Edgar Filing: FIRST CHARTER CORP /NC/

First Charter Corporation

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, 2007


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, 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 Filer o

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 May 7, 2007, the Registrant had outstanding 35,151,321 shares of Common Stock, no par value.

First Charter Corporation
FORM 10-Q
QUARTER ENDED MARCH 31, 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		27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk		50
Item 4.	Controls and Procedures		51

Part II
Other Information
Item 1.	Legal Proceedings		51
Item 1A.	Risk Factors		51
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 3.	Defaults Upon Senior Securities		52
Item 4.	Submission of Matters to a Vote of Security Holders		52
Item 5.	Other Information		53
Item 6.	Exhibits		53
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)	2007			2006

Assets
Cash and due from banks	$	95,168		$	87,771
Federal funds sold		1,256			10,515
Interest-bearing bank deposits		4,431			4,541

Cash and cash equivalents		100,855			102,827
Securities available for sale (cost of $906,580 and $916,189 at March 31, 2007 and December 31, 2006, respectively)		897,762			906,415
Loans held for sale		13,691			12,292
Portfolio loans:
Commercial and construction		2,215,413			2,129,582
Mortgage		604,834			618,142
Consumer		709,628			737,342

Total portfolio loans		3,529,875			3,485,066
Allowance for loan losses		(35,854	)		(34,966	)
Unearned income		(6	)		(13	)

Portfolio loans, net		3,494,015			3,450,087
Premises and equipment, net		112,145			111,588
Goodwill and other intangible assets		84,010			85,068
Other assets		182,017			188,440

Total Assets	$	4,884,495		$	4,856,717

Liabilities
Deposits:
Noninterest-bearing demand	$	476,122		$	454,975
Demand		434,412			420,774
Money market		636,586			620,699
Savings		114,785			111,047
Certificates of deposit		1,659,461			1,640,633

Total deposits		3,321,366			3,248,128
Federal funds purchased and securities sold under agreements to repurchase		177,790			201,713
Commercial paper and other short-term borrowings		338,661			409,191
Long-term debt		527,778			487,794
Accrued expenses and other liabilities		63,528			62,529

Total Liabilities		4,429,123			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 35,104,606 and 34,922,222 shares at March 31, 2007 and December 31, 2006, respectively		233,549			231,602
Common stock held in Rabbi Trust for deferred compensation		(1,283	)		(1,226	)
Deferred compensation payable in common stock		1,283			1,226
Retained earnings		227,163			221,678
Accumulated other comprehensive loss		(5,340	)		(5,918	)

Total Shareholders’ Equity		455,372			447,362

Total Liabilities and Shareholders’ Equity	$	4,884,495		$	4,856,717

See notes to consolidated financial statements.

First Charter Corporation
Consolidated Statements of Income
(Unaudited)



	Three Months Ended
	March 31
(Dollars in thousands, except per share amounts	2007			2006

Interest income
Loans	$	66,118		$	50,260
Securities		10,918			9,311
Federal funds sold		128			36
Interest-bearing bank deposits		50			39

Total interest income		77,214			59,646
Interest expense
Deposits		26,540			16,562
Borrowings		13,939			10,994

Total interest expense		40,479			27,556

Net interest income		36,735			32,090
Provision for loan losses		1,366			1,519

Net interest income after provision for loan losses		35,369			30,571
Noninterest income
Service charges on deposits		7,390			6,698
ATM, debit, and merchant fees		2,444			1,898
Wealth management		716			700
Equity method investments gains, net		1,127			545
Mortgage services		901			523
Gain on sale of Small Business Administration loans		377			—
Brokerage services		1,081			711
Insurance services		3,634			4,334
Bank owned life insurance		1,139			827
Property sale gains, net		63			81
Securities losses, net		(11	)		—
Other		705			674

Total noninterest income		19,566			16,991
Noninterest expense
Salaries and employee benefits		19,587			17,200
Occupancy and equipment		4,612			4,705
Data processing		1,790			1,410
Marketing		1,351			1,288
Postage and supplies		1,172			1,182
Professional services		3,586			1,903
Telecommunications		671			563
Amortization of intangibles		223			102
Foreclosed properties		153			54
Other		2,775			2,334

Total noninterest expense		35,920			30,741

Income from continuing operations before income tax expense		19,015			16,821
Income tax expense		6,659			5,668

Income from continuing operations, net of tax		12,356			11,153
Discontinued operations
Income from discontinued operations before gain on sale and income tax expense		—			148
Income tax expense		—			58

Income from discontinued operations, net of tax		—			90

Net income	$	12,356		$	11,243

Net income per common share
Basic
Income from continuing operations, net of tax	$	0.36		$	0.36
Income from discontinued operations, net of tax		—			—
Net income		0.36			0.36
Diluted
Income from continuing operations, net of tax	$	0.35		$	0.36
Income from discontinued operations, net of tax		—			—
Net income		0.35			0.36
Average common shares outstanding
Basic		34,770			30,859
Diluted		35,085			31,153
Dividends declared per common share	$	0.195		$	0.190

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
	Common Stock					Deferred			Payable in		Retained			Comprehensive
(Dollars in thousands, except per share amounts)	Shares		Amount			Compensation			Common Stock		Earnings			Income (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		—		—			—			—		12,356			—			12,356
Change in unrealized gains and losses on securities, net of reclassification adjustment for net losses included in net income		—		—			—			—		—			578			578

Total comprehensive income																		12,934
Common stock purchased by Rabbi Trust for deferred compensation		—		—			(57	)		—		—			—			(57	)
Deferred compensation payable in common stock		—		—			—			57					—			57
Cash dividends declared, $0.195 per share		—					—			—		(6,871	)		—			(6,871	)
Issuance of shares under stock-based compensation plans, including related tax effects		182,384		2,929			—			—		—			—			2,929
Issuance of shares pursuant to acquisition		—		(982	)		—			—		—			—			(982	)

Balance, March 31, 2007		35,104,606	$	233,549		$	(1,283	)	$	1,283	$	227,163		$	(5,340	)	$	455,372

See notes to consolidated financial statements.

First Charter Corporation
Consolidated Statements of Cash Flows
(Unaudited)



	Three Months Ended
	March 31
(In thousands)	2007			2006

Operating activities
Net income	$	12,356		$	11,243

Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,366			1,519
Depreciation		1,814			2,344
Amortization of intangibles		223			102
Amortization of servicing rights		81			101
Stock-based compensation expense		786			513
Tax benefits from stock-based compensation plans		(116	)		(144	)
Premium amortization and discount accretion, net		89			284
Securities losses, net		11			—
Net gains on sales of other real estate owned		(51	)		(18	)
Write-downs on other real estate owned		74			—
Equity method investment gains, net		(1,127	)		(545	)
Gains on sales of loans held for sale		(701	)		(376	)
Gains on sale of Small Business Administration loans		(377	)		—
Property sale gains, net		(63	)		(81	)
Origination of loans held for sale		(67,080	)		(38,833	)
Proceeds from sale of loans held for sale		66,382			36,937
Change in cash surrender value of life insurance		(1,158	)		(827	)
Change in other assets		7,591			(1,050	)
Change in other liabilities		1,055			4,686

Net cash provided by operating activities		21,155			15,855
Investing activities
Proceeds from sales of securities available for sale		25,180			10,037
Proceeds from maturities, calls and paydowns of securities available for sale		62,347			21,578
Purchases of securities available for sale		(78,001	)		(34,684	)
Net change in loans		(45,667	)		(67,432	)
Proceeds from sales of other real estate owned		498			546
Net purchases of premises and equipment		(2,371	)		(2,869	)

Net cash used in investing activities		(38,014	)		(72,824	)
Financing activities
Net change in deposits		73,238			868
Net change in federal funds purchased and securities sold under repurchase agreements		(23,923	)		(50,684	)
Net change in commercial paper and other short-term borrowings		(70,530	)		100,910
Proceeds from issuance of long-term debt and trust preferred securities		150,000			220,000
Retirement of long-term debt		(110,016	)		(235,016	)
Proceeds from issuance of common stock		2,813			2,076
Tax benefits from stock-based compensation plans		116			144
Cash dividends paid		(6,811	)		(5,048	)

Net cash provided by financing activities		14,887			33,250

Net decrease in cash and cash equivalents		(1,972	)		(23,719	)
Cash and cash equivalents at beginning of period		102,827			125,552

Cash and cash equivalents at end of period	$	100,855		$	101,833


Supplemental information
Cash paid for:
Interest	$	40,561		$	25,051
Income taxes		3,200			295
Non-cash items:
Transfer of loans to other real estate owned		373			1,475
Unrealized gains (losses) on securities available for sale (net of tax expense (benefit) of $378, and ($583), respectively)		578			(890	)

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 March 31, 2007, First Charter operated 57 financial centers, four insurance offices, and 137 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 our audited financial statements and accompanying notes in our 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. The Corporation adopted SFAS 155 as of January 1, 2007 and 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 statue 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 March 31, 2007, the Corporation had accrued approximately $0.9 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 2001 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 $13.0 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 in no longer subject to U. S. federal income tax examination by tax authorities for years prior to 2003.

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 ended March 31, 2006, is summarized below:



	As of and for the Three Months Ended
	March 31, 2006
	Before					As
(in thousands, except per share data)	Adjustment		Adjustment			Adjusted

Other assets	$	161,878	$	(1,939	)	$	159,939
Other liabilities		45,599		1,007			46,606
Shareholders’ equity		333,627		(2,946	)		330,681
Mortgage services revenue		808		(285	)		523
Total noninterest income		17,276		(285	)		16,991
Salaries and employee benefits expense		17,154		46			17,200
Total noninterest expense		30,695		46			30,741
Total income tax expense		5,856		(130	)		5,726
Net income		11,444		(201	)		11,243
Diluted earnings per share		0.37		(0.01	)		0.36

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 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 three months ended March 31, 2007, the Corporation made certain refinements to its initial allocation of the purchase price of GBC. 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 adjustments, and the adjusted purchase price allocation at March 31, 2007.



	Initial						Adjusted
	Purchase			Purchase			Purchase
	Price			Price			Price
(In thousands)	Allocation			Adjustments			Allocation

Purchase price	$	103,221		$	(982	)	$	102,239
Capitalized merger costs		1,211			51			1,262
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			(931	)		63,632
Purchase accounting adjustments:
Securities		241			—			241
Loans		643			(108	)		535
Deferred taxes		794			—			794
Certificates of deposit		—			(34	)		(34	)

Subtotal		1,678			(142	)		1,536

Core deposit intangibles		(3,091	)		(469	)		(3,560	)
Other identifiable intangible assets		(1,186	)		238			(948	)

Goodwill	$	61,964		$	(1,304	)	$	60,660

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.



	Three Months Ended
	March 31
(In thousands)	2007		2006

Noninterest income	$	—	$	965
Noninterest expense		—		817

Income from discontinued operations before tax		—		148
Gain on sale		—		—
Income tax expense		—		58

Income from discontinued operations, after tax	$	—	$	90

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, 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
	March 31
	2007		2006

Basic weighted-average number of common shares outstanding		34,770,106		30,859,461
Dilutive effect arising from potential common stock issuances		314,534		293,877

Diluted weighted-average number of common shares outstanding		35,084,640		31,153,338

The effects of outstanding anti-dilutive stock options are excluded from the computation of diluted net income per share. These amounts were 424,024 and 258,950 shares for the three months ended March 31, 2007 and 2006, respectively.

Dividends declared by the Corporation were $0.195 and $0.19 per share for the three months ended March 31, 2007 and 2006, 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:



	March 31, 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	$	301	$	3,259	$	3,091	$	200	$	2,891
Noncompete agreements		90		70		20		90		63		27
Customer lists		2,359		1,292		1,067		2,359		1,177		1,182

Total amortized intangible assets		6,009		1,663		4,346		5,540		1,440		4,100

Goodwill		79,664		—		79,664		80,968		—		80,968


Total goodwill and amortized intangible assets	$	85,673	$	1,663	$	84,010	$	86,508	$	1,440	$	85,068

The gross carrying amount of core deposit intangibles increased to $3.6 million at March 31, 2007, from $3.1 million at December 31, 2006, and goodwill decreased to $79.7 million at March 31, 2007, from $81.0 million at December 31, 2006. The adjustments were due to refinements made in the purchase accounting for the GBC acquisition. Refer to Note 3 for further discussion of these purchase accounting adjustments.

