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 June 30, 2007

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

FIRST CHARTER CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

North Carolina		56-1355866
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification 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

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, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ          Accelerated Filer o          Non-Accelerated Filero

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

As of August 1, 2007, the Registrant had outstanding 34,686,023 shares of Common Stock, no par value.

 

 

First Charter Corporation
FORM 10-Q
QUARTER ENDED JUNE 30, 2007

All reports filed electronically by First Charter 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 Corporations’ Web site at www.firstcharter.com. These filings are also accessible on the SEC’s Web site at www.sec.gov.

TABLE OF CONTENTS

						Page
Part I — Financial Information
Item 1.		Financial Statements:
				Consolidated Balance Sheets			3
				Consolidated Statements of Income			4
				Consolidated Statements of Shareholders’ Equity			5
				Consolidated Statements of Cash Flows			6
				Notes to Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations					28
Item 3.		Quantitative and Qualitative Disclosures about Market Risk					57
Item 4.		Controls and Procedures					58
Part II Other Information
Item 1.		Legal Proceedings					59
Item 1A.		Risk Factors					59
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds					59
Item 3.		Defaults Upon Senior Securities					60
Item 4.		Submission of Matters to a Vote of Security Holders					60
Item 5.		Other Information					60
Item 6.		Exhibits					61
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)

		June 30				December 31
(Dollars in thousands, except share data)		2007				2006
Assets
Cash and due from banks		$	91,446			$	87,771
Federal funds sold			22,495				10,515
Interest-bearing bank deposits			5,145				4,541
Cash and cash equivalents			119,086				102,827
Securities available for sale (cost of $912,883 and $916,189 at June 30, 2007 and December 31, 2006, respectively)			898,528				906,415
Loans held for sale			11,471				12,292
Portfolio loans:
Commercial and construction			2,272,151				2,129,569
Mortgage			589,976				618,142
Consumer			691,710				737,342
Total portfolio loans			3,553,837				3,485,053
Allowance for loan losses			(44,790	)			(34,966	)
Portfolio loans, net			3,509,047				3,450,087
Premises and equipment, net			112,874				111,588
Goodwill and other intangible assets			84,107				85,068
Other assets			181,608				188,440
Total Assets		$	4,916,721			$	4,856,717
Liabilities
Deposits:
Noninterest-bearing demand		$	480,078			$	454,975
Demand			427,899				420,774
Money market			587,691				620,699
Savings			114,245				111,047
Certificates of deposit			1,620,433				1,640,633
Total deposits			3,230,346				3,248,128
Federal funds purchased and securities sold under agreements to repurchase			216,152				201,713
Commercial paper and other short-term borrowings			342,844				409,191
Long-term debt			617,762				487,794
Accrued expenses and other liabilities			63,789				62,529
Total Liabilities			4,470,893				4,409,355
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 34,689,641 and 34,922,222 shares at June 30, 2007 and December 31, 2006, respectively			225,139				231,602
Common stock held in Rabbi Trust for deferred compensation			(1,408	)			(1,226	)
Deferred compensation payable in common stock			1,408				1,226
Retained earnings			229,379				221,678
Accumulated other comprehensive loss			(8,690	)			(5,918	)
Total Shareholders’ Equity			445,828				447,362
Total Liabilities and Shareholders’ Equity		$	4,916,721			$	4,856,717

See notes to consolidated financial statements.

First Charter Corporation
Consolidated Statements of Income
(Unaudited)

