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, 2006


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

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

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

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer o		Accelerated Filer þ		Non-Accelerated Filero

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

As of May 9, 2006 the Registrant had outstanding 31,083,364 shares of Common Stock, no par value.

First Charter Corporation

Form 10-Q for the Quarterly Period Ended March 31, 2006

INDEX


		Page
Part I Financial Information

Item 1. Financial Statements:

Consolidated Balance Sheets at March 31, 2006 and December 31, 2005		3

Consolidated Statements of Income for the Three Months Ended March 31, 2006 and 2005		4

Consolidated Statement of Shareholders’ Equity for the Three Months Ended March 31, 2006		5

Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005		6

Notes to Consolidated Financial Statements		7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3. Quantitative and Qualitative Disclosures about Market Risk		34

Item 4. Controls and Procedures		34

Part II Other Information

Item 1. Legal Proceedings		35

Item 1A. Risk Factors		35

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		35

Item 3. Defaults Upon Senior Securities		35

Item 4. Submission of Matters to a Vote of Security Holders		35

Item 5. Other Information		35

Item 6. Exhibits		36

Signature		37

PART 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

First Charter Corporation and Subsidiaries
Consolidated Balance Sheets


	March 31,			December 31,
	2006			2005
(Dollars in thousands, except share data)	(Unaudited)

Assets:
Cash and due from banks	$	95,382		$	119,080
Federal funds sold		2,706			2,474
Interest bearing bank deposits		3,745			3,998

Cash and cash equivalents		101,833			125,552

Securities available for sale (cost of $920,496 and $917,710; carrying amount of pledged collateral $588,258 and $557,132)		900,424			899,111
Loans held for sale		8,719			6,447

Loans		3,011,088			2,945,918
Less: Unearned income		(125	)		(173	)
Allowance for loan losses		(29,505	)		(28,725	)

Loans, net		2,981,458			2,917,020

Premises and equipment, net		107,298			106,773
Goodwill and other intangible assets		21,746			21,897
Other assets		161,878			155,620

Total assets	$	4,283,356		$	4,232,420


Liabilities:
Deposits, domestic:
Noninterest bearing demand	$	422,184		$	429,758
Interest bearing		2,378,162			2,369,721

Total deposits		2,800,346			2,799,479

Federal funds purchased and securities sold under agreements to repurchase		261,599			312,283
Commercial paper and other short-term borrowings		199,342			198,432
Long-term debt		642,843			557,859
Other liabilities		45,599			40,772

Total liabilities		3,949,729			3,908,825


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 30,974,393 and 30,736,936 shares		138,363			133,408
Common stock held in Rabbi Trust for deferred compensation		(974	)		(893	)
Deferred compensation payable in common stock		974			893
Retained earnings		207,409			201,442
Accumulated other comprehensive loss:
Unrealized loss on securities available for sale, net		(12,145	)		(11,255	)

Total shareholders’ equity		333,627			323,595

Total liabilities and shareholders’ equity	$	4,283,356		$	4,232,420

See accompanying notes to consolidated financial statements.

First Charter Corporation and Subsidiaries
Consolidated Statements of Income
(Unaudited)


	For the Three Months
	Ended March 31
(Dollars in thousands, except share and per share data)	2006		2005

Interest income:
Loans	$	50,260	$	36,446
Securities		9,311		14,784
Federal funds sold and interest bearing bank deposits		75		52

Total interest income		59,646		51,282

Interest expense:
Deposits		16,562		10,514
Federal funds purchased and securities sold under agreements to repurchase		2,807		1,327
Federal Home Loan Bank and other borrowings		8,187		8,867

Total interest expense		27,556		20,708

Net interest income		32,090		30,574
Provision for loan losses		1,519		1,900

Net interest income after provision for loan losses		30,571		28,674

Noninterest income:
Service charges on deposit accounts		6,698		6,236
Wealth management income		1,664		1,580
Loss on sale of securities		—		(49	)
Gain (loss) from equity method investments		545		(58	)
Mortgage services income		808		394
Brokerage services income		711		802
Insurance services income		4,290		3,512
Bank owned life insurance		827		827
Gain on sale of properties		81		529
ATM & debit card income		1,898		1,450
Other		719		591

Total noninterest income		18,241		15,814


Noninterest expense:
Salaries and employee benefits		17,693		15,569
Occupancy and equipment		4,770		4,381
Data processing		1,453		1,321
Marketing		1,288		1,080
Postage and supplies		1,231		1,208
Professional services		1,950		1,913
Telephone		579		528
Amortization of intangibles		150		131
Other		2,398		2,738

Total noninterest expense		31,512		28,869

Income before income taxes		17,300		15,619
Income tax expense		5,856		5,310

Net income	$	11,444	$	10,309


Net income per share:
Basic	$	0.37	$	0.34
Diluted	$	0.37	$	0.34
Weighted average shares:
Basic		30,859,461		30,234,683
Diluted		31,153,338		30,630,601

See accompanying notes to consolidated financial statements.