Amortization expense from continuing and discontinued operations follows:



	Three Months Ended
	March 31
(In thousands)	2007		2006

Continuing operations	$	223	$	102
Discontinued operations		—		48

Total intangibles amortization expense	$	223	$	150

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



	Core		Noncompete		Customer
(In thousands)	Deposits		Agreements		Lists		Total

April – December 2007	$	507	$	20	$	307	$	834
2008		608		—		313		921
2009		531		—		204		735
2010		453		—		100		553
2011		375		—		57		432
2012 and after		785		—		86		871

Total intangibles amortization	$	3,259	$	20	$	1,067	$	4,346

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

March 31, 2007

Pre-tax

Tax Expense

After-tax

(In thousands)

Amount

(Benefit)

Amount

Comprehensive income

Net income

19,015

6,659

12,356

Other comprehensive income

Unrealized gains on available-for-sale securities:

Net unrealized gains

945

374

571

Reclassification adjustment for losses included in net income

(11

)

Other comprehensive income

956

378

578

Total comprehensive income

19,971

7,037

12,934

Accumulated other comprehensive loss at January 1, 2007

(9,774

)

(3,856

)

(5,918

)

Other comprehensive income

956

378

578

Accumulated other comprehensive loss at March 31, 2007

(8,818

)

(3,478

)

(5,340

)


	Three Months Ended
	March 31, 2006
	Pre-tax			Tax Expense			After-tax
(In thousands)	Amount			(Benefit)			Amount

Comprehensive income
Net income	$	16,969		$	5,726		$	11,243
Other comprehensive loss
Unrealized losses on available-for-sale securities:
Net unrealized losses		(1,473	)		(583	)		(890	)
Reclassification adjustment for losses included in net income		—			—			—

Other comprehensive loss		(1,473	)		(583	)		(890	)

Total comprehensive income	$	15,496		$	5,143		$	10,353

Accumulated other comprehensive loss at January 1, 2006	$	(18,599	)	$	(7,344	)	$	(11,255	)
Other comprehensive loss		(1,473	)		(583	)		(890	)

Accumulated other comprehensive loss at March 31, 2006	$	(20,072	)	$	(7,927	)	$	(12,145	)

7. Securities Available for Sale

Securities available for sale are summarized as follows:

March 31, 2007

Amortized

Unrealized

Fair

(In thousands)

Cost

Gains

Losses

Value

U.S. government agency obligations

228,063

317

1,820

226,560

Mortgage-backed securities

471,068

932

8,057

463,943

State, county, and municipal obligations

99,237

655

347

99,545

Asset-backed securities

57,766

123

1,025

56,864

Equity securities

50,446

449

50,850

Total securities

906,580

2,476

11,294

897,762


	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 March 31, 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	$	120,638		3.36	%	$	98,155		4.45	%	$	7,767		5.56	%	$	—		—	%	$	226,560		3.91	%
Mortgage-backed securities ⁽¹⁾		—		—			251,254		5.13			195,198		4.81			17,491		5.57			463,943		5.01
State and municipal obligations ⁽²⁾		16,833		7.22			39,845		5.83			7,886		5.83			34,981		5.59			99,545		5.98
Asset-backed securities		—		—			24,750		7.53			10,000		6.72			22,114		7.41			56,864		7.34
Equity securities ⁽³⁾		—		—			—		—			—		—			50,850		6.17			50,850		6.17

Total	$	137,471		3.83	%	$	414,004		5.18	%	$	220,851		4.96	%	$	125,436		6.14	%	$	897,762		5.05	%

Amortized cost of securities available for sale	$	138,136				$	417,719				$	224,659				$	126,066				$	906,580


⁽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 6.17% yield represents the expected dividend yield to be earned on equity securities, principally investments in Federal Home Loan Bank of Atlanta and Federal Reserve Bank stock.

Securities with an aggregate carrying value of $567.2 million and $632.9 million at March 31, 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
	March 31
(In thousands)	2007			2006

Gross gains	$	94		$	—
Gross losses		(105	)		—

Securities losses, net	$	(11	)	$	—

At March 31, 2007 and December 31, 2006, the Bank owned stock in the Federal Home Loan Bank of Atlanta with a cost basis (par value) of $43.3 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 $5.7 million and $5.6 million at March 31, 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 months ended March 31, 2007 or 2006.

As of March 31, 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 $188.2 million were considered temporarily impaired at March 31, 2007. U.S. government agency obligations are interest-bearing debt securities of U.S. government agencies (i.e., FNMA and FHLMC). At March 31, 2007, mortgage-backed securities of $320.4 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 $19.2 million were considered temporarily impaired at March 31, 2007. Asset-backed securities of $9.0 million were considered temporarily impaired at March 31, 2007. These obligations are collateralized debt obligations, representing securitizations of financial company capital securities. Equity securities of $455,000 were considered temporarily impaired at March 31, 2007.

The unrealized losses at March 31, 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	$	—	$	—	$	188,155	$	1,820	$	188,155	$	1,820
Mortgage-backed securities		65,157		506		255,265		7,551		320,422		8,057

State, county, and municipal obligations		995		2		18,158		345		19,153		347

Total AAA/AA-rated securities		66,152		508		461,578		9,716		527,730		10,224
A/BBB-RATED SECURITIES
Asset-backed securities		9,000		1,025		—		—		9,000		1,025

Total A/BBB-rated securities		9,000		1,025		—		—		9,000		1,025
UNRATED SECURITIES
Equity securities		455		45		—		—		455		45

Total unrated securities		455		45		—		—		455		45


Total temporarily impaired securities	$	75,607	$	1,578	$	461,578	$	9,716	$	537,185	$	11,294

At March 31, 2007, investments in a gross unrealized loss position included 18 U.S. agency securities, 52 mortgage-backed securities, 20 municipal obligations, another asset-backed security, and one equity security. 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. In addition, investments that have been in an unrealized loss position for longer than one year have an external credit rating of AAA by Standard & Poors. At March 31, 2007, the Corporation had the ability and the intent to hold these investments to recovery of fair market value.

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 March 31, 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. No areas of significant concentrations of credit risk have been identified due to the diverse industrial base in the Corporation’s market area.

Portfolio loans are categorized as follows:


	March 31, 2007					December 31, 2006
(Dollars in thousands)	Amount		Percent			Amount		Percent

Commercial real estate	$	1,062,672		30.1	%	$	1,034,330		29.7	%
Commercial non real estate		315,102		8.9			301,958		8.7
Construction		837,639		23.8			793,294		22.8
Mortgage		604,834		17.1			618,142		17.7
Home equity		427,441		12.1			447,849		12.8
Consumer		282,187		8.0			289,493		8.3

Total portfolio loans	$	3,529,875		100.0	%	$	3,485,066		100.0	%

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


	Three Months Ended
	March 31
(In thousands)	2007			2006

Balance at beginning of period	$	34,966		$	28,725
Provision for loan losses		1,366			1,519
Charge-offs		(786	)		(1,229	)
Recoveries		308			490

Net charge-offs		(478	)		(739	)

Balance at end of period	$	35,854		$	29,505

The table below summarizes the Corporation’s nonperforming assets.



	March 31		December 31
(In thousands)	2007		2006

Nonaccrual loans	$	10,943	$	8,200
Loans 90 days or more past due and accruing interest		—		—

Total nonperforming loans		10,943		8,200
Other real estate		6,330		6,477

Total nonperforming assets	$	17,273	$	14,677

At March 31, 2007 and December 31, 2006, impaired loans amounted to $7.6 million and $1.0 million, respectively. Included in the allowance for loan losses was $704,000 and $282,000 related to the impaired loans at March 31, 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 $7.6 million of total impaired loans at March 31, 2007 were $2.3 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.

The average recorded investment in individually impaired loans for the three months ended March 31, 2007 and 2006 was $5.5 million and $2.4 million, respectively. Included in the $5.5 million of average impaired loans for the three months ended March 31, 2007 was $2.4 million of consumer and residential mortgage loans.

9. Servicing Rights

As of March 31, 2007, the Corporation serviced $203.7 million of mortgage loans for other parties. The carrying value and aggregate estimated fair value of mortgage servicing rights (“MSR”) at March 31, 2007 was $715,000 and $2.1 million, respectively, compared to a carrying value and estimated fair value of $756,000 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. As previously disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, the Corporation was in the process of finalizing 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 $238,000. Amortization expense included for the three months ended March 31, 2007, was $40,000. As of March 31, 2007, the Corporation serviced $40.0 million of SBA loans for other parties, and the carrying value and estimated fair value of the SBA loan servicing rights (“SSR”) was $872,000 and $1.0 million, respectively.

Servicing rights are periodically evaluated for impairment based on their fair value. Impairment is recognized through a valuation allowance. 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

Balance, January 1	$	756		$	1,137		$	1,133		$	—
Servicing rights capitalized		—			13			—			—
Purchase accounting adjustment		—			(238	)		—			—
Amortization expense		(41	)		(40	)		(101	)		—
Valuation allowance		—			—			—			—

Balance, March 31	$	715		$	872		$	1,032		$	—

Assumptions used to value the MSR included an average conditional prepayment rate (“CPR”) of 15.7 percent, an average discount rate of 12.3 percent, and a weighted-average life of 3.6 years. An increase in the prepayment speeds of 10 percent and 20 percent may result in a decline in fair value of $85,000 and $164,000, respectively. An increase in the discount rate of 10 percent and 20 percent may result in a decline in fair value of $55,000 and $107,000, 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 mortgage servicing rights is calculated independently without changing any other assumption. In reality, changes in one factor may result in changes in another (for example, changes in mortgage interest rates, which drive changes in prepayment rate estimates, could result in changes in the discount rates), which may magnify or counteract the sensitivities.

Assumptions used to value the SSR included a CPR of 12.0 percent, a discount rate of 11.0 percent, and a weighted-average life of 4.7 years. An increase in the prepayment speeds of 10 percent and 20 percent may result in a decline in fair value of $46,000 and $89,000, respectively. An increase in the discount rate of 10 percent and 20 percent may result in a decline in fair value of $29,000 and $56,000, respectively.

The MSR and SSR are expected to be amortized against other noninterest income over a weighted-average period of 3.2 years and 3.1 years, respectively. Expected future amortization expense for these capitalized servicing rights follows:



(In thousands)	MSR		SSR		Total

April 1 - December 31, 2007	$	124	$	149	$	273
2008		135		169		304
2009		111		140		251
2010		92		116		208
2011		74		94		168
2012 and after		179		204		383

Total amortization	$	715	$	872	$	1,587

Contractual servicing fee revenue recognized for the three months ended March 31, 2007 and 2006, was $362,000 and $274,000, respectively, and was included in other noninterest income.

10. Stock-Based Compensation

First Charter Comprehensive Stock Option Plan. In April 1992, the Corporation’s shareholders approved the First Charter Corporation Comprehensive Stock Option Plan (Comprehensive Stock Option Plan). Under the terms of the Comprehensive Stock Option Plan, stock options (which can be incentive stock options or non-qualified stock options) may be periodically granted to key employees of the Corporation or its subsidiaries. The terms and vesting schedules of options granted under the Comprehensive Stock Option Plan generally are determined by the Compensation Committee of the Corporation’s Board of

Directors (Compensation Committee). However, no options may be exercisable prior to six months following the grant date, and certain additional restrictions, including the term and exercise price, apply with respect to any incentive stock options. Under the Comprehensive Stock Option Plan, 480,000 shares of common stock are reserved for issuance. During the three months ended March 31, 2007, no shares were issued under this plan.

First Charter Corporation Stock Option Plan for Non-Employee Directors. In April 1997, the Corporation’s shareholders approved the First Charter Corporation Stock Option Plan for Non-Employee Directors (Director Plan). Under the Director Plan, non-statutory stock options may be granted to non-employee Directors of the Corporation and its subsidiaries. The terms and vesting schedules of any options granted under the Director Plan generally are determined by the Compensation Committee. The exercise price for each option granted, however, is the fair value of the common stock as of the date of grant. A maximum of 180,000 shares are reserved for issuance under the Director Plan. During the three months ended March 31, 2007, no shares were issued under this plan.

2000 Omnibus Stock Option and Award Plan. In June 2000, the Corporation’s shareholders approved the First Charter Corporation 2000 Omnibus Stock Option and Award Plan (the “2000 Omnibus Plan”). Under the 2000 Omnibus Plan, 2.0 million shares of common stock were originally reserved for issuance. In April of 2005, the shareholders approved an amendment to the 2000 Omnibus Plan, authorizing an additional 1.5 million shares for issuance, for a total of 3.5 million shares. The 2000 Omnibus Plan permits the granting of stock options and nonvested shares to Directors and key employees. Stock options are granted with an exercise price equal to the market price of the Corporation’s common stock at the date of grant; those stock option awards generally vest ratably over five years and have a 10-year contractual term. Nonvested shares are generally granted at a value equal to the market price of the Corporation’s common stock at the date of grant and vesting is based on either service or performance conditions. Service-based nonvested shares generally vest over three years. Performance-based nonvested shares are earned over three years upon meeting various performance goals as approved by the Compensation Committee of the Corporation’s Board of Directors (the “Compensation Committee”), including cash return on equity, targeted charge-off levels, and earnings per share growth as measured against a group of selected peer companies. During the three months ended March 31, 2007, 71,500 stock options, 21,000 service-based nonvested shares, and 54,600 performance-based nonvested shares were issued under this plan.

Restricted Stock Award Program. In April 1995, the Corporation’s shareholders approved the First Charter Corporation Restricted Stock Award Program (the “Restricted Stock Plan”). Awards of restricted stock (nonvested shares) may be made under the Restricted Stock Plan at the discretion of the Compensation Committee to key employees. Nonvested shares are granted at a value equal to the market price of the Corporation’s common stock at the date of grant and generally vest based on either three or five years of service. Under the Restricted Stock Plan, a maximum of 360,000 shares of common stock are reserved for issuance. During the three months ended March 31, 2007, there were 71,203 service-based nonvested shares issued under this plan.