		Three Months Ended								Six Months Ended
		June 30								June 30
(Dollars in thousands, except per share amounts		2007				2006				2007				2006
Interest income
Loans		$	67,124			$	54,123			$	133,242			$	104,383
Securities			11,058				9,522				21,976				18,833
Federal funds sold			48				37				176				73
Interest-bearing bank deposits			61				60				111				99
Total interest income			78,291				63,742				155,505				123,388
Interest expense
Deposits			26,364				18,343				52,904				34,904
Borrowings			14,383				12,752				28,322				23,747
Total interest expense			40,747				31,095				81,226				58,651
Net interest income			37,544				32,647				74,279				64,737
Provision for loan losses			9,124				880				10,490				2,399
Net interest income after provision for loan losses			28,420				31,767				63,789				62,338
Noninterest income
Service charges on deposits			7,942				7,469				15,332				14,167
ATM, debit, and merchant fees			2,636				2,117				5,080				4,015
Wealth management			944				693				1,660				1,393
Equity method investments gains, net			678				11				1,805				556
Mortgage services			1,056				812				1,957				1,335
Gain on sale of Small Business Administration loans			132				—				509				—
Brokerage services			1,007				692				2,088				1,403
Insurance services			3,422				2,898				7,056				7,232
Bank owned life insurance			1,162				850				2,301				1,677
Property sale gains, net			152				107				215				188
Securities gains (losses), net			—				32				(11	)			32
Other			1,010				611				1,715				1,285
Total noninterest income			20,141				16,292				39,707				33,283
Noninterest expense
Salaries and employee benefits			19,576				16,343				39,163				33,543
Occupancy and equipment			4,759				4,826				9,371				9,531
Data processing			1,492				1,448				3,282				2,858
Marketing			1,055				1,196				2,406				2,484
Postage and supplies			1,164				1,282				2,336				2,464
Professional services			3,181				2,258				6,767				4,161
Telecommunications			519				513				1,190				1,076
Amortization of intangibles			314				107				537				209
Foreclosed properties			226				418				379				472
Other			2,921				2,297				5,696				4,631
Total noninterest expense			35,207				30,688				71,127				61,429
Income from continuing operations before income tax expense			13,354				17,371				32,369				34,192
Income tax expense			4,404				5,946				11,063				11,614
Income from continuing operations, net of tax			8,950				11,425				21,306				22,578
Discontinued operations
Income from discontinued operations before gain on sale and income tax expense			—				50				—				198
Income tax expense			—				20				—				78
Income from discontinued operations, net of tax			—				30				—				120
Net income		$	8,950			$	11,455			$	21,306			$	22,698
Net income per common share
Basic
Income from continuing operations, net of tax		$	0.26			$	0.37			$	0.61			$	0.73
Income from discontinued operations, net of tax			—				—				—				—
Net income			0.26				0.37				0.61				0.73
Diluted
Income from continuing operations, net of tax		$	0.26			$	0.37			$	0.61			$	0.72
Income from discontinued operations, net of tax			—				—				—				—
Net income			0.26				0.37				0.61				0.73
Average common shares outstanding
Basic			34,698				31,059				34,734				30,960
Diluted			34,987				31,339				35,036				31,249
Dividends declared per common share		$	0.195			$	0.195			$	0.390			$	0.385

See notes to consolidated financial statements.

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

										Common Stock
										in Rabbi				Deferred								Accumulated
										Trust for				Compensation								Other
(Dollars in thousands, except		Common Stock								Deferred				Payable in				Retained				Comprehensive
share and per share amounts)		Shares				Amount				Compensation				Common Stock				Earnings				Loss				Total
Balance, December 31, 2006			34,922,222			$	231,602			$	(1,226	)		$	1,226			$	221,678			$	(5,918	)		$	447,362
Comprehensive income:
Net income			—				—				—				—				21,306				—				21,306
Change in unrealized gains and losses on securities, net of reclassificiation adjustment for net losses included in net income			—				—				—				—				—				(2,772	)			(2,772	)
Total comprehensive income																											18,534
Cummulative transaction adjustment for FIN 48			—				—				—				—				29				—				29
Common stock purchased by Rabbi Trust for deferred compensation			—				—				(182	)			—				—				—				(182	)
Deferred compensation payable in common stock			—				—				—				182								—				182
Cash dividends declared, $0.39 per share			—								—				—				(13,634	)			—				(13,634	)
Issuance of shares under stock-based compensation plans, including related tax effects			256,787				4,889				—				—				—				—				4,889
Repurchase of common stock			(500,000	)			(10,626	)			—				—				—				—				(10,626	)
Issuance of shares pursuant to acquisition			10,632				(726	)			—				—				—				—				(726	)
Balance, June 30, 2007			34,689,641			$	225,139			$	(1,408	)		$	1,408			$	229,379			$	(8,690	)		$	445,828

See notes to consolidated financial statements.

First Charter Corporation
Consolidated Statements of Cash Flows
(Unaudited)