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


					Common Stock
					held in Rabbi			Deferred					Accumulated
					Trust for			Compensation					Other
	Common Stock				Deferred			Payable in		Retained			Comprehensive
(Dollars in thousands, except share data)	Shares		Amount		Compensation			Common Stock		Earnings			Income (Loss)			Total

Balance, December 31, 2005		30,736,936	$	133,408	$	(893	)	$	893	$	201,442		$	(11,255	)	$	323,595
Comprehensive loss:
Net income		—		—		—			—		11,444			—			11,444
Unrealized loss on securities available for sale, net		—		—		—			—		—			(890	)		(890	)

Total comprehensive loss																	10,554
Common stock purchased by Rabbi Trust for deferred compensation		—		—		(81	)		—		—			—			(81	)
Deferred compensation payable in common stock		—		—		—			81		—			—			81
Cash dividends declared		—		—		—			—		(5,477	)		—			(5,477	)
Stock options exercised and Dividend Reinvestment Plan stock issued		148,803		2,307		—			—		—			—			2,307
Restricted stock issued		88,654		2,118		—			—		—			—			2,118
Tax benefit from employees’ stock option and restricted stock plans		—		144		—			—		—			—			144
Stock-based compensation		—		386		—			—		—			—			386

Balance, March 31, 2006		30,974,393	$	138,363	$	(974	)	$	974	$	207,409		$	(12,145	)	$	333,627

See accompanying notes to consolidated financial statements.

First Charter Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)


	Three Months
	Ended March 31
(Dollars in thousands)	2006			2005

Cash flows from operating activities:
Net income	$	11,444		$	10,309
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,519			1,900
Depreciation		2,344			2,352
Amortization of intangibles		150			131
Stock-based compensation expense		513			42
Premium amortization and discount accretion, net		284			591
Net loss on securities available for sale transactions		—			49
Net (gain) loss on sale of foreclosed assets		(18	)		123
Write-downs on foreclosed assets		—			117
Net gain on sale of equipment		—			(21	)
(Gain) loss from equity method investments		(545	)		58
Net gain on sale property		(81	)		(529	)
Origination of mortgage loans held for sale		(38,833	)		(27,666	)
Proceeds from sale of mortgage loans held for sale		36,561			26,987
Change in cash surrender value of bank owned life insurance		(827	)		(827	)
Change in other assets		(1,283	)		4,640
Change in other liabilities		4,771			(11,044	)

Net cash provided by operating activities		15,999			7,212

Cash flows from investing activities:
Proceeds from sales of securities available for sale		10,037			157,897
Proceeds from maturities of securities available for sale		21,578			42,935
Purchase of securities available for sale		(34,684	)		(7,228	)
Net change in loans		(67,432	)		(270,565	)
Proceeds from sales of other real estate		546			443
Net purchases of premises and equipment		(2,869	)		(3,382	)

Net cash used in investing activities		(72,824	)		(79,900	)

Cash flows from financing activities:
Net change in demand, money market and savings accounts		32,354			6,521
Net change in certificates of deposit		(31,486	)		86,342
Net change in federal funds purchased and securities sold under repurchase agreements		(50,684	)		29,647
Net change in commerical paper and other short-term borrowings		910			87,478
Proceeds from issuance of long-term debt		84,984			(115,105	)
Proceeds from issuance of common stock		1,932			2,881
Tax benefit from employees’ stock option and restricted stock plans		144			—
Dividends paid		(5,048	)		(4,884	)

Net cash provided by financing activities		33,106			92,880

Net change in cash and cash equivalents		(23,719	)		20,192
Cash and cash equivalents at beginning of period		125,552			98,011

Cash and cash equivalents at end of period	$	101,833		$	118,203

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	25,051		$	20,113
Income taxes		295			10,104
Supplemental disclosure of non-cash transactions:
Transfer of loans to other real estate		1,475			4,487
Unrealized loss on securities available for sale (net of tax effect of ($583) and ($7,144), respectively)		(890	)		(10,850	)

See accompanying notes to consolidated financial statements.

First Charter Corporation and Subsidiaries
Notes to Interim Consolidated Financial Statements (Unaudited)
For the Three Months Ended March 31, 2006 and 2005

First Charter Corporation (the “Corporation”) is a regional financial services company with assets of $4.3 billion and is the holding company for First Charter Bank. As of March 31, 2006, First Charter operated 58 financial centers, four insurance offices and 139 ATMs located throughout North Carolina. 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, mortgages and a broad array of employee benefit programs. The results of operations of the Bank constitute a substantial majority of the consolidated net income, revenues and assets of the Corporation.

Note One — Accounting Policies

The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank, and variable interest entities (VIEs) where the Corporation is the primary beneficiary. In consolidation, all intercompany accounts and transactions have been eliminated.

The information contained in the interim consolidated financial statements, excluding information as of the fiscal year ended December 31, 2005, is unaudited. The consolidated financial statements are prepared in conformity with U.S. generally accepted accounting principles, which require management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, as well as the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

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 59 to 67 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005. With the exception of the Corporation’s policy regarding stock-based compensation adopted January 1, 2006, these policies have not materially changed from the disclosure in that report.

Stock-Based Compensation

In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123(R) (“SFAS No. 123(R)”), “Share-Based Payment”, which is a revision of FASB Statement No. 123 “Accounting for Stock-Based Compensation” and supersedes Accounting Principles Board Opinion No. 25 (“APB Opinion No. 25”), “Accounting for Stock Issued to Employees”. The Corporation adopted SFAS No. 123(R) on January 1, 2006, with no material effect on its consolidated financial statements. Under the fair value recognition provisions of SFAS No. 123(R), stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. If the vesting terms are not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The Corporation previously accounted for stock-based compensation under the provisions of APB No. 25. As permitted under SFAS No. 123(R), the Corporation adopted the “modified prospective” method on January 1, 2006. In accordance with the modified prospective method, compensation cost is recognized as a component of salary and employee benefits expense in the accompanying Consolidated Financial Statements beginning on January 1, 2006 (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after January 1, 2006 and (b) based on the requirements of SFAS 123 for all awards granted to employees prior to January 1, 2006 that remained unvested as of that date.