Stock-based compensation costs totaled $786,000 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. Stock-based compensation costs totaled $513,000 for the three months ended March 31, 2006, which consisted of $279,000 related to stock options, $127,000 related to service-based nonvested shares, and $107,000 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 using the following weighted-average assumptions:



	Three Months Ended
	March 31
	2007			2006

Expected volatility		22.4	%		24.8	%
Expected dividend yield		3.2			3.2
Risk-free interest rate		4.8			4.7
Expected term (in years)		8.0			8.0

The Black-Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of interest for periods within the contractual life of the option is based on a U.S. government instrument over the contractual term of the equity instrument. Expected volatility is based on historical volatility of the Corporation’s stock.

Stock option activity under the Comprehensive Stock Option Plan, the Director Plan, and the 2000 Omnibus Plan at and for the three months ended March 31, 2007, follows:

Weighted-

Average

Weighted-

Remaining

Average

Contractual

Aggregate

Exercise

Term

Intrinsic

Price

(in years)

Value

Outstanding at January 1, 2007

1,497,619

20.57

Granted

71,500

24.46

Exercised

(56,960

)

18.98

297,893

Forfeited or expired

(204,906

)

25.79

Outstanding at March 31, 2007

1,307,253

20.03

5.5

3,093,754

Exercisable at March 31, 2007

1,187,673

19.62

5.1

3,093,754

Weighted-average Black-Scholes fair value of options granted during the year

5.63

The weighted-average Black-Scholes fair value of options granted during the three months ended March 31, 2006 was $5.85, and the aggregate intrinsic value of options exercised was $883,000.

Nonvested share activity under the Omnibus Plan and the Restricted Stock Plan at and for the three months ended March 31, 2007 follows:



	Service-Based					Performance-Based
				Weighted-				Weighted-
				Average				Average
				Grant Date				Grant Date
	Shares			Fair Value		Shares		Fair Value

Outstanding at January 1, 2007		215,663		$	24.00		51,600	$	21.91
Granted		92,203			24.34		54,600		22.70
Vested		(5,342	)		23.66		—		—
Forfeited or expired		(13,262	)		23.81		—		—

Outstanding at March 31, 2007		289,262		$	24.14		106,200	$	22.32

As of March 31, 2007, there was $5.5 million of total unrecognized compensation cost related to service-based nonvested share-based compensation arrangements granted under the Omnibus Plan and the Restricted Stock Plan. This cost is expected to be recognized over a remaining weighted-average period

of 2.4 years. The total fair value of shares vested during the three months ended March 31, 2007, was $126,000.

As of March 31, 2007, there was $1.8 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 2.2 years.

The following table provides certain information about stock options outstanding at March 31, 2007:



	Outstanding Options						Options Exercisable
			Weighted-Average		Weighted-				Weighted-
	Number		Remaining Contractual		Average		Number		Average
Range of Exercise Prices	Outstanding		Life (in years)		Exercise Price		Exercisable		Exercise Price

$ 5.01-10.00		3,400		2.5	$	9.04		3,400	$	9.04
10.01 - 12.50		18,702		1.7		11.63		18,702		11.63
12.51 - 15.00		69,725		2.5		14.44		69,725		14.44
15.01 - 17.50		277,911		4.1		16.63		277,911		16.63
17.51 - 20.00		292,232		4.3		18.45		292,232		18.45
20.01 - 22.50		177,546		6.4		20.78		177,546		20.78
22.51 - 25.00		435,672		7.7		23.83		316,092		23.72
25.01 - 27.50		32,065		2.7		26.35		32,065		26.35

Total		1,307,253		5.5	$	20.03		1,187,673	$	19.62

11. Deposits

A summary of deposit balances follows:



	March 31		December 31
(In thousands)	2007		2006

Noninterest bearing demand	$	476,122	$	454,975
Interest bearing demand		434,412		420,774
Money market accounts		636,586		620,699
Savings deposits		114,785		111,047
Certificates of deposit		1,659,461		1,640,633

Total deposits	$	3,321,366	$	3,248,128

12. Other Borrowings

A summary of other borrowings follows:

March 31

December 31

2007

2006

Weighted-

Weighted-

Average

Average

Contractual

Contractual

(In thousands)

Balance

Rate

Balance

Rate

Federal funds purchased and securities sold under agreements to repurchase

177,790

4.57

201,713

4.60

Commercial paper

18,661

2.84

38,191

2.72

Other short-term borrowings

320,000

5.30

371,000

5.35

Long-term debt

527,778

5.09

487,794

4.79

Total other borrowings

1,044,229

5.03

1,098,698

4.87

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 $166.3 million and $214.9 million at March 31, 2007 and December 31, 2006, respectively, were pledged to secure securities sold under agreements to repurchase.

Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the banking subsidiaries. At March 31, 2007, the Corporation’s banking subsidiary had federal funds back-up lines of credit totaling $175.0 million with $44.0 million outstanding.

The 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, 2007 was $18.7 million, compared to $38.2 million at December 31, 2006.

Long-term borrowings represent FHLB borrowings with original maturities greater than one year and subordinated debentures related to trust preferred securities. At March 31, 2007, the Bank had $465.9 million of long-term FHLB borrowings, compared to $425.9 million at December 31, 2006. In addition, the Corporation had $61.9 million of outstanding subordinated debentures at March 31, 2007 and December 31, 2006.

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 million and $25 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 the subordinated debentures (the “Notes”) discussed above from the Corporation, which are presented as long-term borrowings in the consolidated balance sheet and qualify for inclusion in Tier 1 capital for regulatory capital purposes, subject to certain limitations.

The following table is a summary of the Corporation’s outstanding trust preferred securities and Notes at March 31, 2007.

(Dollars in thousands)

Aggregate Principal

Amount of Trust

Stated

Per Annum

Interest

Preferred

Aggregate Principal

Maturity of

Interest Rate of

Payment

Redemption

Issuer

Issuance Date

Securities

Amount of the Notes

the Notes

Dates

Period

Capital Trust I

June 2005

35,000

36,083

September 2035

3 mo. LIBOR +
169 bps

3/15, 6/15,
9/15, 12/15

On or after
9/15/2010

Capital Trust II

September 2005

25,000

25,774

December 2035

3 mo. LIBOR + 142 bps

3/15, 6/15, 9/15, 12/15

On or after 12/15/2010

Total

60,000

61,857

13. 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 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, 2007, of standby letters of credit issued or modified during the three months ended March 31, 2007 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.

The Corporation’s maximum exposure to credit risk follows:



	Less than
(In thousands)	1 year		1-3 Years		4-5 Years		Over 5 Years		Total

Loan commitments	$	673,645	$	140,650	$	35,473	$	62,139	$	911,907
Lines of credit		32,253		1,991		1,880		449,389		485,513
Standby letters of credit		22,865		2,490		—		—		25,355

Total commitments	$	728,763	$	145,131	$	37,353	$	511,528	$	1,422,775

Contingencies. The Corporation is under examination by the North Carolina Department of Revenue for tax years 1999 through 2001 and is subject to examination for subsequent tax years. Additional information regarding the examination is included in Note 2.

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.

14. Regulatory Restrictions and Capital Ratios

The Corporation and the Bank are subject to various regulatory capital requirements administered by bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial position and operations. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to adjusted average assets (as defined). Management believes, as of March 31, 2007, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject.

The Corporation’s and the Bank’s various regulators have issued regulatory capital requirements for U.S. banking organizations. Failure to meet the capital requirements can initiate certain mandatory and discretionary actions by regulators that could have a material effect on the Corporation’s financial statements. At March 31, 2007, the Corporation and the Bank were classified as “well capitalized” under these regulatory frameworks. In the judgment of management, there have been no events or conditions since March 31, 2007, that would change the “well capitalized” status of the Corporation or the Bank.

The Corporation’s and the Bank’s actual capital amounts and ratios follow:


						For Capital
						Adequacy Purposes					To Be Well Capitalized
	Actual							Minimum					Minimum
(Dollars in thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio

At March 31, 2007:
Leverage
First Charter Corporation	$	436,655		9.10	%	$	191,880		4.00	%	None		None
First Charter Bank		407,213		8.61			189,187		4.00		$	236,484		5.00	%

Tier I Capital
First Charter Corporation	$	436,655		10.81	%	$	161,640		4.00	%	None		None
First Charter Bank		407,213		10.09			161,490		4.00		$	242,236		6.00	%

Total Risk-Based Capital
First Charter Corporation	$	472,709		11.70	%	$	323,280		8.00	%	None		None
First Charter Bank		443,067		10.97			322,980		8.00		$	403,726		10.00	%

At December 31, 2006:
Leverage
First Charter Corporation	$	428,136		9.32	%	$	183,678		4.00	%	None		None
First Charter Bank		362,970		8.36			173,591		4.00		$	216,988		5.00	%

Tier I Capital
First Charter Corporation	$	428,136		10.49	%	$	163,299		4.00	%	None		None
First Charter Bank		362,970		9.99			145,275		4.00		$	217,913		6.00	%

Total Risk-Based Capital
First Charter Corporation	$	463,268		11.35	%	$	326,598		8.00	%	None		None
First Charter Bank		393,664		10.84			290,550		8.00		$	363,188		10.00	%

Tier 1 capital consists of total equity plus qualifying capital securities and minority interests, less unrealized gains and losses accumulated in other comprehensive income, certain intangible assets, and adjustments related to the valuation of servicing assets and certain equity investments in nonfinancial companies (principal investments).

The leverage ratio reflects Tier 1 capital divided by average total assets for the period. Average assets used in the calculation exclude certain intangible and servicing assets.

Total risk-based capital is comprised of Tier 1 capital plus qualifying subordinated debt and allowance for loan losses and a portion of unrealized gains on certain equity securities.

Both the Tier 1 and the total risk-based capital ratios are computed by dividing the respective capital amounts by risk-weighted assets, as defined.

The Corporation from time to time is required to maintain noninterest bearing reserve balances with the Federal Reserve Bank. The required reserve was $1.0 million at March 31, 2007.

Under current Federal Reserve regulations, a bank subsidiary is limited in the amount it may loan to its parent company and nonbank subsidiaries. Loans to a single affiliate may not exceed 10 percent and loans to all affiliates may not exceed 20 percent of the bank’s capital stock, surplus, and undivided profits, plus the allowance for loan losses. Loans from the Bank to nonbank affiliates, including the parent company, are also required to be collateralized.

The primary source of funds available to the Corporation is the payment of dividends from the Bank. Dividends paid by a subsidiary bank to its parent company are also subject to certain legal and regulatory limitations.

15. Business Segment Information

The Corporation operates one reportable segment, the Bank, the Corporation’s primary banking subsidiary. The Bank provides businesses and individuals with commercial, consumer and mortgage loans, deposit banking services, brokerage services, insurance products, and comprehensive financial planning solutions. The results of the Bank’s operations constitute a substantial majority of the consolidated net income, revenue and assets of the Corporation. Intercompany transactions and the Corporation’s revenue, expenses, assets (including cash, investment securities, and investments in venture capital limited partnerships) and liabilities (including commercial paper and subordinated debentures) are included in the “Other” category.

Information regarding the separate results of operations and assets for the Bank and Other for the three months ended March 31, 2007 and 2006, follows:

Three Months Ended

March 31, 2007

Consolidated

(In thousands)

The Bank ⁽¹⁾

Other

Eliminations

Total

Interest income

77,132

—

77,214

Interest expense

39,222

1,257

—

40,479

Net interest income (expense)

37,910

(1,175

)

—

36,735

Provision for loan losses

1,366

—

1,366

Noninterest income

19,458

108

—

19,566

Noninterest expense

35,710

210

—

35,920

Income (loss) from continuing operations before income tax expense

20,292

(1,277

)

—

19,015

Income tax expense (benefit)

7,106

(447

)

—

6,659

Net income (loss)

13,186

(830

)

—

12,356

Average loans

3,521,868

—

3,521,868

Average assets

4,856,050

540,699

(525,666

)

4,871,083

Total assets

4,866,281

540,302

(522,088

)

4,884,495


(1)		Includes the results of Gwinnett Banking Company


	Three Months Ended
	March 31, 2006
									Consolidated
(In thousands)	The Bank		Other			Eliminations			Total

Interest income	$	59,628	$	18		$	—		$	59,646
Interest expense		26,476		1,080			—			27,556

Net interest income (expense)		33,152		(1,062	)		—			32,090
Provision for loan losses		1,519		—			—			1,519
Noninterest income		16,903		88			—			16,991
Noninterest expense		30,678		63			—			30,741

Income (loss) from continuing operations before income tax expense		17,858		(1,037	)		—			16,821
Income tax expense (benefit)		6,019		(351	)		—			5,668

Income (loss) from continuing operations, net of tax		11,839		(686	)		—			11,153
Discontinued operations:
Income from discontinued operations		148		—			—			148
Income tax expense		58		—			—			58

Income from discontinued operations, net of tax		90		—			—			90

Net income (loss)	$	11,929	$	(686	)	$	—		$	11,243

Average loans	$	2,945,908	$	—		$	—		$	2,945,908
Average assets of continuing operations		4,183,733		418,097			(402,893	)		4,198,937
Average assets of discontinued operations		2,540		—			—			2,540
Total assets of continuing operations		4,260,238		421,395			(402,889	)		4,278,744
Total assets of discontinued operations		2,673		—			—			2,673

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Factors that May Affect Future Results

The following discussion contains certain forward-looking statements about the Corporation’s financial condition and results of operations, which are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s judgment only as of the date hereof. The Corporation undertakes no obligation to publicly revise these forward-looking statements to reflect events and circumstances that arise after the date hereof.