		Six Months Ended
		June 30
(In thousands)		2007				2006
Operating activities
Net income		$	21,306			$	22,698
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			10,490				2,399
Depreciation			3,845				4,761
Amortization of intangibles			537				304
Amortization of servicing rights			173				201
Stock-based compensation expense			1,787				1,068
Tax benefits from stock-based compensation plans			(137	)			(328	)
Premium amortization and discount accretion, net			199				579
Securities (gains) losses, net			11				(32	)
Net gains on sales of other real estate owned			(101	)			(89	)
Write-downs on other real estate owned			278				355
Equity method investment gains, net			(1,805	)			(556	)
Gains on sales of loans held for sale			(1,459	)			(776	)
Gains on sale of Small Business Administration loans			(509	)			—
Property sale gains, net			(215	)			(188	)
Origination of loans held for sale			(140,022	)			(93,448	)
Proceeds from sale of loans held for sale			142,302				92,290
Change in cash surrender value of life insurance			(398	)			1,677
Change in other assets			5,545				(5,062	)
Change in other liabilities			1,449				308
Net cash provided by operating activities			43,276				26,161
Investing activities
Proceeds from sales of securities available for sale			25,180				24,603
Proceeds from maturities, calls and paydowns of securities available for sale			126,006				48,719
Purchases of securities available for sale			(148,079	)			(69,174	)
Net change in loans			(70,119	)			(130,822	)
Proceeds from sales of other real estate owned			4,242				1,170
Net purchases of premises and equipment			(5,131	)			(5,232	)
Net cash used in investing activities			(67,901	)			(130,736	)
Financing activities
Net change in deposits			(17,782	)			189,323
Net change in federal funds purchased and securities sold under repurchase agreements			14,439				(92,460	)
Net change in commercial paper and other short-term borrowings			(66,347	)			(65,374	)
Proceeds from issuance of long-term debt and trust preferred securities			240,000				220,000
Retirement of long-term debt			(110,032	)			(135,032	)
Proceeds from issuance of common stock			4,752				3,721
Purchases of common stock			(10,626	)			—
Tax benefits from stock-based compensation plans			137				328
Cash dividends paid			(13,657	)			(10,147	)
Net cash provided by financing activities			40,884				110,359
Net increase in cash and cash equivalents			16,259				5,784
Cash and cash equivalents at beginning of period			102,827				125,552
Cash and cash equivalents at end of period		$	119,086			$	131,336
Supplemental information
Cash paid for:
Interest		$	79,570			$	55,949
Income taxes			10,215				11,875
Non-cash items:
Transfer of loans to other real estate owned			669				2,674
Unrealized losses on securities available for sale (net of tax benefit of $1,810, and $3,968, respectively)			(2,772	)			(6,079	)
Issuance of common stock for business acquisition			(726	)			362
See notes to consolidated financial statements.

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 $4.9 billion and is the holding company for First Charter Bank (the “Bank”). As of June 30, 2007, First Charter operated 58 financial centers, four insurance offices, and 138 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, 2006, 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, 2006, filed with the SEC on April 5, 2007.

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. Certain amounts reported in prior periods have been reclassified to conform to the current-period presentation. Such reclassifications have no effect on net income or shareholders’ equity as previously reported.

The significant accounting policies followed by the Corporation are presented on pages 69 to 76 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006. 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

Fair Value Option for Financial Assets and Financial Liabilities: In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) No. 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. The FASB’s stated objective in issuing this standard is “to improve financial reporting by

providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.”

The fair value option established by SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. A business entity will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (a) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (b) is irrevocable (unless a new election date occurs); and (c) is applied only to entire instruments and not to portions of instruments.

SFAS 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Corporation is currently evaluating the impact, if any, SFAS 159 will have on the Corporation’s consolidated financial statements.

Fair Value Measurements: 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 will adopt the guidance of SFAS 157 beginning January 1, 2008, and does not expect it to have a material impact on the Corporation’s consolidated financial statements.

Accounting for Servicing of Financial Assets: In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets – an Amendment of FASB Statement No. 140. SFAS 156 requires entities to separately recognize a servicing asset or liability whenever it undertakes an obligation to service financial assets and also requires all separately recognized servicing assets or liabilities to be initially measured at fair value. Additionally, this standard permits entities to choose among two alternatives, the amortization method or fair value measurement method, for the subsequent measurement of each class of separately recognized servicing assets and liabilities. Under the amortization method, an entity amortizes the value of servicing assets or liabilities in proportion to and over the period of estimated net servicing income or net servicing loss and assesses servicing assets or liabilities for impairment or increased obligation based on fair value at each reporting date. Under the fair value measurement method, an entity measures servicing assets or liabilities at fair value at each reporting date and reports changes in fair value in earnings in the period in which the changes occur. The Corporation adopted SFAS 156 as of January 1, 2007, and elected the amortization method. The initial adoption of SFAS 156 did not have an impact on the Corporation’s consolidated financial statements.

Accounting for Certain Hybrid Financial Instruments: In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments – an Amendment of FASB Statements No. 133 and 140. SFAS 155 requires entities to evaluate and identify whether interests in securitized financial assets are freestanding derivatives, hybrid financial instruments that contain an embedded derivative requiring bifurcation, or hybrid financial instruments that contain embedded derivatives that do not require bifurcation. SFAS 155 also permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS 155 was adopted by the Corporation as of January 1, 2007 and the statement is effective for all financial instruments acquired or issued by the Corporation on or after the date of adoption. The adoption of SFAS 155 did not have an impact on the Corporation’s consolidated financial statements.