Note Two — Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the three months ended March 31, 2006 and 2005, respectively. Diluted net income per share reflects the potential dilution that could occur if the Corporation’s potential common stock and contingently issuable shares, which consist of dilutive stock options and restricted stock, were issued.

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


	Three Months
	Ended March 31
	2006		2005

Basic weighted average number of common shares outstanding		30,859,461		30,234,683
Dilutive effect arising from potential common stock issuances		293,877		395,918

Diluted weighted average number of common shares outstanding		31,153,338		30,630,601

The effects of outstanding antidilutive stock options are excluded from the computation of diluted net income per share. These amounts were 259,000 and 992,000 shares for the three months ended March 31, 2006 and 2005, respectively.

Dividends declared by the Corporation were $0.19 per share for both the three months ended March 31, 2006 and 2005.

Note Three — 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 to individual and commercial clients. The results of the Bank’s operations constitute a substantial majority of the consolidated net income, revenues and assets of the Corporation. Intercompany transactions and the parent company’s revenues, 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.

The Corporation continuously assesses its assumptions, methodologies and reporting classifications to better reflect the true economics of the Corporation’s business segments. Based on these continuous assessments, during the second quarter of 2005, the Corporation changed the composition of its reportable segments to collapse insurance, brokerage, mortgage and financial planning services into the Bank. Accordingly, the Corporation restated its business segment disclosure for prior periods.

Information regarding the reportable segment’s separate results of operations and segment assets for the three months ended March 31, 2006 and 2005, is provided in the following tables:


Three Months Ended March 31, 2006
*(Dollars in thousands)*	The Bank		Other			Eliminations			Totals

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

Net interest income (loss)		33,152		(1,062	)		—			32,090
Provision for loan losses		1,519		—			—			1,519
Total noninterest income		18,153		88			—			18,241
Total noninterest expense		31,449		63			—			31,512

Net income (loss) before income taxes		18,337		(1,037	)		—			17,300
Income taxes expense (benefit)		6,207		(351	)		—			5,856

Net income (loss)	$	12,130	$	(686	)	$	—		$	11,444


Total loans held for sale and loans, net	$	2,990,177	$	—		$	—		$	2,990,177
Total assets		4,264,850		421,395			(402,889	)		4,283,356


Three Months Ended March 31, 2005
(Dollars in thousands)	The Bank		Other			Eliminations			Totals

Total interest income	$	51,265	$	17		$	—		$	51,282
Total interest expense		20,466		242			—			20,708

Net interest income (loss)		30,799		(225	)		—			30,574
Provision for loan losses		1,900		—			—			1,900
Total noninterest income		15,831		(17	)		—			15,814
Total noninterest expense		28,819		50			—			28,869

Net income (loss) before income taxes		15,911		(292	)		—			15,619
Income taxes expense (benefit)		5,409		(99	)		—			5,310

Net income (loss)	$	10,502	$	(193	)	$	—		$	10,309


Total loans held for sale and loans, net	$	2,682,713	$	—		$	—		$	2,682,713
Total assets		4,495,572		380,744			(363,262	)		4,513,053

Note Four — Goodwill and Other Intangible Assets

The following is a summary of the gross carrying amount and accumulated amortization of amortized intangible assets and the carrying amount of unamortized intangible assets as of March 31, 2006 and December 31, 2005:


	March 31,						December 31,
	2006						2005
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
(Dollars in thousands)	Amount		Amortization		Amount		Amount		Amortization		Amount

Amortized intangible assets:
Noncompete agreements	$	1,037	$	987	$	50	$	1,037	$	979	$	58
Customer lists		2,676		1,125		1,551		2,676		998		1,678
Other intangibles ⁽¹⁾		379		144		235		379		128		251

Total	$	4,092	$	2,256	$	1,836	$	4,092	$	2,105	$	1,987


Unamortized intangible assets:
Goodwill	$	19,910	$	—	$	19,910	$	19,910	$	—	$	19,910


⁽¹⁾		Other intangibles include trade name and proprietary software.

Amortization expense totaled $150 thousand and $131 thousand for the three months ended March 31, 2006 and 2005, respectively.

The following table presents the estimated amortization expense for intangible assets:


	Noncompete		Customer		Other
(Dollars in thousands)	Agreements		Lists		Intangibles		Total

April — December 2006	$	22	$	347	$	45	$	414
2007		28		386		54		468
2008		—		298		46		344
2009		—		210		36		246
2010		—		125		27		152
2011 and after		—		185		27		212

Total	$	50	$	1,551	$	235	$	1,836

Note Five — Comprehensive Income

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

The following table presents the components of Comprehensive Income (Loss):


	For the Three Months Ended March 31,
	2006									2005
	Pre-Tax			Tax			After Tax			Pre-Tax			Tax			After Tax
*(Dollars in thousands)*	Amount			Effect			Amount			Amount			Effect			Amount

Comprehensive income:
Net income	$	17,300		$	5,856		$	11,444		$	15,619		$	5,310		$	10,309

Other comprehensive loss:
Unrealized losses on securities:
Unrealized losses arising during period		(1,473	)		(583	)		(890	)		(18,043	)		(7,163	)		(10,880	)
Less: Reclassification for realized (losses) gains		—			—			—			(49	)		(19	)		(30	)

