are presented as long-term borrowings in the consolidated balance sheets and qualify for inclusion in Tier 1 capital for regulatory capital purposes, subject to certain limitations.

The following is a summary of the Corporation’s outstanding trust preferred securities and Notes at March 31, 2008.

(Dollars in thousands)

Aggregate

Principal

Amount of

Aggregate

Trust

Principal

Stated

Per Annum

Interest

Preferred

Amount of

Maturity of

Interest Rate

Payment

Redemption

Issuer

Issuance Date

Securities

the Notes

the Notes

of the Notes

Dates

Period

September

3 mo. LIBOR

3/15, 6/15,

On or after

Capital Trust I

June 2005

$

35,000

$

36,083

2035

+ 169 bps

9/15, 12/15

9/15/2010

December

3 mo. LIBOR

3/15, 6/15,

On or after

Capital Trust II

September 2005

25,000

25,774

2035

+ 142 bps

9/15, 12/15

12/15/2010

Total

$

60,000

$

61,857

11. Income Tax

Income tax expense attributable to net income differed from the amounts computed by applying the U.S. federal statutory income tax rate of 35 percent to pretax income as follows:

		Three Months Ended March 31
(Dollars in thousands)		2008								2007
Tax at statutory federal rate		$	5,110				35.0	%		$	6,655				35.0	%
Change in income taxes resulting from:
Tax-exempt income			(307	)			(2.1	)			(372	)			(2.0	)
Bank-owned life insurance			(407	)			(2.8	)			(399	)			(2.1	)
State income tax, net of federal			524				3.6				293				1.5
Settlement with North Carolina DOR			4,938				33.8				—				—
Addition to or (release of) tax reserve			(843	)			(5.8	)			226				1.2
Other, net			42				0.3				256				1.3
Income tax expense		$	9,057				62.0	%		$	6,659				34.9	%

The Corporation utilizes FASB Interpretation No. 48 (“FIN 48”) , Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 . FIN 48 prescribes a more-likely-than-not threshold for the financial statement recognition of uncertain tax positions. The Corporation has a liability for unrecognized tax benefits relating to uncertain tax positions.

As a result of various tax strategies of the Corporation, the amount of unrecognized tax benefits as of March 31, 2008 was $5.1 million, all of which would impact the Corporation’s effective tax rate, if recognized. The Corporation believes its current tax reserves are adequate. A reconciliation of the beginning and ending amount of unrecognized tax benefits for the three months ended March 31, 2008 follows:

(In thousands)
Balance, beginning of period		$	10,833
Expiration of statute			(731	)
Reductions for tax positions of prior periods			(4,981	)
Balance, March 31, 2008		$	5,121

Consistent with prior reporting periods, the Corporation recognizes interest accrued in connection with unrecognized tax benefits, net of related tax benefits, and penalties in income tax expense in the consolidated statements of income. As of March 31, 2008, the Corporation had accrued approximately $0.1 million for the payment of interest and penalties.

The Corporation completed an examination by the North Carolina Department of Revenue (the “DOR”) for tax years 1999 through 2005. On March 31, 2008, the Corporation entered into a closing agreement with the DOR for years 1999 through and including 2006. As a result of this settlement, the Corporation paid $15.4 million in franchise and income taxes, interest and penalties. The closing agreement resulted in a reduction of unrecognized tax benefits of $4.2 million. The Corporation remains subject to examination by the DOR for tax years 2007 forward.

The Corporation was also under examination by the Internal Revenue Service for the 2004 and 2005 tax years. The examination was effectively concluded by March 31, 2008. The Corporation recognized $0.8 million of additional income tax expense in connection with the effective settlement of this examination.

12. Share-Based Payments

The Corporation has various stock-based compensation plans under which awards, including stock options and restricted stock, may be granted to employees and non-employee directors. These plans and the related accounting are described in Note 18 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2007.

Stock-based compensation costs totaled $0.8 million for the three months ended March 31, 2008, which consisted of $43,000 related to stock options, $573,000 related to service-based nonvested shares, and $172,000 related to performance-based nonvested shares. Stock-based compensation costs totaled $0.8 million for the three months ended March 31, 2007, which consisted of $50,000 related to stock options, $523,000 related to service-based nonvested shares, and $213,000 related to performance-based nonvested shares.

The fair value of each stock option award is estimated at the date of grant using a Black-Scholes option-pricing model based on the following weighted-average assumptions:

		Three Months Ended
		March 31
		2008		2007
Expected volatility		N/A			22.4	%
Expected dividend yield		N/A			3.2
Risk-free interest rate		N/A			4.8
Expected term (in years)		N/A			8.0

Stock option activity for the three months ended March 31, 2008, follows:

										Weighted-
										Average
						Weighted-				Remaining
						Average				Contractual				Aggregate
						Exercise				Term				Intrinsic
		Shares				Price				(in years)				Value
Outstanding, beginning of period			882,853			$	19.98
Exercised			(26,688	)			20.14							$	187,093
Outstanding, March 31, 2008			856,165			$	19.98				4.8			$	5,765,413
Exercisable, March 31, 2008			782,505			$	19.58				4.5			$	5,577,166

Nonvested share activity for the three months ended March 31, 2008 follows:

		Service-Based								Performance-Based
						Weighted-								Weighted-
						Average								Average
						Grant Date								Grant Date
		Shares				Fair Value				Shares				Fair Value
Outstanding, beginning of period			263,168			$	24.01				90,167			$	22.31
Exercised			(5,196	)			23.68				(5,967	)			22.13
Forfeited			(1,000	)			20.04				—
Outstanding, March 31, 2008			256,972			$	24.03				84,200			$	22.32

As of March 31, 2008, there was approximately $4.4 million of total unrecognized compensation cost related to service-based nonvested share-based compensation arrangements granted under the 2000 Omnibus Stock Option and Award Plan (“Omnibus Plan”) and the Restricted Stock Award Program. This cost is expected to be recognized over a remaining weighted-average period of 1.6 years. No share-based awards vested during the three months ended March 31, 2008.