In June 2006, the FASB issued Interpretation (“FIN”) 48, Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109. The interpretation addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Pursuant to FIN 48, the Corporation may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. FIN 48 requires the tax benefits recognized in the financial statements to be measured based on the largest benefit that has a greater than fifty percent likelihood to

be realized upon ultimate settlement. FIN 48 also provides guidance regarding derecognition of tax benefits, interest and penalties related to tax deficiencies, and requires additional income tax disclosures. The Corporation adopted the provisions of FIN 48 as of January 1, 2007 and the adoption did not have a material impact on the Corporation’s consolidated financial statements.

As a result of various tax strategies of the Corporation, the amount of unrecognized tax benefits as of January 1, 2007 was $11.2 million, of which $10.3 million would impact the Corporation’s effective tax rate, if recognized. While it is possible that the unrecognized tax benefit could change significantly during the next year, it is reasonably possible that the Company will recognize approximately $0.4 million of unrecognized tax benefits as a result of the expiration of the relevant statute of limitations.

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 January 1, 2007, the date the Corporation adopted FIN 48, the Corporation had accrued approximately $0.8 million for the payment of interest and penalties. As of June 30, 2007, the Corporation had accrued approximately $0.8 million for the payment of interest and penalties.

The Corporation is under examination by the North Carolina Department of Revenue (the “DOR”) for tax years 1999 through 2004 and is subject to examination for subsequent tax years. As a result of the examination, the DOR issued a proposed tax assessment, including an estimate for accrued interest, of $3.7 million for tax years 1999 and 2000. The Corporation is currently appealing the proposed assessment. The Corporation estimates that the maximum tax liability that may be asserted by the DOR for tax years 1999 through the current tax year is approximately $15.1 million in excess of amounts reserved, net of federal tax benefit. The Corporation would disagree with such potential liability, if assessed, and would intend to continue to defend its position. The Corporation believes its current tax reserves are adequate.

There can be no assurance regarding the ultimate outcome of this matter, the timing of its resolution or the eventual loss or penalties that may result from it, which may be more or less than the amounts reserved by the Corporation.

The Corporation is also under examination by the Internal Revenue Service for the 2004 tax year. The examination is of a routine nature and is not the result of any prior tax position taken by the Corporation. The Corporation’s tax years prior to 2003 are no longer subject to examination by the Internal Revenue Service.

Accounting for Purchases of Life Insurance: In September 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-5, Accounting for Purchases of Life Insurance – Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4. The EITF reached a consensus that a policyholder should consider any additional amounts included in the contractual terms of the policy when determining the amount that could be realized under the insurance contract. The Task Force also reached a consensus that a policyholder should determine the amount that could be realized under the life insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). Furthermore, the Task Force reached a consensus that the cash surrender value should not be discounted when contractual limitations on the ability to surrender a policy exist if the policy continues to operate under its normal terms (continues to earn interest) during the restriction period. The Corporation adopted EITF No. 06-5 as of January 1, 2007, and the adoption did not have a material impact on the Corporation’s consolidated financial statements.

Effects of Prior-Year Misstatements: In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 provides guidance on the consideration of the effects of prior-year misstatements in quantifying current-year misstatements for the purpose of a materiality assessment. In December 2006, the Corporation adopted the provisions of SAB 108. The Corporation’s

Annual Report on Form 10-K contains further disclosure related to the adoption of SAB 108 in Note 3 to the consolidated financial statements. The impact of the Corporation’s SAB 108 adjustments as of and for the three months and six months ended and June 30, 2006, is summarized below:

		As of and for the Three Months Ended
		June 30, 2006
		Before								As
(in thousands, except per share data)		Adjustment				Adjustment				Adjusted
Other assets		$	167,149			$	(2,043	)		$	165,106
Other liabilities			41,830				994				42,824
Shareholders’ equity			336,935				(3,037	)			333,898
Mortgage services revenue			916				(104	)			812
Total noninterest income			16,396				(104	)			16,292
Salaries and employee benefits expense			16,297				46				16,343
Total noninterest expense			30,642				46				30,688
Total income tax expense			6,025				(59	)			5,966
Net income			11,546				(91	)			11,455
Diluted earnings per share			0.37				—				0.37

		As of and for the Six Months Ended
		June 30, 2006
		Before								As
(in thousands, except per share data)		Adjustment				Adjustment				Adjusted
Other assets		$	167,149			$	(2,043	)		$	165,106
Other liabilities			41,830				994				42,824
Shareholders’ equity			336,935				(3,037	)			333,898
Mortgage services revenue			1,724				(389	)			1,335
Total noninterest income			33,672				(389	)			33,283
Salaries and employee benefits expense			33,451				92				33,543
Total noninterest expense			61,337				92				61,429
Total income tax expense			11,881				(189	)			11,692
Net income			22,990				(292	)			22,698
Diluted earnings per share			0.74				(0.01	)			0.73

3. Acquisitions and Divestitures

Acquisition of GBC Bancorp, Inc. On November 1, 2006, the Corporation completed its acquisition of GBC Bancorp, Inc. (“GBC”), parent of Gwinnett Banking Company (“Gwinnett Bank”), headquartered in Lawrenceville, Georgia. The assets and liabilities of GBC were recorded on the Corporation’s balance sheet at their estimated fair values as of the acquisition date, and their results of operations were included in the consolidated statements of income from that date forward.