Unrealized losses, net of reclassification	$	(1,473	)	$	(583	)	$	(890	)	$	(17,994	)	$	(7,144	)	$	(10,850	)

Total comprehensive income (loss)	$	15,827		$	5,273		$	10,554		$	(2,375	)	$	(1,834	)	$	(541	)

Note Six — Securities Available-for-Sale

Securities available-for-sale are summarized as follows:

March 31, 2006

Gross

Amortized

Unrealized

Fair

(Dollars in thousands)

Cost

Gains

Losses

Value

US government obligations

14,931

—

14,880

US government agency obligations

327,429

—

7,250

320,179

Mortgage-backed securities

419,886

266

13,871

406,281

State, county, and municipal obligations

104,180

953

445

104,688

Equity securities

49,070

337

—

49,407

Other

5,000

—

4,989

Total

920,496

1,556

21,628

900,424


	December 31, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
(Dollars in thousands)	Cost		Gains		Losses		Value

US government obligations	$	14,905	$	—	$	27	$	14,878
US government agency obligations		327,418		21		7,032		320,407
Mortgage-backed securities		417,891		335		12,776		405,450
State, county, and municipal obligations		108,298		1,125		427		108,996
Equity securities		44,198		188		—		44,386
Other		5,000		—		6		4,994

Total	$	917,710	$	1,669	$	20,268	$	899,111

Equity securities include Bank-owned stock in the Federal Home Loan Bank of Atlanta (FHLB) and Federal Reserve Bank. The cost basis (par value) in FHLB stock was $42.5 million and $37.5 million at March 31, 2006 and December 31, 2005, respectively, and the cost basis of Federal Reserve Bank stock was $5.6 million at both March 31, 2006 and December 31, 2005.

For the Corporation’s securities designated as temporarily impaired on March 31, 2006 the following table reflects the fair values and gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

As of March 31, 2006


	Less than 12 months					12 months or longer					Total
			Gross Unrealized					Gross Unrealized					Gross Unrealized
(Dollars in thousands)	Fair Value		Losses			Fair Value		Losses			Fair Value		Losses

US government obligations	$	14,880	$	(51	)	$	—	$	—		$	14,880	$	(51	)
US government agency obligations		15,999		(10	)		304,180		(7,241	)		320,179		(7,251	)
Mortgage-backed securities		114,626		(2,220	)		269,698		(11,650	)		384,324		(13,870	)
State, county and muncipal obligations		8,358		(99	)		11,075		(346	)		19,433		(445	)
Other		4,989		(11	)		—		—			4,989		(11	)

Total temporarily impaired securities	$	158,852	$	(2,391	)	$	584,953	$	(19,237	)	$	743,805	$	(21,628	)

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, of the $280.8 million of mortgage-backed securities and municipal investments that have been in an unrealized loss position for longer than one year, $277.8 million have an external credit rating of AAA by Standard & Poors and $3.0 million have a credit rating of AA. The remaining investments that have been in an unrealized loss position for longer than one year are US government obligations issued by the U.S. Treasury. At March 31, 2006, the Corporation had the ability and the intent to hold these investments to recovery of fair market value.

Note Seven — Loans and Allowance for Loan Losses

Loans are categorized as follows:


	March 31, 2006					December 31, 2005
(Dollars in thousands)	Amount		Percent			Amount		Percent

Commercial real estate	$	820,318		27.2	%	$	780,597		26.5	%
Commercial non real estate		213,338		7.1			233,409		7.9
Construction		583,288		19.4			517,392		17.6
Mortgage		565,166		18.8			573,007		19.4
Consumer		355,636		11.8			358,592		12.2
Home equity		473,342		15.7			482,921		16.4

Total loans	$	3,011,088		100.0	%	$	2,945,918		100.0	%

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


	Three Months Ended
	March 31,
(Dollars in thousands)	2006			2005

Balance, January 1	$	28,725		$	26,872

Provision for loan losses		1,519			1,900
Charge-offs		(1,229	)		(1,918	)
Recoveries		490			629

Net charge-offs		(739	)		(1,289	)

Balance, March 31	$	29,505		$	27,483

The table below summarizes the Corporation’s nonperforming assets and loans 90 days or more past due and still accruing interest at the dates indicated.


	March 31		December 31
(Dollars in thousands)	2006		2005

Nonaccrual loans	$	9,211	$	10,811
Other real estate owned		6,072		5,124

Total nonperforming assets		15,283		15,935

Loans 90 days or more past due and still accruing		—		—

Total nonperforming assets and loans 90 days or more past due and still accruing	$	15,283	$	15,935

At March 31, 2006, the recorded investment in individually impaired loans was $2.1 million, all of which were on nonaccrual status. The related allowance for loan losses on these loans was $0.5 million. At December 31, 2005, the recorded investment in individually impaired loans was $8.2 million, of which $4.3 million were on nonaccrual status and had specific reserves of $0.6 million and $3.9 million were accruing and had specific reserves of $0.7 million.

The average recorded investment in individually impaired loans for the three months ended March 31, 2006 and 2005 was $2.4 million and $12.0 million, respectively.