Factors that may cause actual results to differ materially from those contemplated by such forward- looking statements, and which may be beyond the Corporation’s control, include, among others, the following possibilities: (i) projected results in connection with management’s implementation of, or changes in, the Corporation’s business plan and strategic initiatives, including balance sheet initiatives described herein, are lower than expected; (ii) competitive pressure among financial services companies increases significantly; (iii) costs or difficulties related to the integration of acquisitions, including deposit attrition, customer retention and revenue loss, or expenses in general are greater than expected; (iv) general economic conditions, in the markets in which the Corporation does business, are less favorable than expected; (v) risks inherent in making loans, including repayment risks and risks associated with collateral values, are greater than expected; (vi) changes in the interest rate environment, or interest rate policies of the Board of Governors of the Federal Reserve System, may reduce interest margins and affect funding sources; (vii) changes in market rates and prices may adversely affect the value of financial products; (viii) legislation or regulatory requirements or changes thereto, including changes in accounting standards, may adversely affect the businesses in which the Corporation is engaged; (ix) regulatory compliance cost increases are greater than expected; (x) the passage of future tax legislation, or any negative regulatory, administrative or judicial position, may adversely impact the Corporation; (xi) the Corporation’s competitors may have greater financial resources and may develop products that enable them to compete more successfully in the markets in which the Corporation operates; (xii) changes in the securities markets, including changes in interest rates, may adversely affect the Corporation’s ability to raise capital from time to time; (xiii) the material weaknesses in the Corporation’s internal control over financial reporting result in subsequent adjustments to management’s projected results; and (xiv) implementation of management’s plans to remediate the material weaknesses takes longer than expected and causes the Corporation to incur costs that are greater than expected.

Overview

First Charter Corporation (NASDAQ: FCTR) (hereinafter referred to as “First Charter,” the “Corporation,” or the “Registrant”), 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 March 31, 2007, First Charter operated 57 financial centers, four insurance offices, and 137 ATMs throughout North Carolina and Georgia, and 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.

The Corporation’s principal source of earnings is derived from net interest income. Net interest income is the interest earned on securities, loans, and other interest-earning assets less the interest paid for deposits and short- and long-term debt.

Another source of earnings for the Corporation is noninterest income. Noninterest income is derived largely from service charges on deposit accounts and other fee or commission-based services and products, including mortgage, wealth management, brokerage, and insurance. Other sources of

noninterest income include securities gains or losses, gains from Small Business Administration loan sales, transactions involving bank-owned property, and income from Bank Owned Life Insurance (“BOLI”) policies.

Noninterest expense is the primary component of expense for the Corporation. Noninterest expense is primarily composed of corporate operating expenses, including salaries and benefits, occupancy and equipment, professional fees, and other operating expense. Income taxes are also considered a material expense.

The Community-Banking Model

The Bank follows a community-banking model. The community-banking model is focused on delivering a broad array of financial products and solutions to our clients with exceptional service and convenience at a fair price. It emphasizes local market decision-making and management whenever possible. Management believes this model works well against larger competitors that may have less flexibility, as well as local competition that may not have the array of products and services that the Bank offers. The Bank competes against four of the largest banks in the country, as well as other local banks, savings and loan associations, credit unions, and finance companies. Management believes that by focusing on core values, striving to exceed our clients’ expectations, being an employer of choice and providing exceptional value to shareholders, the Corporation can achieve the profitability and growth goals it has set for itself.

Market Expansion

First Charter expanded into the Raleigh, North Carolina market with the opening of a de novo financial center in October 2005 and three more in mid-February, 2006. A fifth de novo financial center opened in Raleigh in late-January 2007.

On November 1, 2006, the Corporation entered the greater Atlanta, Georgia metropolitan market with the acquisition of GBC Bancorp, Inc. (“GBC”) and its banking subsidiary, Gwinnett Banking Company (“Gwinnett Bank”), with financial centers located in Lawrenceville and Alpharetta, Georgia. By expanding into the greater Atlanta metropolitan market through this acquisition, the Corporation has been able to spread its credit risk over multiple market areas and states, as well as gain access to another large market area as a source of core deposits. Effective March 1, 2007, Gwinnett Bank was merged with and into the Bank.

Recent Challenges

During the fourth quarter of 2006, the Corporation closed two significant transactions, the acquisition of GBC and the sale of Southeastern Employee Benefits Services (“SEBS”), its employee benefits administration business. In addition, the Corporation was faced with several new accounting standards. The numerous challenges that these events posed for the Corporation were compounded by a key vacancy in the leadership of its accounting area and turnover within other key finance positions, and exposed certain material weaknesses in the Corporation’s internal control over financial reporting. Management has begun to implement its remediation plan to address these material weaknesses (the “Remediation Plan”). See Item 4A. Controls and Procedures.

For additional information with respect to the Corporation’s recent accomplishments and challenges, the material weaknesses in the Corporation’s internal controls, and the Remediation Plan, refer to First Charter’s Annual Report on Form 10-K for the year ended December 31, 2006.

Financial Summary

The Corporation’s first quarter 2007 net income was $12.4 million, a 9.9 percent increase, compared to $11.2 million for the first quarter of 2006. On a per share basis, net income was $0.35 per diluted share, compared to $0.36 per diluted share for the first quarter of 2006.

Total revenue on a tax-equivalent basis increased 14.7 percent to $56.9 million, compared to $49.7 million in the first quarter of 2006. Return on average tangible equity was 13.9 percent and return on average assets was 1.03 percent, compared to 15.2 percent and 1.09 percent, respectively, a year ago.

First quarter 2007 results include a full quarter of financial performance and the effect of additional outstanding shares from the recent acquisition of GBC Bancorp, Inc., compared with two months of results in the 2006 fourth quarter and no impact in the year-ago quarter.

Table One
Selected Financial Data by Quarter



	Three Months Ended
	March 31			December 31			September 30			June 30			March 31
(Dollars in thousands, except per share amounts)	2007			2006			2006			2006			2006

Income statement
Interest income	$	77,214		$	74,456		$	67,085		$	63,742		$	59,646
Interest expense		40,479			38,441			34,127			31,095			27,556

Net interest income		36,735			36,015			32,958			32,647			32,090
Provision for loan losses		1,366			1,486			1,405			880			1,519
Noninterest income		19,566			17,388			17,007			16,292			16,991
Noninterest expense		35,920			33,853			29,655			30,688			30,741

Income from continuing operations before income tax expense		19,015			18,064			18,905			17,371			16,821
Income tax expense		6,659			5,962			6,223			5,946			5,668

Income from continuing operations, net of tax		12,356			12,102			12,682			11,425			11,153
Discontinued operations:
Income (loss) from discontinued operations		—			(162	)		—			50			148
Gain on sale		—			962			—			—			—
Income tax expense		—			887			—			20			58

Income (loss) from discontinued operations, net of tax		—			(87	)		—			30			90

Net income	$	12,356		$	12,015		$	12,682		$	11,455		$	11,243

Per common share
Basic earnings per share
Income from continuing operations, net of tax	$	0.36		$	0.36		$	0.41		$	0.37		$	0.36
Net income		0.36			0.36			0.41			0.37			0.36
Diluted earnings per share
Income from continuing operations, net of tax		0.35			0.36			0.40			0.37			0.36
Net income		0.35			0.36			0.40			0.37			0.36
Average shares
Basic		34,770,106			33,268,542			31,056,059			31,058,858			30,859,461
Diluted		35,084,640			33,583,617			31,426,563			31,339,325			31,153,338
Dividends declared		0.195			0.195			0.195			0.195			0.190
Period-end book value		12.97			12.81			11.20			10.73			10.68

Performance ratios
Return on average equity ⁽¹⁾		11.09	%		11.69	%		14.76	%		13.80	%		13.99	%
Return on average assets ⁽¹⁾		1.03			1.02			1.16			1.07			1.09
Net yield on earning assets ⁽¹⁾		3.38			3.40			3.33			3.36			3.40
Average portfolio loans to average deposits		107.98			105.88			103.37			108.27			105.51
Average equity to average assets		9.28			8.75			7.86			7.79			7.76
Efficiency ratio ⁽²⁾		63.1			62.6			52.6			62.0			61.9

Selected period-end balances
Portfolio loans, net	$	3,494,015		$	3,450,087		$	3,061,864		$	3,042,768		$	2,981,458
Loans held for sale		13,691			12,292			10,923			8,382			8,719
Allowance for loan losses		35,854			34,966			29,919			29,520			29,505
Securities available for sale		897,762			906,415			899,120			884,370			900,424
Assets		4,884,495			4,856,717			4,382,507			4,361,231			4,281,417
Deposits		3,321,366			3,248,128			2,954,854			2,988,802			2,800,346
Other borrowings		1,044,229			1,098,698			1,031,798			995,707			1,103,784
Total liabilities		4,429,123			4,409,355			4,033,069			4,027,333			3,950,736
Shareholders’ equity		455,372			447,362			349,438			333,898			330,681
Selected average balances
Portfolio loans		3,510,437			3,336,563			3,070,286			3,021,005			2,939,233
Loans held for sale		11,431			10,757			8,792			9,810			6,675
Securities available for sale, at cost		926,970			924,773			923,293			921,026			914,760
Earning assets		4,463,161			4,284,735			4,013,745			3,960,835			3,868,519
Assets		4,871,083			4,664,431			4,336,270			4,274,345			4,201,477
Deposits		3,251,137			3,151,120			2,970,047			2,790,197			2,785,632
Other borrowings		1,113,191			1,054,550			984,504			1,108,734			1,049,529
Shareholders’ equity		451,835			407,929			340,986			332,987			325,917


⁽¹⁾		Annualized.

⁽²⁾		Noninterest expense divided by the sum of taxable-equivalent net interest income plus noninterest income less gain (loss) on sale of securities, net. Excludes the results of discontinued operations.

Critical Accounting Estimates and Policies

The Corporation’s significant accounting policies are described in Note 1 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006, on pages 69 to 76. These policies are essential in understanding management’s discussion and analysis of financial condition and results of operations. Some of the Corporation’s accounting policies require significant judgment to estimate values of either assets or liabilities. In addition, certain accounting principles require significant judgment with respect to their application to complicated transactions to determine the most appropriate treatment.

The Corporation has identified three accounting policies as being critical in terms of judgments and the extent to which estimates are used: allowance for loan losses, income taxes, and identified intangible assets and goodwill. In many cases, there are numerous alternative judgments that could be used in the process of estimating values of assets or liabilities. Where alternatives exist, the Corporation has used the factors it believes represent the most reasonable value in developing the inputs for the valuation. Actual performance that differs from the Corporation’s estimates of the key variables could affect net income. For more information on the Corporation’s critical accounting policies, refer to pages 29 to 31 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.

Earnings Performance

Net Interest Income and Margin

Net interest income, the difference between total interest income and total interest expense, is the Corporation’s principal source of earnings. An analysis of the Corporation’s net interest income on a taxable-equivalent basis and average balance sheets for the three months ended March 31, 2007 and 2006 is presented in Table Two. Net interest income on a taxable-equivalent basis is a non-GAAP (Generally Accepted Accounting Principles) performance measure used by management in operating the business, which management believes provides investors with a more accurate picture of the interest margin for comparative purposes. The changes in net interest income (on a taxable-equivalent basis) for the three months ended March 31, 2007 and 2006 are analyzed in Table Three. The discussion below is based on net interest income computed under accounting principles generally accepted in the United States of America.

Net interest income increased to $36.7 million, representing a $4.6 million, or 14.5 percent, increase over the first quarter of 2006. The net interest margin (taxable-equivalent net interest income divided by average earning assets) decreased two basis points to 3.38 percent in the first quarter of 2007 from 3.40 percent in the first quarter of 2006. The margin benefited from continued disciplined pricing of loans and deposits and a greater concentration of higher-yielding commercial loans relative to total assets. The margin was adversely impacted, in part, by the maturity of $110 million of wholesale funding with an average yield of 2.98 percent early in the quarter, compared with the sale and maturity of $52.9 million in securities with an average yield of 3.17 percent late in the quarter.

Compared to the first quarter of 2006, earning-asset yields increased 76 basis points to 7.05 percent. This increase was driven by two factors. First, loan yields increased 71 basis points to 7.62 percent and securities yields increased 64 basis points to 4.95 percent. Second, the mix of higher-yielding (loan) assets improved as a result of the GBC acquisition, recent balance sheet repositionings, and a smaller percentage of lower-yielding mortgage loans. The percentage of investment security average balances (which, on average, have lower yields than loans) to total earning-asset average balances, was reduced from 23.6 percent to 20.8 percent over the past year.