As of March 31, 2008, there was $0.7 million of total unrecognized compensation cost related to performance-based nonvested share-based compensation arrangements granted under the Omnibus Plan. This cost is expected to be recognized over a remaining weighted-average period of 1.3 years.

13. Financial Instruments Measured at Fair Value

As discussed in Note 2 , the Corporation adopted SFAS 157 as of January 1, 2008. The following table presents the allocation of the Corporation’s assets recorded at fair value within the SFAS 157 fair value hierarchy as of March 31, 2008:

(In thousands)						Fair Value Measurements Using
						Quoted prices in								Significant
						active markets for				Significant other				unobservable
						identical assets				observable inputs				inputs
Description		Fair Value				(Level 1)				(Level 2)				(Level 3)
Securities at fair value		$	821,518			$	1,436			$	770,034			$	50,048
Loans recorded at collateral value			48,246				—				—				48,246

The majority of the Corporation’s available-for-sale securities portfolio falls into Level 2 of the fair value hierarchy. The securities are generally priced through independent providers. In obtaining such valuation information, the Corporation has evaluated the valuation methodologies used to develop the fair values.

The Corporation has valued its asset-backed securities, which are trust preferred securities, using third-party dealer determined pricing models. Significant inputs to these dealer pricing models are not readily observable, thus the valuations of these securities are classified as Level 3 within the fair value hierarchy. The need to use unobservable inputs generally results from the lack of market liquidity of these securities, which has resulted in diminished observability of actual trades and observable market assumptions that would otherwise be used to value these instruments.

Impaired loans are recorded at the fair value of the underlying collateral. The fair value of the loan’s collateral is generally determined by third-party appraisals.

The following table shows a reconciliation for the three months ending March 31, 2008 of financial instruments measured using significant unobservable inputs and classified as Level 3 within the fair value hierarchy:

		Fair Value of				Fair Value of
		Level 3				Level 3
(In thousands)		Securities				Loans
Balance, beginning of period		$	54,229			$	18,787
Losses included in earnings			—				(3,169	)
Losses included in other comprehensive income			(4,161	)			—
Net transfers			(20	)			32,628
Balance, March 31, 2008		$	50,048			$	48,246

14. Commitments, Contingencies, and Off-Balance Sheet Risk

Commitments and Off-Balance Sheet Risk. The Corporation is party to various financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Corporation. Included in loan commitments are commitments of $83.6 million to cover customer deposit account overdrafts should they occur. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated

amount and with specified terms and conditions. Standby letters of credit are recorded as a liability by the Corporation at the fair value of the obligation undertaken in issuing the guarantee. The fair value and carrying value at March 31, 2008 of standby letters of credit issued or modified during 2008 was immaterial. Commitments to extend credit are not recorded as an asset or liability by the Corporation until the instrument is exercised. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for instruments reflected in the consolidated financial statements. The creditworthiness of each customer is evaluated on a case-by-case basis.

As of March 31, 2008, the Corporation’s maximum exposure is as follows:

		Less than																Timing not
(In thousands)		1 year				1-3 Years				4-5 Years				Over 5 Years				determinable				Total
Loan commitments		$	570,313			$	113,946			$	16,922			$	95,381			$	—			$	796,562
Lines of credit			28,597				1,202				4,957				455,497				—				490,253
Standby letters of credit			23,016				2,849				4				—				—				25,869
Anticipated tax settlements			—				—				—				—				5,172				5,172
Total commitments		$	621,926			$	117,997			$	21,883			$	550,878			$	5,172			$	1,317,856

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.

During October 2007, Visa completed a restructuring and issued shares of Visa common stock to its financial institution members in contemplation of its IPO which occurred in March 2008. After the restructuring, member financial institutions became guarantors of certain Visa litigation liabilities based on the members’ proportionate share of the membership base. On November 7, 2007, Visa announced that it had reached a settlement in the amount of $2.065 billion to resolve certain restraint of trade litigation brought by American Express. The Corporation, as a member of the Visa network and a guarantor of its proportionate share of these liabilities, recognized a litigation liability of $0.6 million related to the American Express settlement and the remaining unsettled Discover, Interchange and Attridge litigation. Of this $0.6 million, $0.3 million is the Corporation’s proportionate share of the American Express Settlement and $0.3 million is the Corporation’s estimate of the fair value of the potential losses related to the remaining unsettled litigation. Charges related to these litigation matters is included in “Legal and professional services” on the Corporation’s consolidated statements of income.

The Corporation filed its Form 10-Q for the three months ended September 30, 2007 on November 9, 2007. As such, the Corporation should have recorded its $0.3 million proportionate share of Visa’s settlement with American Express in the third quarter of 2007. Additionally, the $0.3 million reserve related to the Discover, Interchange and Attridge litigation should have been recorded in the fourth quarter of 2007. The Corporation evaluated the impact of these errors, considering both qualitative and quantitative factors, and concluded the errors were immaterial to all periods affected. As such, the Corporation corrected the errors by recording the $0.6 million litigation reserve in the first quarter of 2008.

Visa funded an escrow account with a portion of the proceeds from the IPO. The escrow account will be used to pay settlements of Visa’s restraint of trade litigation. The Corporation’s proportionate share of this escrow account was $0.4 million and the Corporation recognized the benefit from the escrow account as a partial recapture of expenses incurred to establish the Visa litigation reserve liability. See Note 7 for further discussion of the Visa IPO transaction.

15. Regulatory Restrictions and Capital Ratios