Note Eight — Stock-Based Compensation

First Charter Comprehensive Stock Option Plan. Under the terms of the First Charter Corporation Comprehensive Stock Option Plan (the “Comprehensive Stock Option Plan”), stock options (which can be incentive stock options or non-qualified stock options) may be periodically granted to key employees of the Corporation or its subsidiaries. The terms and vesting schedules of options granted under the Comprehensive Plan generally are determined by the Compensation Committee of the Board of Directors of the Corporation (the “Compensation Committee”). However, no options may be exercisable prior to six months following the grant date, and certain additional restrictions, including the term and exercise price, apply with respect to any incentive stock options. Under the Comprehensive Stock Option Plan, 480,000 shares of common stock are reserved for issuance. During the three months ended March 31, 2006, no shares were issued under this plan.

First Charter Corporation Stock Option Plan for Non-Employee Directors. In April 1997, the shareholders approved the First Charter Corporation Stock Option Plan for Non-Employee Directors (the “Director Plan”). Under the Director Plan, non-statutory stock options may be granted to non-employee Directors of the Corporation and its subsidiaries. The terms and vesting schedules of any options granted under the Director Plan generally 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, 2006, no shares were issued under this plan.

2000 Omnibus Stock Option and Award Plan. In June 2000, the shareholders approved the First Charter Corporation 2000 Omnibus Stock Option and Award Plan (the “2000 Omnibus Plan”). Under the 2000 Omnibus Plan, 2,000,000 shares of common stock were originally reserved for issuance. In April of 2005, the shareholders approved an amendment to the 2000 Omnibus Plan, authorizing an additional 1,500,000 shares for issuance, for a total of 3,500,000 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, including cash return on equity and 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, 2006, 69,250 stock options, 15,000 service-based nonvested shares and 58,500 performance-based nonvested shares were issued under this plan.

Restricted Stock Award Program. In April 1995, the shareholders approved the First Charter Corporation Restricted Stock Award Program (the “Restricted Stock Plan”). Awards of restricted stock (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 vest based on either three or five years of service. A maximum of 360,000 shares of common stock are reserved for issuance under the Restricted Stock Plan. During the three months ended March 31, 2006, 74,549 service-based nonvested shares were issued under this plan.

Stock-based compensation costs totaled $513,000 for the three months ended March 31, 2006, which consisted of $279,000 related to stock options, $107,000 related to performance-based nonvested shares and $127,000 related to service-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,
	2006			2005
Dividend yield		3.21	%		3.16	%
Risk free interest rate		4.72	%		3.87	%
Expected lives	8 years			7 years
Volatility		25	%		26	%

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 Company’s stock.

Pro forma net income as if the fair value based method had been applied to all awards is as follows:


	Three Months Ended
	March 31,
(Dollars in thousands, except per share data)	2006			2005
Net income, as reported	$	11,444		$	10,309
Total stock-based employee compensation expense included in the determination of reported net income		446			26
Total stock-based employee compensation expense determined under fair value based method for all awards, net of tax effect of $67 and $43, respectively		(446	)		(621	)

Pro forma net income	$	11,444		$	9,714


Net income per share:
Basic-as reported	$	0.37		$	0.34

Basic-pro forma	$	0.37		$	0.32


Diluted-as reported	$	0.37		$	0.34

Diluted-pro forma	$	0.37		$	0.32

The following is a summary of stock option activity under the Comprehensive Plan, the Director Plan and the 2000 Omnibus Plan during the period:

2006

Weighted

Weighted-

Average

Exercise

Remaining

Aggregate

(Option)

Contractual

Intrinsic

Price

Term (Years)

Value

Outstanding at January 1

2,638,058

21.09

Granted

69,250

23.68

Exercised

(115,250

)

16.52

883,380

Forfeited

(23,567

)

21.56

Expired

(7,400

)

24.66

Outstanding at March 31

2,561,091

21.35

4.54

6,699,388

Options exercisable at March 31

1,945,326

21.11

3.34

5,724,719

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

5.85

The weighted-average Black-Scholes fair value of options granted during the three months ended March 31, 2005 was $5.53 and the aggregate intrinsic value of options exercised was $1.4 million.

The following table presents the status and changes of nonvested shares in the Restricted Stock Plan and the Omnibus Plan:

Service-Based

Performance-Based

Weighted Average

Shares

Grant Price

Shares

Grant Price

Outstanding at December 31, 2005

32,647

22.9724

—

Granted

89,549

23.6600

58,500

23.6600

Vested

—

Forfeited

(895

)

22.3400

—

Outstanding at March 31, 2006

121,301

23.4847

58,500

23.6600

As of March 31, 2006, there were $2.4 million of total unrecognized compensation costs related to service-based nonvested share-based compensation arrangements granted under the Restricted Stock Plan and the Omnibus Plan and is expected to be recognized over a weighted-average period of 2.5 years.

As of March 31, 2006, there were $1.2 million of total unrecognized compensation costs related to performance-based nonvested share-based compensation arrangements granted under the Omnibus Plan and is expected to be recognized over a weighted-average period of 2.8 years.

Note Nine — Commitments, Contingencies and Off-Balance Sheet Risk

Commitments and Off-Balance Sheet Risk. The Corporation is party to various financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Corporation. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Standby letters of credit are recorded as a liability by the Corporation at the fair value of the obligation undertaken in issuing the guarantee. The fair value and carrying value at March 31, 2006 of standby letters of credit issued or modified during the three months ended March 31, 2006 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 exposure to credit risk was as follows:


	March 31,		December 31,
(Dollars in thousands)	2006		2005

Lines of Credit	$	458,556	$	441,855
Standby Letters of Credit		16,030		15,600
Loan Commitments		679,218		668,356

Total Commitments	$	1,153,804	$	1,125,811

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

The Corporation is currently under examination by the North Carolina Department of Revenue for 1999 and 2000 and is subject to examination for subsequent tax years. The Corporation received a proposed assessment for tax and interest of $3.6 million that the Corporation is appealing. The Corporation’s maximum exposure for tax and interest related to this assessment in excess of the current reserve is approximately $1.5 million, net of tax. The ultimate tax implications for 1999 and 2000 may impact tax years beyond 2000. Management believes there will be no material impact on the consolidated results of operations as a result of this examination.