The Corporation continues to finalize the valuations of certain assets and liabilities, including intangible assets. During the six months ended June 30, 2007, the Corporation made certain refinements to its initial allocation of the GBC purchase price, including a $1.0 million adjustment to the purchase price as the stock price paid upon acquisition was adjusted for EITF 99-12, Determination of the Measurement Date for the Market Price of Acquirer Securities Issued in a Purchase Business Combination. The following table shows the excess of the purchase price over capitalized merger costs and carrying value of net assets acquired, the initial purchase price allocation and the resulting goodwill as of the date of the acquisition, subsequent purchase price refinements, and the adjusted purchase price allocation at June 30, 2007.

		Initial								Adjusted
		Purchase				Purchase				Purchase
		Price				Price				Price
(In thousands)		Allocation				Refinements				Allocation
Purchase price		$	103,221			$	(982	)		$	102,239
Capitalized merger costs			1,211				88				1,299
Carrying value of net assets acquired			39,869				—				39,869
Excess of the purchase price over capitalized merger costs and carrying value of net assets acquired			64,563				(894	)			63,669
Purchase accounting adjustments:
Securities			241				—				241
Loans			643				(108	)			535
Deferred taxes			794				—				794
Certificates of deposit			—				33				33
Subtotal			1,678				(75	)			1,603
Core deposit intangibles			(3,091	)			(469	)			(3,560	)
Other identifiable intangible assets			(1,186	)			238				(948	)
Goodwill		$	61,964			$	(1,200	)		$	60,764

Sale of Southeastern Employee Benefits Services. On December 1, 2006, the Corporation completed the sale of Southeastern Employee Benefits Services (“SEBS”), the sole component of its former employee benefits administration business, to an independent third-party administrator for $3.1 million in cash. The results of SEBS are presented as Discontinued Operations for all periods presented. Condensed financial statements for discontinued operations are presented below.

		Six Months Ended
		June 30
(In thousands)		2007				2006
Noninterest income		$	—			$	1,809
Noninterest expense			—				1,611
Income from discontinued operations before tax			—				198
Gain on sale			—				—
Income tax expense			—				78
Income from discontinued operations, after tax		$	—			$	120

On December 1, 2004, the Corporation acquired substantially all of the assets of Smith & Associates Insurance Services Inc., a property and casualty insurance agency (the “Agency”). In connection with this transaction, the Corporation has previously issued to the Agency an aggregate of 42,198 shares of common were valued at $1.1 million. On May 1, 2007, pursuant to the purchase agreement and based upon the performance of the business for the period of December 1, 2005 through November 30, 2006, the Corporation issued 10,632 additional shares of Common Stock valued at $0.3 million to the Agency. One additional issuance, based upon the future performance of the acquired business, is expected to total approximately $0.2 million, if earned.

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 and six months ended June 30, 2007 and 2006, 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								Six Months Ended
		June 30								June 30
		2007				2006				2007				2006
Basic weighted-average number of common shares outstanding			34,697,944				31,058,858				34,733,825				30,959,711
Dilutive effect arising from potential common stock issuances			288,718				280,467				302,190				289,338
Diluted weighted-average number of common shares outstanding			34,986,662				31,339,325				35,036,015				31,249,049

The effects of outstanding anti-dilutive stock options are excluded from the computation of diluted net income per share. These amounts were 454,329 and 436,568 shares for the three and six months ended June 30, 2007, respectively. The amounts were 257,667 and 259,185 shares for the three and six months ended June 30, 2006, respectively.

Dividends declared by the Corporation were $0.195 per share for the three months ended June 30, 2007 and 2006. For the six months ended June 30, 2007 and 2006 dividends declared by the Corporation were $0.39 per share and $0.385 per share, respectively.