On the liability side of the balance sheet, the cost of interest-bearing liabilities increased 92 basis points, compared to the first quarter of 2006. This was comprised of a 101 basis point increase in interest-bearing deposit costs to 3.84 percent, while other borrowing costs increased 83 basis points to 5.08 percent. During 2006, the Federal Reserve raised the rate that banks lend funds to each other (the Fed Funds rate) by 100 basis points. Also, as a result of the balance sheet repositionings, the percentage of

higher-cost, other borrowings average balances was reduced from 30.7 percent to 28.4 percent of total interest-bearing liabilities average balances over the past year.

Interest income and yields for earning-asset average balances and interest expense and rates paid on interest-bearing liability average balances, and the net interest margin follow:

Table Two
Average Balances and Net Interest Income Analysis


	Three Months Ended March 31
	2007							2006
	Daily		Interest		Average			Daily		Interest		Average
	Average		Income/		Yield/Rate			Average		Income/		Yield/Rate
(Dollars in thousands)	Balance		Expense		Paid⁽⁵⁾			Balance		Expense		Paid⁽⁵⁾

Assets
Earning assets
Loans and loans held for sale^(1)(2)(3)(4)	$	3,521,868	$	66,239		7.62	%	$	2,945,908	$	50,306		6.91	%
Securities — taxable ⁽⁴⁾		826,337		9,949		4.83			808,399		8,307		4.12
Securities — tax-exempt		100,633		1,491		5.92			106,361		1,544		5.81
Federal funds sold		9,073		128		5.70			3,223		36		4.54
Interest-bearing bank deposits		5,250		50		3.90			4,628		39		3.40

Total earning assets		4,463,161	$	77,857		7.05	%	$	3,868,519	$	60,232		6.29	%
Cash and due from banks		79,360							97,893
Other assets		328,562							235,065

Total assets	$	4,871,083						$	4,201,477

Liabilities and shareholders’ equity
Interest-bearing liabilities
Demand deposits	$	399,557	$	1,058		1.07	%	$	356,179	$	446		0.51	%
Money market accounts		642,383		5,551		3.50			575,601		3,852		2.71
Savings deposits		112,988		67		0.24			120,096		64		0.22
Certificates of deposit		1,649,408		19,865		4.88			1,321,036		12,200		3.75
Retail other borrowings		92,090		662		2.92			129,087		778		2.44
Wholesale other borrowings		1,021,101		13,276		5.27			920,442		10,216		4.50

Total interest-bearing liabilities		3,917,527		40,479		4.19	%		3,422,441		27,556		3.27	%
Noninterest-bearing deposits		446,801							412,720
Other liabilities		54,920							40,399
Shareholders’ equity		451,835							325,917

Total liabilities and shareholders’ equity	$	4,871,083						$	4,201,477

Net interest spread						2.86	%						3.02	%
Contribution of noninterest bearing sources						0.52							0.38

Net interest income/ yield on earning assets			$	37,378		3.38	%			$	32,676		3.40	%


⁽¹⁾		The preceding analysis takes into consideration the principal amount of nonaccruing loans and only income actually collected and recognized on such loans.

⁽²⁾		Average loan balances are shown net of unearned income.

⁽³⁾		Includes amortization of deferred loan fees of $829 and $745 for the three months ended March 31, 2007 and 2006, respectively.

⁽⁴⁾		Yields on tax-exempt securities and loans are stated on a taxable-equivalent basis, assuming a Federal tax rate of 35 percent and applicable state taxes for 2007 and 2006. The adjustments made to convert to a taxable-equivalent basis were $643 and $586 for the three months ended March 31, 2007 and 2006, respectively.

⁽⁵⁾		Annualized.

The following table shows changes in tax-equivalent interest income, interest expense, and tax-equivalent net interest income arising from rate and volume changes for major categories of earning assets and interest-bearing liabilities. The change in interest not solely due to changes in volume or rate has been allocated in proportion to the absolute dollar amounts of the change in each.

Table Three
Volume and Rate Variance Analysis

Three Months Ended

March 31

2007 vs 2006

Due to Change in

Net

(In thousands)

Volume

Rate

Change

Increase (decrease) in tax-equivalent interest income

Loans and loans held for sale ⁽¹⁾

10,492

5,441

15,933

Securities — taxable ⁽¹⁾

188

1,454

1,642

Securities — tax-exempt

(84

)

(53

)

Federal funds sold

Interest-bearing bank deposits

Total

10,682

6,943

17,625

Increase (decrease) in interest expense

Deposits:

Demand

552

612

Money market

484

1,215

1,699

Savings

)

Certificates of deposit

3,447

4,218

7,665

Retail other borrowings

(249

)

133

(116

)

Wholesale other borrowings

1,192

1,868

3,060

Total

4,930

7,993

12,923

Increase in tax-equivalent net interest income

4,702


⁽¹⁾		Income on tax-exempt securities and loans are stated on a taxable-equivalent basis. Refer to *Table Two* for further details.

Noninterest Income

Details of noninterest income follow:

Table Four
Noninterest Income


	Three Months Ended
	March 31					Increase / (Decrease)
(In thousands)	2007			2006		Amount			Percent

Service charges on deposits	$	7,390		$	6,698	$	692			10.3	%
ATM, debit, and merchant fees		2,444			1,898		546			28.8
Wealth management		716			700		16			2.3
Equity method investment gains, net		1,127			545		582			106.8
Mortgage services		901			523		378			72.3
Gain on sale of Small Business Administration loans		377			—		377			—
Brokerage services		1,081			711		370			52.0
Insurance services		3,634			4,334		(700	)		(16.2	)
Bank owned life insurance		1,139			827		312			37.7
Property sale gains, net		63			81		(18	)		(22.2	)
Securities losses, net		(11	)		—		(11	)		—
Other		705			674		31			4.6

Noninterest income from continuing operations		19,566			16,991		2,575			15.2
Noninterest income from discontinued operations		—			965		(965	)		—

Total noninterest income	$	19,566		$	17,956	$	1,610			9.0	%

The major components of noninterest income are derived from service charges on deposit accounts, ATM, debit, and merchant fees, and mortgage, brokerage, insurance, and wealth management revenue. In addition, the Corporation realizes gains (and losses) on securities, equity investments, Small Business Administration loan sales, and bank-owned property sales, and income from its BOLI policies.

Historical noninterest income and expense amounts have been restated to reflect the effect of reporting the previously announced sale of Southeastern Employee Benefits Services (SEBS) in the fourth quarter of 2006 as discontinued operations and to reflect the implementation of SAB 108 at year-end 2006.

Noninterest income from continuing operations for the first quarter of 2007 was $19.6 million, an increase of $2.6 million from $17.0 million in the first quarter of 2006. Compared to the first quarter of 2006, revenue from deposit service charges was $692,000 higher, principally reflecting a larger number of checking accounts. Equity method investment gains were $582,000 higher in the 2007 first quarter, versus the 2006 first quarter. ATM, debit, and merchant card revenue was $546,000 higher, reflecting both a larger number of accounts and transactions. Mortgage services revenue increased $378,000, due to a rise in originations and sales in the first quarter of 2007, versus the first quarter of 2006. Gains on SBA loan sales were $377,000 in the 2007 period, compared to no sales in the same 2006 period. SBA loans were generated through GBC’s loan originators. Brokerage services revenue was $370,000 higher in 2007 due to increased production from the addition of several financial consultants in the latter half of 2006. The restructuring of $21.5 million of Bank Owned Life Insurance (BOLI) in mid-2006, the purchase of $10.0 million in new coverage, and the addition of $5.9 million of BOLI from GBC led to the $312,000 increase in revenue between periods. These revenue increases and gains were partially offset by $700,000 less in insurance services revenue, primarily due to less contingency income recognized in the first quarter of 2007, compared with the first quarter of 2006. The reduction in contingency income reflects a combination of less favorable loss experience with one carrier, combined with the majority of this income having been received in the first quarter of 2006, versus a more even distribution between the first and second quarters of 2007.

Noninterest Expense

Details of noninterest expense follow:

Table Five
Noninterest Expense


	Three Months Ended
	March 31						Increase / (Decrease)
(In thousands)	2007			2006			Amount			Percent

Salaries and employee benefits	$	19,587		$	17,200		$	2,387			13.9	%
Occupancy and equipment		4,612			4,705			(93	)		(2.0	)
Data processing		1,790			1,410			380			27.0
Marketing		1,351			1,288			63			4.9
Postage and supplies		1,172			1,182			(10	)		(0.8	)
Professional services		3,586			1,903			1,683			88.4
Telecommunications		671			563			108			19.2
Amortization of intangibles		223			102			121			118.6
Foreclosed properties		153			54			99			183.3
Other		2,775			2,334			441			18.9

Noninterest expense from continuing operations		35,920			30,741			5,179			16.8
Noninterest expense from discontinued operations		—			817			(817	)		(100.0	)

Total noninterest expense	$	35,920		$	31,558		$	4,362			13.8	%

Full-time equivalent employees at March 31		1,105			1,078			27			2.5	%

Efficiency ratio⁽¹⁾		63.1	%		61.9	%		1.2	%		1.9	%


⁽¹⁾		Noninterest expense divided by the sum of taxable-equivalent net interest income plus noninterest income less securities gains (losses), net. Excludes the results of discontinued operations.

Selected items included in noninterest expense follow:

Table Six
Selected Items Included in Noninterest Expense


	Three Months Ended
	March 31
(In thousands)	2007		2006

Separation agreements	$	58	$	105

Merger-related costs		200		—

Noninterest expense from continuing operations for the 2007 first quarter was $35.9 million, a $5.2 million increase, compared to the first quarter of 2006. Of this increase, $2.4 million was attributable to salaries and employee benefits expense and $1.7 million related to professional services expense. Salaries and benefits expense increased in 2007 compared to 2006 due to higher salaries and wages, incentive compensation, and equity-based compensation. The increase in salaries and wages reflects a higher number of full-time equivalent employees and normal salary increases. Additionally, salaries and employee benefits expense included merger-related costs of $200,000, representing severance and other compensation-related bonuses for certain employees to remain with Gwinnett Bank for a period of transition following the acquisition. Incentive compensation increased $770,000 in the 2007 first quarter due to business growth, particularly in corporate and retail banking. Equity-based compensation increased $273,000 between periods. Additional expense related to the review and analysis of the Corporation’s financial control environment and other matters, incremental audit work related to completing the Corporation’s 2006 financial reports, and temporary staffing augmentation contributed $1.3 million to the increase in professional services expense between years. Data processing expense increased $380,000 on a year-over-year basis due to increased transaction volume, primarily due to additional customer debit card usage. Other noninterest expense increased $441,000 between comparable quarters, principally consisting of increases in recruiting, insurance, franchise tax, travel, and other sundry and miscellaneous operational expense.

The efficiency ratio was 63.1 percent in the first quarter of 2007, compared with 61.9 percent in the first quarter of 2006. The first quarter of 2007 was adversely impacted by the incremental expense from the review and analysis of the Corporation’s financial control environment and other matters, additional audit fees, and temporary financial staffing expense.

Income Tax Expense

Income tax expense for the three months ended March 31, 2007, was $6.7 million, for an effective tax rate of 35.0 percent, compared with $5.7 million, for an effective tax rate of 33.7 percent in the first quarter of 2006.

Balance Sheet Analysis

Securities Available for Sale

The securities portfolio, all of which is classified as available-for-sale, is a component of the Corporation’s Asset Liability Management (“ALM”) strategy. The decision to purchase or sell securities is based upon liquidity needs, changes in interest rates, changes in the Bank’s risk tolerance, the composition of the rest of the balance sheet, and other factors. Securities available-for-sale are accounted for at fair value, with unrealized gains and losses recorded net of tax as a component of other comprehensive income in shareholders’ equity unless the unrealized losses are considered other-than-temporary.

The fair value of the securities portfolio is determined by various third party sources. The valuation is determined as of the end of the reporting period based on available quoted market prices or quoted market prices for similar securities if a quoted market price is not available.

At March 31, 2007, securities available for sale were $897.8 million, compared to $906.4 million at December 31, 2006. Pretax unrealized net losses on securities available for sale were $8.8 million at March 31, 2007, compared to pretax unrealized net losses of $9.8 million at December 31, 2006. Paydowns and maturities of existing securities, totaling $62.3 million, along with the sale of $25.2 million of securities, led to the reduction in the unrealized losses between December 31, 2006 and March 31, 2007. The unrealized losses in the securities portfolio have primarily resulted from the rise in interest rates over the past few years. The Corporation has been purchasing shorter-duration securities with more predictable cash flows in a variety of interest rate scenarios as part of its overall balance sheet management. During the first quarter of 2007, proceeds from the aforementioned maturities, along with the sales, paydowns, and calls were used to purchase $78.0 million of securities, principally mortgage- and asset-backed securities. The asset-backed securities purchased are collateralized debt obligations, representing securitizations of financial company capital securities and were purchased for portfolio risk diversification and their higher yields.

The following table shows the carrying value of (i) U.S. government obligations, (ii) U.S. government agency obligations, (iii) mortgage-backed securities, (iv) state, county, and municipal obligations, (v) equity securities, which are primarily comprised of Federal Reserve and Federal Home Loan Bank stock, and (vi) asset-backed securities.