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: (1) projected results in connection with management’s implementation of, or changes in, the Corporation’s business plan and strategic initiatives, including the recent balance sheet initiatives, are lower than expected; (2) competitive pressure among financial services companies increases significantly; (3) 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; (4) general economic conditions, in the markets in which the Corporation does business, are less favorable than expected; (5) risks inherent in making loans, including repayment risks and risks associated with collateral values, are greater than expected; (6) changes in the interest rate environment, or interest rate policies of the Board of Governors of the Federal Reserve System, may reduce interest margins and affect funding sources; (7) changes in market rates and prices may adversely affect the value of financial products; (8) legislation or regulatory requirements or changes thereto, including changes in accounting standards, may adversely affect the businesses in which the Corporation is engaged; (9) regulatory compliance cost increases are greater than expected; (10) the passage of future tax legislation, or any negative regulatory, administrative or judicial position, may adversely impact the Corporation; (11) 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 it operates; and (12) changes in the securities markets, including changes in interest rates, may adversely affect the Corporation’s ability to raise capital from time to time.

Overview

First Charter Corporation is a regional financial services company with assets of $4.3 billion and is the holding company for First Charter Bank. As of March 31, 2006, First Charter operated 58 financial centers, four insurance offices and 139 ATMs located throughout North Carolina. 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, mortgages and a broad array of employee benefit programs.

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 long- and short-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, financial management, brokerage and insurance. Other sources of noninterest income include securities gains or losses, 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 expenses.

First Quarter 2006 Highlights

The Corporation’s first quarter 2006 net income was $11.4 million, an increase of 11 percent from a year ago. Earnings per share increased to $0.37 from $0.34 per fully diluted share a year ago. Total revenues increased 9 percent to $50.3 million, compared to $46.4 million a year ago. The increase was driven by two factors. First, net interest income on a taxable-equivalent basis increased $1.5 million to $32.7 million as the net interest margin improved 34 basis points. The improvement in net interest income and the margin was largely attributable to First Charter’s balance sheet repositioning initiatives executed in the fourth quarter of 2005. Second, noninterest income increased $2.4 million or 15 percent due to higher insurance, mortgage and deposit revenues. Loan growth was strong as average balances increased $394.0 million or 15 percent compared to a year ago. Loan growth includes $73.3 million in average balances attributable to first quarter 2005 mortgage loan purchases. Credit quality continues to be very strong with net charge-offs only 0.10 percent of average total loans in the first quarter of 2006. The Corporation also continued with its growth strategy by opening three additional full-service financial centers and three ATMs in the Raleigh area.

The Community Banking Model

First Charter follows a community banking model. The community banking model is focused on delivering our clients with a broad array of financial products and solutions, delivered 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 both larger competitors that may have less flexibility, as well as local competition that may not have the array of products and services that First Charter can offer. First Charter competes against three 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 expand our clients expectations, being an employer of choice and providing exceptional value to shareholders, First Charter can achieve the profitability and growth goals it has set for itself.

Please refer to First Charter’s Annual Report on Form 10-K for the year ended December 31, 2005, for additional information with respect to the Corporation’s recent accomplishments and significant challenges.

Table One
Selected Financial Data


	For the Three Months Ended
	March 31,			December 31,			September 30,			June 30,			March 31,
(Dollars in thousands, except per share amounts)	2006			2005			2005			2005			2005

Income statement
Total interest income	$	59,646		$	58,639		$	59,080		$	55,604		$	51,282
Total interest expense		27,556			26,710			27,990			24,314			20,708

Net interest income		32,090			31,929			31,090			31,290			30,574
Provision for loan losses		1,519			1,795			2,770			2,878			1,900
Total noninterest income		18,241			39			17,043			17,317			15,814
Total noninterest expense		31,512			44,046			28,943			29,364			28,869

Net income (loss) before income taxes		17,300			(13,873	)		16,420			16,365			15,619
Income tax expense (benefit)		5,856			(5,543	)		4,368			5,085			5,310