5. Goodwill and Other Intangible Assets

A summary of the gross carrying amount and accumulated amortization of amortized intangible assets and the net carrying amount of unamortized intangible assets follows:

		June 30, 2007												December 31, 2006
		Gross								Net				Gross								Net
		Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
(In thousands)		Amount				Amortization				Amount				Amount				Amortization				Amount
Amortized intangible assets from continuing operations:
Core deposits		$	3,560			$	475			$	3,085			$	3,091			$	200			$	2,891
Noncompete agreements			90				78				12				90				63				27
Customer lists			2,487				1,424				1,063				2,359				1,177				1,182
Total Amortized Intangible Assets			6,137				1,977				4,160				5,540				1,440				4,100
Goodwill			79,947				N/A				79,947				80,968				N/A				80,968
Total goodwill and amortized intangible assets		$	86,084			$	1,977			$	84,107			$	86,508			$	1,440			$	85,068

The gross carrying amount of core deposit intangibles increased to $3.6 million at June 30, 2007, from $3.1 million at December 31, 2006, and goodwill decreased to $79.9 million at June 30, 2007 from $81.0 million at December 31, 2006. These changes are primarily due to refinements made in the purchase accounting for the GBC acquisition. Refer to Note 3 for further discussion of the GBC purchase accounting adjustments.

The gross carrying amount of customer lists increased to $2.5 million at June 30, 2007 from $2.4 million at December 31, 2006 due to a contractual payment made in connection with the acquisition of Smith & Associates Insurance Services, Inc.

Amortization expense from continuing and discontinued operations follows:

		Six Months Ended
		June 30
(In thousands)		2007				2006
Continuing operations		$	537			$	209
Discontinued operations			—				95
Total intangibles amortization expense		$	537			$	304

Expected future amortization expense on finite-lived intangible assets follows:

		Core				Noncompete				Customer
(In thousands)		Deposits				Agreements				Lists			Total
July 1 - December 31 ,2007		$	333			$	12			$	215		$	560
2008			608				—				344			952
2009			531				—				229			760
2010			453				—				117			570
2011			375				—				68			443
2012 and after			785				—				90			875
Total intangibles amortization		$	3,085			$	12			$	1,063		$	4,160

6. Comprehensive Income

Comprehensive income is defined as the change in shareholders’ equity from all transactions other than those with shareholders, and it includes net income and other comprehensive income.

The components of comprehensive income follow:

		Three Months Ended								Six Months Ended
		June 30								June 30
		2007				2006				2007				2006
Comprehensive income
Net Income		$	8,950			$	11,455			$	21,306			$	22,698
Other comprehensive loss
Unrealized losses on available-for-sale securities, net			(5,538	)			(8,542	)			(4,593	)			(10,015	)
Reclassification adjustment for gain/(losses) included in net income			—				32				(11	)			32
Income tax effect, net			(2,188	)			(3,385	)			(1,810	)			(3,968	)
Other comprehensive loss			(3,350	)			(5,189	)			(2,772	)			(6,079	)
Total comprehensive income		$	5,600			$	6,266			$	18,534			$	16,619

7. Securities Available for Sale

Securities available for sale are summarized as follows:

		June 30, 2007
		Amortized				Unrealized				Unrealized				Fair
(In thousands)		Cost				Gains				Losses				Value
U.S. government agency obligations		$	238,155			$	41			$	1,494			$	236,702
Mortgage-backed securities			469,821				149				11,466				458,504
State, county, and municipal obligations			92,474				386				671				92,189
Asset-backed securities			57,767				155				1,865				56,057
Equity securities			54,666				438				28				55,076
Total securities		$	912,883			$	1,169			$	15,524			$	898,528

		December 31, 2006
		Amortized				Unrealized				Unrealized				Fair
(In thousands)		Cost				Gains				Losses				Value
U.S. government agency obligations		$	278,106			$	358			$	3,070			$	275,394
Mortgage-backed securities			419,824				768				8,572				412,020
State, county, and municipal obligations			102,221				745				364				102,602
Asset-backed securities			65,141				11				37				65,115
Equity securities			50,897				387				—				51,284
Total securities		$	916,189			$	2,269			$	12,043			$	906,415

The contractual maturity distribution and yields (computed on a taxable-equivalent basis) of the Corporation’s securities portfolio at June 30, 2007, are summarized below. Actual maturities may differ from contractual maturities shown below, as 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		$	130,804				3.76	%		$	98,245				4.72	%		$	7,653				5.56	%		$	—				—	%		$	236,702				4.22	%
Mortgage-backed securities (1)			4,351				4.77				354,130				5.00				89,942				4.96				10,081				5.76				458,504				5.01
State and municipal obligations (2)			10,797				7.11				31,044				5.69				13,284				6.14				37,064				5.76				92,189				5.95
Asset-backed securities			—				—				24,503				7.53				9,900				6.70				21,654				7.41				56,057				7.34
Equity securities (3)			—				—				—				—				—				—				55,076				5.77				55,076				5.77
Total		$	145,952				4.04	%		$	507,922				5.11	%		$	120,779				5.27	%		$	123,875				6.05	%		$	898,528				5.09	%
Amortized cost of securities available for sale		$	146,489							$	518,030							$	123,405							$	124,959							$	912,883