Table Seven
Investment Portfolio


	March 31		December 31
(In thousands)	2007		2006

U.S. government agency obligations	$	226,560	$	275,394
Mortgage-backed securities		463,943		412,020
State, county, and municipal obligations		99,545		102,602
Asset-backed securities		56,864		65,115
Equity securities		50,850		51,284

Total securities	$	897,762	$	906,415

Loan Portfolio

The Corporation’s loan portfolio at March 31, 2007, consisted of six major categories: Commercial Non Real Estate, Commercial Real Estate, Construction, Mortgage, Home Equity, and Consumer. Pricing is driven by quality, loan size, loan tenor, prepayment risk, the Corporation’s relationship with the customer, competition, and other factors. The Corporation is primarily a secured lender in all of these loan categories. The terms of the Corporation’s loans are generally five years or less with the exception of home equity lines and residential mortgages, for which the terms can range out to 30 years. In addition, the Corporation has a program in which it buys and sells portions of loans (primarily originated in the Southeastern region of the United States), both participations and syndications, from key strategic partner financial institutions with which the Corporation has established relationships. This strategic partners’ portfolio includes commercial real estate, commercial non real estate, and construction loans. This program enables the Corporation to diversify both its geographic risk and its total exposure risk. From time to time, the Corporation also sources commercial real estate, commercial non real estate, construction, and consumer loans through correspondent relationships. As of March 31, 2007, the Corporation’s total loan portfolio included $347.8 million of loans originated through the strategic partners’ program and correspondent relationships.

Total loan average balances for the 2007 first quarter increased $576.0 million, or 19.6 percent, to $3.5 billion, compared to $2.9 billion for the 2006 first quarter. Commercial loan growth drove the increase, rising by $640.3 million, or 41.7 percent. The remaining growth reflected continued robust commercial lending in the Charlotte and Raleigh markets. Included in the increases were approximately $337 million of total loan balances and $322 million of commercial loan balances that were added to the First Charter portfolio on November 1, 2006, as a result of the GBC acquisition. The Charlotte and Raleigh markets continued to demonstrate steady and consistent growth across most industries. The Corporation’s observations indicate that the new home construction markets in these key areas show continued

balance between new home construction and new home purchases, despite national trends to the contrary.

Consumer loan average balances decreased $23.5 million and mortgage loan average balances decreased $45.6 million. The consumer loan balance decline was driven, in part, by lower consumer borrowing costs of refinancing first mortgages relative to current rates on home equity products. The decline in mortgage loan balances was due to normal loan amortization and First Charter’s strategy of selling most of its new mortgage production in the secondary market. GBC had no residential mortgages on its balance sheet at the time of the acquisition. Cash flow from mortgage loan runoff, along with consumer loan repayments contributed to financing higher yielding commercial loans.

At March 31, 2007, Raleigh-related loans totaled $148.8 million, representing a $14.9 million increase from $133.9 million at December 31, 2006.

A summary of the composition of the loan portfolio follows:

Table Eight
Loan Portfolio Composition


	March 31			Percent of			December 31			Percent of
(In thousands)	2007			Total Loans			2006			Total Loans

Commercial real estate	$	1,062,672			30.1	%	$	1,034,330			29.7	%
Commercial non real estate		315,102			8.9			301,958			8.7
Construction		837,639			23.8			793,294			22.8
Mortgage		604,834			17.1			618,142			17.7
Consumer		282,187			8.0			289,493			8.3
Home equity		427,441			12.1			447,849			12.8

Total portfolio loans		3,529,875			100.0	%		3,485,066			100.0	%
Allowance for loan losses		(35,854	)					(34,966	)
Unearned income		(6	)					(13	)

Portfolio loans, net	$	3,494,015					$	3,450,087

Deposits

A summary of the composition of deposits follows:

Table Nine
Deposits


	March 31		December 31
(In thousands)	2007		2006

Noninterest bearing demand	$	476,122	$	454,975
Interest bearing demand		434,412		420,774
Money market accounts		636,586		620,699
Savings deposits		114,785		111,047
Certificates of deposit		1,659,461		1,640,633

Total deposits	$	3,321,366	$	3,248,128

Deposits totaled $3.3 billion at March 31, 2007, a slight increase from $3.2 billion at December 31, 2006. Compared to March 31, 2006, deposits increased by $521.0 million, as a result of overall growth in money market and interest checking balances, combined with the addition of $357.3 million of deposits from GBC at November 1, 2006.

Deposit balances in Raleigh were $51.3 million at March 31, 2007, an increase of $19.5 million from $31.8 million at December 31, 2006.

Deposit growth, particularly low-cost transaction (or core) deposit growth (money market, demand, and savings accounts), continues to be an area of emphasis at First Charter. For the first quarter of 2007, core deposit average balances increased $137.1 million, or 9.4 percent, compared to the first quarter of 2006. This includes the impact of First Charter’s sale of two financial centers in September 2006, which involved the sale of $24 million of core deposits. The total core deposit increase was primarily driven by a $66.8 million, or 11.6 percent, increase in money market average balances, a $36.3 million, or 7.6 percent, increase in interest checking and savings average balances, and a $34.1 million, or 8.3 percent, increase in noninterest-bearing demand deposit average balances.

Certificate of deposit (CD) average balances for the first quarter of 2007 grew $66.8 million from the fourth quarter of 2006 and $328.4 million from the first quarter of 2006. On November 1, 2006, $248.6 million of CD balances were added as a result of the GBC acquisition. CD growth was also affected by the sale of $14 million of CDs in conjunction with the previously mentioned September 2006 financial center sale.

Other Borrowings

Other borrowings consist of Federal Funds purchased, securities sold under agreement to repurchase, commercial paper and other short-term borrowings, and long-term borrowings. Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank. At March 31, 2007, the Bank had federal funds back-up lines of credit totaling $175.0 million with $44.0 million outstanding, compared to similar lines of credit totaling $188.2 million with $41.5 million outstanding at December 31, 2006. Securities sold under agreements to repurchase represent short-term borrowings by the Bank with maturities less than one year collateralized by a portion of the Corporation’s United States Government or Agency securities. Securities sold under agreements to repurchase totaled $133.8 million at March 31, 2007, compared to $160.2 million at December 31, 2006. These borrowings are an important source of funding to the Corporation. Access to alternate short-term funding sources allows the Corporation to meet funding needs without relying on increasing deposits on a short-term basis.

The Corporation issues commercial paper as another source of short-term funding. It is purchased primarily by the Bank’s commercial deposit clients. Commercial paper outstanding at March 31, 2007 was $18.7 million, compared to $38.2 million at December 31, 2006.

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, 2007, the Bank had $320.0 million of short-term FHLB borrowings, compared to the Bank’s $371.0 million at December 31, 2006. The Corporation, in its overall management of interest-rate risk, is opportunistic in evaluating alternative funding sources. While balancing the funding needs of the Corporation, management considers the duration of available maturities, the relative attractiveness of funding costs, and the diversification of funding sources, among other factors, in order to maintain flexibility in the nature of deposits and borrowings the Corporation holds at any given time.

that were sold to third parties. The proceeds of the sale of the trust preferred securities were used to purchase subordinated debentures discussed above from the Corporation, which are presented as long-term borrowings in the consolidated balance sheet and qualify for inclusion in Tier 1 capital for regulatory capital purposes, subject to certain limitations.

Credit Risk Management

The Corporation’s credit risk policy and procedures are centralized for every loan type. In addition, all mortgage, consumer, and home equity loans are centrally decisioned. All loans generally flow through an independent closing unit to ensure proper documentation. Loans originated by the Corporation’s Atlanta-based lenders are currently being processed and closed independently from the Corporation’s centralized credit structure. Finally, all known collection or problem loans are centrally managed by experienced workout personnel. To monitor the effectiveness of policies and procedures, Management maintains a set of asset quality standards for past due, nonaccrual, and watchlist loans and monitors the trends of these standards over time. These standards are approved by the Board of Directors and reviewed quarterly with the Board of Directors for compliance.

Loan Administration and Underwriting

The Bank’s Chief Risk Officer is responsible for the continuous assessment of the Bank’s risk profile as well as making any necessary adjustments to policies and procedures. Commercial loan relationships of less than $750,000 may be approved by experienced commercial loan officers, within their loan authority. Commercial and commercial real estate loans are approved by signature authority requiring at least two experienced officers for relationships greater than $750,000. The exceptions to this include City Executives and certain Senior Loan Officers who are authorized to approve relationships up to $1.0 million. An independent Risk Manager is involved in the approval of commercial and commercial real estate relationships that exceed $1.0 million. All relationships greater than $2.0 million receive a comprehensive annual review by either the senior credit analysts or lending officers of the Bank, which is then reviewed by the independent Risk Managers and/or the final approval officer with the appropriate signature authority. Relationships totaling $5.0 million or more are further reviewed by senior lending officers of the Bank, the Chief Risk Officer, and the Credit Risk Management Committee comprised of certain executive and senior management. In addition, relationships totaling $10.0 million or more are reviewed by the Board of Directors’ Credit and Compliance Committee. These oversight committees provide policy, process, product and specific relationship direction to the lending personnel. As of March 31, 2007, the Corporation had a legal lending limit of $66.5 million and a general target-lending limit of $10.0 million per relationship.

The Corporation’s loan portfolio consists of loans made for a variety of commercial and consumer purposes. Because commercial loans are made based to a great extent on the Corporation’s assessment of a borrower’s income, cash flow, character and ability to repay, such loans are viewed as involving a higher degree of credit risk than is the case with residential mortgage loans or consumer loans. To manage this risk, the Corporation’s commercial loan portfolio is managed under a defined process which includes underwriting standards and risk assessment, procedures for loan approvals, loan grading, ongoing identification and management of credit deterioration and portfolio reviews to assess loss exposure and to ascertain compliance with the Corporation’s credit policies and procedures.

During 2006, the Corporation implemented a new consumer loan platform to improve servicing for customers by providing loan officers with additional tools and real-time access to credit bureau information at the time of loan application. This platform also delivers increased reporting capabilities and improved credit risk management by having the Corporation’s policies embedded into the decision process while also managing approval authority limits for credit exposure and reporting.

In general, consumer loans (including mortgage and home equity) have a lower risk profile than commercial loans. Commercial loans (including commercial real estate, commercial non real estate and construction loans) are generally larger in size and more complex than consumer loans. Commercial real estate loans are deemed less risky than commercial non real estate and construction loans, because the collateral value of real estate generally maintains its value better than non real estate or construction collateral. Consumer loans, which are smaller in size and more geographically diverse across the Corporation’s entire primary market area, provide risk diversity across the portfolio. Because mortgage loans are secured by first liens on the consumer’s residential real estate, they are the Corporation’s

lowest risk profile loan type. Home equity loans are deemed less risky than unsecured consumer loans, as home equity loans and lines are secured by first or second deeds of trust on the borrower’s residential real estate. A centralized decision-making process is in place to control the risk of the consumer, home equity, and mortgage loan portfolio. The consumer real estate appraisal process is also centralized relative to appraisal engagement, appraisal review, and appraiser quality assessment. These processes are detailed in the underwriting guidelines, which cover each retail loan product type from underwriting, servicing, compliance issues and closing procedures.

At March 31, 2007, the substantial majority of the total loan portfolio, including the commercial and real estate portfolio, represented loans to borrowers within the Metro regions of Charlotte and Raleigh, North Carolina and Atlanta, Georgia. The diverse economic base of these regions tends to provide a stable lending environment; however, an economic downturn in the Charlotte region, the Corporation’s primary market area, could adversely affect its business. No significant concentration of credit risk has been identified due to the diverse industrial base in this region.

Additionally, the Corporation’s loan portfolio consists of certain non-traditional loan products. Some of these products include interest-only loans, loans with initial interest rates that are below the market interest rate for the initial period of the loan-term and may increase when that period ends and loans with a high loan-to-value ratio. Based on the Corporation’s assessment, these products do not give rise to a concentration of credit risk.

Derivatives

The Corporation enters into interest rate swap agreements or other derivative transactions as business conditions warrant. As of March 31, 2007, and December 31, 2006, the Corporation had no interest rate swap agreements or other derivative transactions outstanding.

Nonperforming Assets

Nonperforming assets are comprised of nonaccrual loans and other real estate owned (“OREO”). The nonaccrual status is determined after a loan is 90 days past due or when deemed not collectible in full as to principal or interest, unless in management’s opinion collection of both principal and interest is assured by way of collateralization, guarantees, or other security and the loan is in the process of collection. OREO represents real estate acquired through foreclosure or deed in lieu thereof and is generally carried at the lower of cost or fair value, less estimated costs to sell.

Management’s policy for any accruing loan greater than 90 days past due is to perform an analysis of the loan, including a consideration of the financial position of the borrower and any guarantor, as well as the value of the collateral, and use this information to make an assessment as to whether collectibility of the principal and interest appears probable. If such collectibility is not probable, the loans are placed on nonaccrual status. Loans are returned to accrual status when management determines, based on an evaluation of the underlying collateral together with the borrower’s payment record and financial condition, that the borrower has the ability and intent to meet the contractual obligations of the loan agreement. As of March 31, 2007, no loans were 90 days or more past due and still accruing interest.