Net income (loss)	$	11,444		$	(8,330	)	$	12,052		$	11,280		$	10,309


Per share data:
Basic net income (loss)	$	0.37		$	(0.27	)	$	0.39		$	0.37		$	0.34
Diluted net income (loss)		0.37			(0.27	)		0.39			0.37			0.34
Cash dividends declared		0.190			0.190			0.190			0.190			0.190
Period-end book value		10.77			10.53			10.82			10.73			10.31
Average shares outstanding — basic		30,859,461			30,678,743			30,575,440			30,409,307			30,234,683
Average shares outstanding — diluted		31,153,338			30,678,743			30,891,887			30,679,636			30,630,601
Ratios
Return on average shareholders’ equity ⁽¹⁾		14.12	%		(10.21	)%		14.57	%		14.12	%		13.21	%
Return on average assets ⁽¹⁾		1.10			(0.77	)		1.02			1.00			0.94
Net interest margin ⁽¹⁾		3.40			3.27			2.92			3.03			3.06
Average loans to average deposits		105.75			103.30			103.30			103.68			97.04
Average equity to average assets		7.82			7.52			7.03			7.05			7.13
Efficiency ratio ⁽²⁾		61.89			59.90			59.44			59.70			61.41
Selected period end balances
Securities available for sale	$	900,424		$	899,111		$	1,374,163		$	1,412,885		$	1,440,494
Loans held for sale		8,719			6,447			7,309			8,159			6,006
Loans, net		2,981,458			2,917,020			2,900,357			2,829,127			2,676,707
Allowance for loan losses		29,505			28,725			29,788			29,032			27,483
Total assets		4,283,356			4,232,420			4,699,722			4,633,236			4,513,053
Total deposits		2,800,346			2,799,479			2,872,993			2,751,385			2,702,708
Borrowings		1,103,784			1,068,573			1,438,388			1,503,322			1,451,756
Total liabilities		3,949,729			3,908,824			4,368,677			4,305,538			4,200,799
Total shareholders’ equity		333,627			323,596			331,045			327,698			312,254
Selected average balances
Loans and loans held for sale		2,945,908			2,932,195			2,904,954			2,788,438			2,551,876
Earning Assets ⁽³⁾		3,868,519			3,969,620			4,331,780			4,236,232			4,122,175
Total assets		4,203,273			4,303,821			4,665,301			4,543,846			4,439,768
Total deposits		2,785,632			2,838,566			2,812,165			2,689,390			2,629,795
Borrowings		1,049,529			1,099,350			1,471,482			1,491,636			1,443,909
Total shareholders’ equity		328,763			323,753			328,115			320,412			316,476


⁽¹⁾		Annualized

⁽²⁾		Noninterest expense less debt extinguishment expense and derivative termination costs divided by the sum of taxable equivalent net interest income plus noninterest income less (loss) gain on sale of securities.

⁽³⁾		The amounts in 2005 have been adjusted to correct the average balances presented in Table Six of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005.

Critical Accounting Estimates and Policies

The Corporation’s significant accounting policies are described in Note One of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005, on pages 57 to 69, as supplemented in this report with respect to the Corporation’s recently adopted stock-based compensation policy. 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, tax contingencies and derivative instruments. In many cases, there are numerous alternative judgments that could be used in the process of estimating values of assets or liabilities. Where alternatives exist, the Corporation has used the factors that 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 impact net income. For more information on the Corporation’s critical accounting policies, refer to pages 26 to 29 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2005.

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, 2006 and 2005 is presented in Table Two. Net interest income on a taxable-equivalent basis (“FTE”) is a non-GAAP (Generally Accepted Accounting Principles) performance measure used by management in operating the business which management believes provides investors with a more accurate picture of the interest margin for comparative purposes. The changes in net interest income (on a taxable-equivalent basis) for the three months ended March 31, 2006 and 2005 are analyzed in Table Three.

For the three months ended March 31, 2006, net interest income on a FTE basis amounted to $32.7 million, an increase of approximately 5 percent from $31.1 million for the three months ended March 31, 2005. The increase was primarily due to a $394.0 million increase in average loan balances, an increase in the percentage of earning assets funded by low-cost core deposits (money market, demand and savings accounts) and the balance sheet repositioning which occurred in late October 2005.

The net interest margin (tax-adjusted net interest income divided by average interest-earning assets) increased 34 basis points to 3.40 percent for the three months ended March 31, 2006, compared to 3.06 percent in the same 2005 period. The improvements were primarily the result of the previously disclosed October 2005 balance sheet repositioning and improved pricing discipline.

The increase in earning asset yields of 121 basis points was driven by two factors. First, loan yields increased 111 basis points to 6.91 percent and securities yields increased 39 basis points to 4.31 percent. Second, the percentage of higher yielding assets improved as a result of the balance sheet repositioning. The percentage of investment securities to total earning assets was reduced from 35 percent to 23 percent. Interest earning asset average balances decreased $253.7 million to $3.87 billion at March 31, 2006 compared to $4.12 billion for the same 2005 period. The decrease was primarily due to the balance sheet repositioning which resulted in a $646.1 million decline in average securities balances. This was partially offset by $394.0 million growth in the Corporation’s loan average balances compared to March 31, 2005. Loan balances increased, in part, due to the purchase of whole loan ARMs during the first quarter of 2005, which contributed $73.3 million to the increase in average balances.

The cost of interest bearing liabilities increased 102 basis points compared to the first quarter of 2005. This was comprised of a 94 basis point increase in interest bearing deposit costs to 2.83 percent while other borrowing costs increased 143 basis points to 4.25 percent. Interest-bearing liability average balances decreased $278.4 million compared to March 31, 2005. The decrease was primarily due to the balance sheet repositioning which resulted in a $394.4 million decline in other borrowings average balances. This decline in interest bearing liabilities average balances was partially offset by a $155.8 million increase in interest-bearing deposit average balances compared to March 31, 2005, driven by a $103.6 million increase in money market average balances.

The following table compares interest income and yields for interest earning asset average balances and interest expense and rates paid on interest bearing liability average balances for the three months ended March 31, 2006 and 2005. In addition, the table includes the net interest margin.