Securities with an aggregate carrying value of $704.6 million and $632.9 million at June 30, 2007 and December 31, 2006, respectively, were pledged to secure public 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								Six Months Ended
		June 30								June 30
(In thousands)		2007				2006				2007				2006
Gross gains		$	—			$	32			$	94			$	32
Gross losses			—				—				(105	)			—
Securities gains (losses), net		$	—			$	32			$	(11	)		$	32

At June 30, 2007 and December 31, 2006, the Bank owned stock in the Federal Home Loan Bank of Atlanta with a cost basis (par value) of $44.9 million and $44.3 million, respectively, which is included in equity securities. While these securities have no quoted fair value, they are redeemable at par value from the FHLB. In addition, the Bank owned Federal Reserve Bank stock with a cost basis (par value) of $8.3 million and $5.6 million at June 30, 2007 and December 31, 2006, respectively, which is also included in equity securities.

There were no write-downs for other-than-temporary declines in the fair value of debt and equity securities for the three and six months ended June 30, 2007 or 2006.

As of June 30, 2007, 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.

U.S. government agency obligations of $206.2 million were considered temporarily impaired at June 30, 2007. U.S. government agency obligations are interest-bearing debt securities of U.S. government agencies (i.e., FNMA and FHLMC). At June 30, 2007, mortgage-backed securities of $418.1 million were considered temporarily impaired. The Corporation’s mortgage-backed securities are investment grade securities backed by a pool of mortgages. Principal and interest payments on the underlying mortgages are used to pay monthly interest and principal on the securities. State, county, and municipal obligations of $27.5 million were considered temporarily impaired at June 30, 2007. Asset-backed securities of $42.9 million were considered temporarily impaired at June 30, 2007. These obligations are collateralized debt obligations, representing securitizations of financial company capital securities. Equity securities of $0.5 million were considered temporarily impaired at June 30, 2007.

The unrealized losses at June 30, 2007, shown in the following table resulted primarily from an increase in rates across the yield curve.

		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		$	47,600			$	101			$	158,574			$	1,393			$	206,174			$	1,494
Mortgage-backed securities			187,677				1,689				230,436				9,777				418,113				11,466
State, county, and muncipal obligations			9,595				136				17,911				535				27,506				671
Total AAA/AA-rated securities			244,872				1,926				406,921				11,705				651,793				13,631
A/BBB-RATED SECURITIES
Asset-backed securities			42,903				1,865				—				—				42,903				1,865
Total A/BBB-rated securities			42,903				1,865				—				—				42,903				1,865
UNRATED SECURITIES
Equity securities			472				28				—				—				472				28
Total unrated securities			472				28				—				—				472				28
Total temporarily impaired securities		$	288,247			$	3,819			$	406,921			$	11,705			$	695,168			$	15,524

At June 30, 2007, investments in a gross unrealized loss position included 26 U.S. agency securities, 68 mortgage-backed securities, 34 municipal obligations, and six asset-backed securities. The unrealized losses associated with these securities were not considered to be other-than-temporary, because they were related to changes in interest rates and did not affect the expected cash flows of the underlying collateral or the issuer. At June 30, 2007, the Corporation had the ability and the intent to hold these investments to recovery of fair market 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.

8. Loans and Allowance for Loan Losses

The Bank primarily makes commercial and installment loans to customers throughout its primary market area, which includes the states of North Carolina, South Carolina, and Georgia, and predominately centers on the metro regions of Charlotte and Raleigh, North Carolina, and Atlanta, Georgia. The real estate loan portfolio can be affected by the condition of the local real estate markets. At June 30, 2007, the majority of the total loan portfolio was to borrowers within this market area. The diversity of this market area’s economic base provides a stable lending environment.

Portfolio loans are categorized as follows:

		June 30, 2007								December 31, 2006
(Dollars in thousands)		Amount				Percent				Amount				Percent
Commercial real estate		$	1,094,866				30.8	%		$	1,034,317				29.7	%
Commercial non real estate			317,984				8.9				301,958				8.7
Construction			859,301				24.2				793,294				22.8
Mortgage			589,976				16.6				618,142				17.7
Home equity			415,705				11.7				447,849				12.8
Consumer			276,005				7.8				289,493				8.3
Total portfolio loans		$	3,553,837				100.0	%		$	3,485,053				100.0	%

A summary of changes in the allowance for loan losses follows:

		Three Months Ended								Six Months Ended
		June 30								June 30
(In thousands)		2007				2006				2007				2006
Balance, beginning of period		$	35,854			$	29,505			$	34,966			$	28,725
Provision for loan losses			9,124				880				10,490				2,399
Charge-offs			(547	)			(1,135	)			(1,333	)			(2,364	)
Recoveries			359				270				667				760
Net charge-offs			(188	)			(865	)			(666	)			(1,604	)
Balance, June 30		$	44,790			$	29,520			$	44,790			$	29,520

The table below summarizes the Corporation’s nonperforming assets.