A summary of nonperforming assets follow:


*Table Ten*
Nonperforming Assets
	March 31			December 31			September 30			June 30			March 31
(In thousands)	2007			2006			2006			2006			2006

Nonaccrual loans	$	10,943		$	8,200		$	7,090		$	7,763		$	9,211
Loans 90 days or more past due accruing interest		—			—			—			—			—

Total nonperforming loans		10,943			8,200			7,090			7,763			9,211
Other real estate		6,330			6,477			5,601			5,902			6,072

Nonperforming assets	$	17,273		$	14,677		$	12,691		$	13,665		$	15,283

Nonaccrual loans as a percentage of total portfolio loans		0.31	%		0.24	%		0.23	%		0.25	%		0.31	%
Nonperforming assets as a percentage of:
Total assets		0.35			0.30			0.29			0.31			0.36
Total portfolio loans and other real estate owned		0.49			0.42			0.41			0.44			0.51
Net charge-offs to average portfolio loans		0.06			0.08			0.13			0.11			0.10
Allowance for loan losses to portfolio loans		1.02			1.00			0.97			0.96			0.98
Allowance for loan losses to net charge-offs		18.50	x		13.56	x		7.50	x		8.51	x		9.84	x
Allowance for loan losses to nonperforming loans		3.28			4.26			4.22	x		3.80	x		3.20	x

Nonaccrual loans totaled $10.9 million, or 0.31 percent of total portfolio loans, at March 31, 2007, representing a $2.7 million increase from $8.2 million, or 0.24 percent of total portfolio loans at December 31, 2006, and a $1.7 million increase from $9.2 million, or 0.31 percent, of total portfolio loans at March 31, 2006. Nonperforming assets as a percentage of total loans and OREO increased to 0.49 percent at March 31, 2007, compared to 0.42 percent at December 31, 2006 and 0.51 percent at March 31, 2006.

One borrower relationship was the principal contributor to the increase in nonperforming loans between December 31, 2006, and March 31, 2007. As of December 31, 2006, management identified a $2.8 million commercial acquisition and development loan as a potential problem loan. In early January 2007, this loan became 90 days past due and was placed on nonaccrual status. At December 31, 2006, the Bank anticipated the borrower would cure the delinquency to keep the loan from reaching 90 days past due. Management continues to believe the loan is well-secured by the underlying collateral and continues to work with the borrower and guarantors to ensure full collection of principal. During the quarter, payments of $114,000 were received, and as of March 31, 2007, the outstanding balance on this loan was $2.7 million. Subsequent to March 31, 2007, payments in the aggregate of $100,000 were received.

Nonaccrual loans at March 31, 2007 and December 31, 2006, were not concentrated in any one industry and primarily consisted of loans secured by real estate, including single-family residential and development construction loans. Nonaccrual loans as a percentage of loans may increase or decrease as economic conditions change. Management takes current economic conditions into consideration when estimating the allowance for loan losses. See Allowance for Loan Losses for a more detailed discussion.

Allowance for Loan Losses

The Corporation’s allowance for loan losses consists of three components: (i) valuation allowances computed on impaired loans in accordance with SFAS 114; (ii) valuation allowances determined by applying historical loss rates to those loans not specifically identified as impaired; and (iii) valuation allowances for factors which management believes are not reflected in the historical loss rates or that otherwise need to be considered when estimating the allowance for loan losses. These three components are estimated quarterly and, along with a narrative analysis, comprise the Corporation’s allowance for loan losses model. The resulting components are used by management to determine the adequacy of the allowance for loan losses. 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.

All estimates of loan portfolio risk, including the adequacy of the allowance for loan losses, are subject to general and local economic conditions, among other factors, which are unpredictable and beyond the Corporation’s control. Because a significant portion of the loan portfolio is comprised of real estate loans and loans to area businesses, the Corporation is subject to risk in the real estate market and changes in the economic conditions in its primary market areas. Changes in these areas can increase or decrease the provision for loan losses.

During the three months ended March 31, 2007, the Corporation made no changes to its estimated loss percentages for economic factors. As a part of its quarterly assessment of the allowance for loan losses, the Corporation reviews key local, regional and national economic information and assesses its impact on the allowance for loan losses. Based on its review for the three months ended March 31, 2007, the Corporation noted that economic conditions are mixed; however, management concluded that the impact on borrowers and local industries in the Corporation’s primary market areas did not change significantly during the period. Accordingly, the Corporation did not modify its loss estimate percentage attributable to economic factors in its allowance for loan losses model.

The Corporation continuously reviews its portfolio for any concentrations of loans to any one borrower or industry. To analyze its concentrations, the Corporation prepares various reports showing total risk concentrations to borrowers by industry, as well as reports showing total risk concentrations to one borrower. At the present time, the Corporation does not believe it is overly concentrated in any industry or specific borrower and therefore has made no allocations of allowances for loan losses for this factor for any of the periods presented.

The Corporation also monitors the amount of operational risk that exists in the portfolio. This would include the front-end underwriting, documentation and closing processes associated with the lending decision. During the three months ended March 31, 2007, the percent of additional allocation for the operational reserve did not change.

Changes in the allowance for loan losses follow:

Table Eleven
Allowance For Loan Losses



	Three Months Ended
	March 31
(In thousands)	2007			2006

Balance at beginning of period	$	34,966		$	28,725
Charge-offs
Commercial non real estate		246			251
Commercial real estate		12			75
Construction		—			—
Mortgage		33			11
Home equity		130			391
Consumer		365			501

Total charge-offs		786			1,229

Recoveries
Commercial non real estate		88			328
Commercial real estate		—			—
Construction		—			—
Mortgage		25			—
Home equity		—			1
Consumer		195			161

Total recoveries		308			490

Net charge-offs		478			739

Provision for loan losses		1,366			1,519

Balance at end of period	$	35,854		$	29,505

Average portfolio loans	$	3,510,437		$	2,939,233
Net charge-offs to average portfolio loans (annualized)		0.06	%		0.10	%
Allowance for loan losses to portfolio loans		1.02			0.98

The allowance for loan losses was $35.9 million, or 1.02 percent of portfolio loans, at March 31, 2007, compared to $29.5 million, or 0.98 percent of portfolio loans, at March 31, 2006. The Corporation’s addition of GBC’s largely commercial loan portfolio, a smaller concentration of lower risk home equity and mortgage loan balances, and First Charter’s credit migration trends led to the higher allowance for loan loss ratio.

Management considers the allowance for loan losses adequate to cover inherent losses in the Corporation’s loan portfolio as of the date of the financial statements. Management believes it has established the allowance in consideration of the current and expected future economic environment. While management uses the best information available to make evaluations, future adjustments to the allowance may be necessary based on changes in economic and other conditions. Additionally, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowances for loan losses. Such agencies may require the recognition of adjustments to the allowance based on their judgment of information available to them at the time of their examinations.

Provision for Loan Losses

The provision for loan losses is the amount charged to earnings, which is necessary to maintain an adequate and appropriate allowance for loan losses. Accordingly, the factors, which influence changes in the allowance for loan losses, have a direct effect on the provision for loan losses. The allowance for loan losses changes from period to period as a result of a number of factors, the most significant of which for the Corporation include the following: (i) changes in the amounts of loans outstanding, which are used to estimate current probable loan losses; (ii) current charge-offs and recoveries of loans; (iii) changes in impaired loan valuation allowances; (iv) changes in credit grades within the portfolio, which arise from a deterioration or an improvement in the performance of the borrower; (v) changes in loss percentages; and (vi) changes in the mix of types of loans. In addition, the Corporation considers other, more subjective factors, which impact the credit quality of the portfolio as a whole and estimates allocations of allowance for loan losses for these factors, as well. These factors include loan concentrations, economic conditions and operational risks. Changes in these components of the allowance can arise from fluctuations in the underlying percentages used as related loss estimates for these factors, as well as variations in the portfolio balances to which they are applied. The net change in all of these components of the allowance for loan losses results in the provision for loan losses. For a more detailed discussion of the Corporation’s process for estimating the allowance for loan losses, see Allowance for Loan Losses.

The provision for loan losses was $1.4 million for the 2007 first quarter, while net charge-offs were $478,000, or 0.06 percent of average portfolio loans, for the period. For the same year-ago period, the provision for loan losses was $1.5 million and net charge-offs were $739,000, or 0.10 percent of average portfolio loans.

Market Risk Management

Asset-Liability Management and Interest Rate Risk

Interest rate risk is the exposure of earnings and capital to changes in interest rates. The objective of Asset-Liability Management (“ALM”) is to quantify and manage the change in interest rate risk associated with the Corporation’s balance sheet. The management of the ALM program includes oversight from the Board of Director’s Asset and Liability Committee (“Board ALCO”) and the Management Asset and Liability Committee (“Management ALCO”). Two primary metrics used in analyzing interest rate risk are earnings at risk (“EAR”) and economic value of equity (“EVE”). The Board of Directors has established limits on the EAR and EVE risk measures. Management ALCO, comprised of select members of senior management, is charged with measuring performance relative to those limits and reporting the Bank’s performance to Board ALCO. Interest rate risk is measured and monitored through simulation modeling. The process is validated regularly by an independent third party.

Both the EAR and the EVE risk measures were within policy guidelines as of March 31, 2007, and December 31, 2006.

Management considers EAR to be the best measure of short-term interest rate risk. This measure reflects the amount of net interest income that will be impacted by a change in interest rates over a 12- month time frame. A simulation model is used to run immediate and parallel changes in interest rates (rate shocks) from a base scenario using implied forward rates. At a minimum, rate shock scenarios are run at plus and minus 100, 200, and 300 basis points. From time to time, additional simulations are run to assess risk from changes in the slope of the yield curve. The simulation model projects the net interest income over the next 12 months for each scenario using consistent balance sheet growth projections and calculates the percentage change from the base scenario. Board ALCO has approved a policy limit for the change in EAR over a 12-month period of minus 10 percent to a plus or minus 200 basis point shock to interest rates. At March 31, 2007, the estimated EAR to a 200 basis point increase in rates was plus 5.5 percent while the estimated EAR to a 200 basis point decrease in rates was minus 6.3 percent. This compares with plus 4.7 percent and minus 5.6 percent, respectively, at December 31, 2006. A change in the earning asset and funding mix contributed to the increase in EAR in the declining-rate scenario.

Management considers EVE to be the best measure of long-term interest rate risk. This measure reflects the amount of net equity that will be impacted by changes in interest rates. Through simulation modeling, the Corporation estimates the economic value of assets and the economic value of liabilities. The difference between these two measures is the EVE. The EVE is calculated for a series of scenarios in which current rates are shocked up and down by 100, 200, and 300 basis points and compared to a base scenario using the current yield curve. Board ALCO has approved a policy limit for the percentage change in EVE of minus 15 percent to a plus or minus 200 basis point shock to interest rates. At March 31, 2007, the estimated EVE to a 200 basis point increase in rates was minus 7.6 percent, while the estimated EVE to a 200 basis point decrease in rates was plus 2.9 percent. At December 31, 2006, EVE risk was minus 7.4 percent and plus 3.1 percent, respectively.

The result of any simulation is inherently uncertain and will not precisely estimate the impact of changes in rates on net interest income or the economic value of assets and liabilities. Actual results may differ from simulated results due to, but not limited to, the timing and magnitude of the change in interest rates, changes in management strategies, and changes in market conditions.

Table Twelve summarizes as of March 31, 2007 the expected maturities and weighted average effective yields and rates associated with certain of the Corporation’s significant non-trading financial instruments. Cash and cash equivalents, federal funds sold, and interest-bearing bank deposits are excluded from Table Twelve as their respective carrying values approximate fair value. These financial instruments generally expose the Corporation to insignificant market risk as they have either no stated maturities or an average maturity of less than 30 days and interest rates that approximate market rates. However, these financial instruments could expose the Corporation to interest rate risk by requiring more or less reliance on alternative funding sources, such as long-term debt. The mortgage-backed securities are shown at their weighted-average expected life, obtained from an independent evaluation of the average remaining life of each security based on expected prepayment speeds of the underlying mortgages at March 31, 2007. These expected maturities, weighted-average effective yields, and fair values would change if interest rates change. Demand deposits, money market accounts, and certain savings deposits are presented in the earliest maturity window because they have no stated maturity. For interest rate risk analytical purposes, these non-maturity deposits are believed to have average lives longer than shown here.

Table Twelve
Market Risk



				Expected Maturity
(Dollars in thousands)	Total			1 Year		2 Years		3 Years		4 Years		5 Years		Thereafter

Assets
Debt securities
Fixed rate
Cost	$	734,303		$	342,055	$	240,383	$	85,143	$	42,363	$	8,657	$	15,702
Weighted-average effective yield		4.75	%
Fair value	$	729,158
Variable rate
Cost	$	172,277			28,937		29,076		25,634		926		4,998		82,706
Weighted-average effective yield		5.04	%
Fair value	$	168,604
Loans and loans held for sale
Fixed rate
Book value	$	954,591			210,218		219,887		152,833		133,736		109,953		127,964
Weighted-average effective yield		7.05	%
Fair value	$	940,344
Variable rate
Book value	$	2,553,115			1,252,596		367,177		188,612		105,061		80,736		558,933
Weighted-average effective yield		7.66	%
Fair value	$	2,556,946

Liabilities
Deposits
Fixed rate
Book value	$	1,659,461			1,477,260		156,717		13,396		6,595		4,256		1,237
Weighted-average effective yield		4.79	%
Fair value	$	1,663,899
Variable rate
Book value	$	1,185,783			299,851		299,863		299,350		131,770		72,763		82,186
Weighted-average effective yield		2.27	%
Fair value	$	1,109,187
Long-term borrowings
Fixed rate
Book value	$	345,921			50,055		70,058		125,061		100,064		21		662
Weighted-average effective yield		4.65	%
Fair value	$	336,521
Variable rate
Book value	$	181,857			120,000		—		—		—		—		61,857
Weighted-average effective yield		5.54	%
Fair value	$	179,408

Off-Balance-Sheet Risk

The Corporation is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Corporation. Included in loan commitments are commitments of $37.1 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. Commitments to extend credit are not recorded as an asset or liability by the Corporation until the instrument is exercised. Refer to Note 13 of the consolidated financial statements for further discussion of these commitments. The Corporation does not have any off-balance sheet financing arrangements, other than the trust preferred securities.

The following table presents, as of March 31, 2007, aggregated information and expected maturities of commitments.

Table Thirteen
Commitments



	Less than
(In thousands)	1 year		1-3 Years		4-5 Years		Over 5 Years		Total

Loan commitments	$	673,645	$	140,650	$	35,473	$	62,139	$	911,907
Lines of credit		32,253		1,991		1,880		449,389		485,513
Standby letters of credit		22,865		2,490		—		—		25,355

Total commitments	$	728,763	$	145,131	$	37,353	$	511,528	$	1,422,775

Commitments to extend credit, including loan commitments, standby letters of credit, and commercial letters of credit do not necessarily represent future cash requirements, in that these commitments often expire without being drawn upon.

Liquidity Risk

Liquidity is the ability to maintain cash flows adequate to fund operations and meet obligations and other commitments on a timely and cost-effective basis. Liquidity is provided by the ability to attract retail deposits, by current earnings, and by a strong capital base that enables the Corporation to use alternative funding sources that complement normal sources. Management’s asset-liability policy includes optimizing net interest income while continuing to provide adequate liquidity to meet continuing loan demand and deposit withdrawal requirements and to service normal operating expenses.

Liquidity is managed at two levels. The first is the liquidity of the Corporation. The second is the liquidity of the Bank. The management of liquidity at both levels is essential, because the Corporation and the Bank have different funding needs and sources, and each are subject to certain regulatory guidelines and requirements.

The primary source of funding for the Corporation includes dividends received from the Bank and proceeds from the issuance of common stock. In addition, the Corporation had commercial paper outstandings of $18.7 million at March 31, 2007. Primary uses of funds for the Corporation include repayment of commercial paper, share repurchases, and dividends paid to shareholders. During 2005, the Corporation issued trust preferred securities through specially formed trusts in an aggregate amount of $60.0 million. The proceeds from the sale of the trust preferred securities were used to purchase $61.9 million of subordinated debentures from the Corporation (the “Notes”). The Notes are presented as long-term borrowings in the consolidated balance sheet and are includable in Tier 1 capital for regulatory capital purposes, subject to certain limitations.

Primary sources of funding for the Bank include customer deposits, wholesale deposits, other borrowings, loan repayments, and available-for-sale securities. The Bank has access to federal funds lines from various banks and borrowings from the Federal Reserve discount window. In addition to these sources, the Bank is a member of the FHLB, which provides access to FHLB lending sources. At March 31, 2007, the Bank had an available line of credit with the FHLB totaling $1.3 billion with $785.9 million outstanding. At March 31, 2007, the Bank also had $175.0 million of federal funds lines with $44.0 million outstanding. Primary uses of funds include repayment of maturing obligations and growing the loan portfolio.

Management believes the Corporation’s and the Bank’s sources of liquidity are adequate to meet loan demand, operating needs, and deposit withdrawal requirements.

Capital Management

The Corporation views capital as its most valuable and most expensive funding source. The objective of effective capital management is to generate above-market returns on equity to the Corporation’s shareholders while maintaining adequate regulatory capital ratios. Some of the Corporation’s primary uses of capital include funding growth, asset acquisition, dividend payments, and common stock repurchases.

Select capital measures follow:

Table Fourteen
Capital Measures



	March 31					December 31
	2007					2006
(Dollars in thousands)	Amount		Ratio			Amount		Ratio

Total equity/total assets
First Charter Corporation	$	455,372		9.32	%	$	447,362		9.21	%
First Charter Bank		480,289		9.87			371,459		8.45

Tangible equity/tangible assets ⁽¹⁾
First Charter Corporation	$	371,362		7.74	%	$	362,294		7.59	%
First Charter Bank		396,279		8.29			351,246		8.03


⁽¹⁾		The tangible equity ratio excludes goodwill and other intangible assets from both the numerator and the denominator.

Shareholders’ equity at March 31, 2007, increased to $455.4 million, representing 9.3 percent of period-end assets, compared to $447.4 million, or 9.2 percent, of period-end assets at December 31, 2006. The increase was due mainly to net income of $12.4 million and $2.9 million of stock issued under stock-based compensation plans and the Corporation’s dividend reinvestment plan. These increases were partially offset by cash dividends of $0.195 per common share, which resulted in cash dividend declarations of $6.9 million for the three months ended March 31, 2007. In addition, the accumulated other comprehensive loss (after-tax unrealized losses on available-for-sale securities) decreased $578,000 to $5.3 million at March 31, 2007, compared to $5.9 million at December 31, 2006.

On January 23, 2002, the Corporation’s Board of Directors authorized the repurchase of up to 1.5 million shares of the Corporation’s common stock. As of March 31, 2007, the Corporation had repurchased a total of approximately 1.4 million shares of its common stock at an average per-share price of $17.52 under this authorization, which has reduced shareholders’ equity by $24.5 million. No shares were repurchased under this authorization during the three months ended March 31, 2007.

On October 24, 2003, the Corporation’s Board of Directors authorized the repurchase of up to 1.5 million additional shares of the Corporation’s common stock. At March 31, 2007, no shares had been repurchased under this authorization.

Based on these authorizations, the Corporation has existing authority to repurchase 1.6 million shares of its common stock. The Corporation anticipates repurchasing shares under this authority from time to time during 2007 under appropriate market conditions.

During 2005, the Corporation issued trust preferred securities through specially formed trusts in an aggregate amount of $60.0 million. The proceeds from the sale of the trust preferred securities were used to purchase $61.9 million of subordinated debentures from the Corporation (the “Notes”). The Notes are presented as long-term borrowings in the consolidated balance sheet and are includable in Tier 1 capital for regulatory capital purposes, subject to certain limitations.

The Corporation’s and the Bank’s various regulators have issued regulatory capital guidelines for U.S. banking organizations. Failure to meet the capital requirements can initiate certain mandatory and

discretionary actions by regulators that could have a material effect on the Corporation’s financial position and results of operations. At March 31, 2007, the Corporation and the Bank were classified as “well capitalized” under these regulatory frameworks.

The Corporation’s and the Bank’s actual capital amounts and ratios at March 31, 2007 follow:

Table Fifteen
Capital Ratios

For Capital

Adequacy Purposes

To Be Well Capitalized

Actual

Minimum

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

Leverage

First Charter Corporation

436,655

9.10

191,880

4.00

None

First Charter Bank

407,213

8.61

189,187

4.00

236,484

5.00

Tier I Capital

First Charter Corporation

436,655

10.81

161,640

4.00

None

First Charter Bank

407,213

10.09

161,490

4.00

242,236

6.00

Total Risk-Based Capital

First Charter Corporation

472,709

11.70

323,280

8.00

None

First Charter Bank

443,067

10.97

322,980

8.00

403,726

10.00

Regulatory Recommendations

Management is not presently aware of any current recommendations to the Corporation or to the Bank by regulatory authorities, which if they were to be implemented, would have a material effect on the Corporation’s liquidity, capital resources, or operations.

Recent Accounting Pronouncements and Developments

Note 2 to the consolidated financial statements discusses new accounting pronouncements adopted by the Corporation during 2007 and other recently issued pronouncements that have not yet been adopted by the Corporation. To the extent the adoption of new accounting pronouncements materially affects financial condition, results of operations, or liquidity, the effects are discussed in the applicable section of Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes to the Consolidated Financial Statements.

From time to time, the FASB issues exposure drafts for proposed statements of financial accounting standards. Such exposure drafts are subject to comment from the public, to revisions by the FASB and to final issuance by the FASB as statements of financial accounting standards. Management considers the effect of the proposed statements on the consolidated financial statements of the Corporation and monitors the status of changes to and proposed effective dates of exposure drafts.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Market Risk Management — Asset-Liability Management and Interest Rate Risk on pages 42-44 for Quantitative and Qualitative Disclosures about Market Risk.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of March 31, 2007, the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the Registrant’s disclosure controls and procedures (as defined in Rule 13(a)-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of the Registrant’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation and the identification of the material weaknesses in the Registrant’s internal control over financial reporting as described in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006 (the “Material Weaknesses”), the Registrant’s Chief Executive Officer and Chief Financial Officer have concluded that the Registrant’s disclosure controls and procedures were not effective to ensure that information required to be disclosed by the Registrant in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reporting within the time periods specified in the Securities Exchange Commission rules and forms.

Changes in Internal Control over Financial Reporting

As disclosed in Item 9A. Controls and Procedures of the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, management has begun to implement a comprehensive plan for remedying the Material Weaknesses (the “Remediation Plan”). In furtherance of the Remediation Plan, the following changes in the Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act), have occurred during or following the quarter ended March 31, 2007.

	•		The Registrant has evaluated its personnel resources and is focused on securing permanent skilled finance, tax and accounting resources. During the quarter ended March 31, 2007, a Strategic Initiatives Director, Financial Reporting Analyst and a Finance Administrator were hired in the Registrant’s finance department. In addition, subsequent to the end of the first quarter, a Financial Quality Assurance Director, Assistant Controller, Tax Manager, Business Support and Analysis Manager and a Quantitative Analyst were hired.

	•		The Registrant is enhancing its internal governance and compliance function. Periodic and regular meetings are being held with the internal governance and compliance functions to discuss and coordinate operational, compliance and financial matters as well as the progress of the Remediation Plan.

	•		The Registrant has engaged independent consultants to assist with the tax function and certain areas of the reconciliation and accounting functions until additional permanent resources are secured.

Except as discussed above, there have been no changes in the Registrant’s internal control over financial reporting that occurred during the quarter ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The Corporation and the Bank are defendants in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the consolidated results of operations, liquidity, or financial condition of the Corporation or the Bank.

Item 1A. Risk Factors

As previously disclosed, on April 5, 2007, the Corporation filed its Annual Report on Form 10-K for the year ended December 31, 2006. As a result of this filing, on April 9, 2007, NASDAQ notified the Corporation that it had regained compliance with NASDAQ Rule 4310 (c) (14). Consequently, the Corporation’s common stock is no longer subject to delisting by NASDAQ.

With the exception of the change noted above, there have been no material changes from those risk factors previously disclosed in Item 1A Risk Factors of Part I of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes the Corporation’s repurchases of its common stock during the quarter ended March 31, 2007.



					Total Number of		Maximum Number
					Shares Purchased		of Shares
	Total Number		Average Price		as Part of		That May Yet be
	of Shares		Paid		Publicly-Announced		Purchased under
Period	Purchased		Per Share		Plans or Programs		the Plans or Programs

January 1, 2007 — January 31, 2007		—		—		—		1,625,400
February 1, 2007 — February 28, 2007		—		—		—		1,625,400
March 1, 2007 — March 31, 2007		—		—		—		1,625,400

Total		—		—		—		1,625,400

On January 23, 2002, the Corporation’s Board of Directors authorized a stock repurchase plan to acquire up to 1.5 million shares of the Corporation’s common stock from time to time. As of March 31, 2007, the Corporation had repurchased 1,374,600 shares under this authorization.

On October 24, 2003, the Corporation’s Board of Directors authorized a stock repurchase plan to acquire up to an additional 1.5 million shares of the Corporation’s common stock from time to time. As of March 31, 2007, no shares have been repurchased under this authorization.

There were no repurchases of the Corporation’s common stock during the three months ended March 31, 2007. The maximum number of shares that may yet be repurchased under the plans or programs was 1,625,400 at March 31, 2007. These stock repurchase plans have no set expiration or termination date.

Item 3. Defaults Upon Senior Securities

Not Applicable.

Item 4. Submission of Matters to a Vote of Security Holders

Not Applicable.

Item 5. Other Information

Not Applicable.

Item 6. Exhibits


Exhibit No.		Description of Exhibits

10.1		Change in Control Agreement, dated as of January 26, 2007, by and between the Registrant and Sheila Stoke, incorporated herein by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, dated January 24, 2007.

12.1		Computation of Ratio of Earnings to Fixed Charges

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	FIRST CHARTER CORPORATION (Registrant)
Date: May 10, 2007	By:	/s/ Charles A. Caswell
		Charles A. Caswell
		Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer duly authorized to sign on behalf of the registrant)