		June 30				December 31
(In thousands)		2007				2006
Nonaccrual loans		$	17,387			$	8,200
Loans 90 days or more past due and accruing interest			—				—
Total nonperforming loans			17,387				8,200
Other real estate			2,726				6,477
Total nonperforming assets		$	20,113			$	14,677

At June 30, 2007 and December 31, 2006, impaired loans amounted to $8.8 million and $1.0 million, respectively. Included in the allowance for loan losses was $1.2 million and $0.3 million related to the impaired loans at June 30, 2007 and December 31, 2006, respectively. Beginning January 1, 2007, the Corporation began including consumer and residential mortgage loans with outstanding principal balances of $150,000 or greater in its computation of impaired loans calculated under SFAS 114, Accounting by Creditors for Impairment of a Loan — an Amendment to FASB Statements No. 5 and No. 15. The application of this methodology conforms the consumer and residential mortgage loan analysis to the Corporation’s SFAS 114 analysis for commercial loans. Included in the $8.8 million of total impaired loans at June 30, 2007 were $3.4 million of consumer and residential mortgage loans. Had this methodology been applied at December 31, 2006, the impaired loan balance would have been $4.0 million.

During the second quarter of 2007, the North Carolina Attorney General obtained a court order to appoint a receiver to take control of a real estate venture in Western North Carolina. The Attorney General’s complaint alleges that various defendants, including real estate development companies, individuals, and an appraiser engaged in deceptive practices to induce consumers to obtain loans to purchase lots in The Village of Penland and related development projects (“Penland”) in the Spruce Pine, North Carolina area. These lots were allegedly priced based upon inflated appraisals. Several financial institutions, including First Charter, made loans in connection with these residential developments.

As of June 30, 2007, the Corporation had 70 loans with an aggregate outstanding balance of $14.1 million to individual lot purchasers related to Penland. As previously disclosed, based on management’s assessment of probable incurred losses associated with the Penland loan portfolio, the Corporation recorded an additional $7.8 million provision for loan losses during the second quarter of 2007. As of June 30, 2007, no loans in the Penland loan portfolio had reached a 90-day past-due status. However, based on management’s assessment of the individual borrowers, $5.4 million of these loans were placed on nonaccrual status as of June 30, 2007.

The average recorded investment in individually impaired loans for the three and six months ended June 30, 2007 were $8.2 million and $6.7 million, respectively. Individually impaired loans were $1.3 million and $1.8 million for the three and six months ended June 30, 2006. Included in the $8.2 million and $6.7 million of average impaired loans for the three and six months ended June 30, 2007 were $2.8 million and $2.7 million of consumer and residential mortgage loans, respectively.

9. Servicing Rights

As of June 30, 2007, the Corporation serviced $197.2 million of mortgage loans for other parties. The carrying value and aggregate estimated fair value of mortgage servicing rights (“MSR”) at June 30, 2007 was $0.7 million and $2.0 million, respectively, compared to a carrying value and estimated fair value of $0.8 million and $2.1 million, respectively, at December 31, 2006.

In conjunction with the Corporation’s acquisition of GBC and its primary banking subsidiary, Gwinnett Bank, on November 1, 2006, the Corporation capitalized $1.2 million in servicing rights on Small Business Administration (“SBA”) loans originated, sold, and serviced by Gwinnett Bank. Effective March 1, 2007, Gwinnett Bank was merged with and into the Bank. The Corporation continues to finalize the valuations of certain assets, including the SBA loan servicing rights. During the three months ended March 31, 2007, the servicing rights valuation was refined, resulting in a downward adjustment of $0.2 million. Amortization expense included for the six months ended June 30, 2007, was $0.1 million. As of June 30, 2007, the Corporation serviced $38.3 million of SBA loans for other parties, and the carrying value and estimated fair value of the SBA loan servicing rights (“SSR”) was $0.8 million and $1.0 million, respectively.

Servicing rights are periodically evaluated for impairment based on their fair value. Impairment is 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:

		2007								2006
(In thousands)		MSR				SSR				MSR				SSR
Beginning Balance		$	756			$	1,137			$	1,133			$	—
Servicing rights capitalized			—				13				—				—
Purchase accounting adjustment			—				(238	)			—				—
Amortization expense			(41	)			(40	)			(101	)			—
Balance, March 31		$	715			$	872			$	1,032			$	—
Servicing rights capitalized			—				8				—				—
Amortization expense			(41	)			(51	)			(100	)			—
Balance, June 30		$	674			$	829			$	932			$	—