Table Two
Average Balances and Net Interest Income Analysis


	First Quarter 2006							First Quarter 2005
			Interest		Average					Interest		Average
	Average		Income/		Yield/Rate			Average		Income/		Yield/Rate
(Dollars in thousands)	Balance		Expense		Paid⁽⁵⁾			Balance		Expense		Paid⁽⁵⁾

Interest earning assets:
Loans and loans held for sale ^{(1) (2) (3)}	$	2,945,908	$	50,306		6.91	%	$	2,551,876	$	36,499		5.80	%
Securities — taxable		808,399		8,308		4.11			1,448,157		13,813		3.82
Securities — nontaxable		106,361		1,544		5.81			112,717		1,493		5.30
Federal funds sold		3,223		36		4.53			1,528		9		2.43
Interest bearing bank deposits		4,628		39		3.42			7,897		43		2.20

Total earning assets⁽⁴⁾		3,868,519		60,233		6.29			4,122,175		51,857		5.08

Cash and due from banks		97,893							93,505
Other assets		236,861							224,088

Total assets	$	4,203,273						$	4,439,768

Interest bearing liabilities:
Demand deposits		931,780		4,298		1.87			807,835		1,536		0.77
Savings deposits		120,096		64		0.22			123,221		70		0.23
Other time deposits		1,321,036		12,200		3.75			1,325,878		8,908		2.72
Other borrowings		1,049,529		10,994		4.25			1,443,909		10,194		2.82

Total interest bearing liabilities		3,422,441		27,556		3.27			3,700,843		20,708		2.25

Noninterest bearing sources:
Noninterest bearing deposits		412,720							372,861
Other liabilities		39,349							49,588
Shareholders’ equity		328,763							316,476

Total liabilities and shareholders’ equity	$	4,203,273						$	4,439,768

Net interest spread						3.02							2.83
Impact of noninterest bearing sources						0.38							0.23

Net interest income/ yield on earning assets			$	32,677		3.40	%			$	31,149		3.06	%


⁽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 loan fees and amortization of deferred loan fees of approximately $745 and $467 for the first quarter of 2006 and 2005, respectively.

⁽⁴⁾		Yields on nontaxable securities and loans are stated on a taxable-equivalent basis, assuming a Federal tax rate of 35 percent, applicable state taxes for the first quarter of 2006 and 2005. The adjustments made to convert to a taxable-equivalent basis were $587 and $575 for the first quarter of 2006 and 2005, respectively.

⁽⁵⁾		Annualized

Changes in net interest income for the three months ended March 31, 2006 and March 31, 2005 are as follows:

Table Three
Volume and Rate Variance Analysis

Three Months Ended

March 31, 2006 versus March 31, 2005

Increase (Decrease) in Net Interest Income

Due to Change in Rate and Volume ⁽¹⁾

2006

2005

Income/

(Dollars in thousands)

Expense

Rate

Volume

Expense

Interest income:

Loans and loans held for sale ⁽²⁾

50,306

7,624

6,183

36,499

Securities — taxable

8,308

834

(6,339

)

13,813

Securities — nontaxable ⁽²⁾

1,544

139

(88

)

1,493

Federal funds sold

Interest bearing bank deposits

(23

)

Total interest income

60,233

8,627

(251

)

51,857

Interest expense:

Demand deposits

4,298

2,359

403

1,536

Savings deposits

)

Other time deposits

12,200

3,331

(39

)

8,908

Other borrowings

10,994

4,257

(3,457

)

10,194

Total interest expense

27,556

9,943

(3,095

)

20,708

Net interest income

32,677

(1,316

)

2,844

31,149


⁽¹⁾		The changes for each category of income and expense are divided between the portion of change attributable to the variance in rate or volume for that category. The amount of change that cannot be separated is allocated to each variance proportionately.

⁽²⁾		Income on nontaxable securities and loans are stated on a taxable-equivalent basis. Refer to *Table Two* for further details.

Noninterest Income

The major components of noninterest income are derived from service charges on deposit accounts, mortgage, brokerage, insurance and wealth management. In addition, the Corporation realizes securities gains and losses, gains and losses from transactions involving bank owned property and income from its BOLI policies.

Noninterest income increased $2.4 million, or 15 percent, to $18.2 million for the three months ended March 31, 2006 compared to the same period in 2005. This improvement was primarily due to a $0.8 million increase in insurance revenues resulting from the early receipt of revenue traditionally received in the second quarter, a $0.5 million increase in service charges resulting from increased NSF volume and a $0.5 million increase in ATM, debit card and merchant income as a result of increased transaction volume. Mortgage loan fees increased $0.4 million as the Corporation sold a majority of its current mortgage loan production, in contrast to the 2005 first quarter. In addition, the Corporation realized gains of $0.5 million in its SBIC/Venture Capital portfolio, compared to a loss of $0.1 million in the first quarter of 2005. Property sale gains of $0.1 million were recognized in the first quarter of 2006 compared to $0.6 million in the first quarter of 2005.

The following table compares noninterest income for the periods indicated.

Table Four
Noninterest Income


	Three Months
	Ended March 31					Increase/(Decrease)
(Dollars in thousands)	2006		2005			Amount			Percent

Service charges on deposit accounts	$	6,698	$	6,236		$	462			7.4	%
Wealth management income		1,664		1,580			84			5.3
Loss on sale of securities		—		(49	)		49			N/A
Gain (loss) from equity method investments		545		(58	)		603			1,039.7
Mortgage services income		808		394			414			105.1
Brokerage services income		711		802			(91	)		(11.3	)
Insurance services income		4,290		3,512			778			22.2
Bank owned life insurance		827		827			—			—
Gain on sale of property		81		529			(448	)		(84.7	)
ATM & debit card income		1,898		1,450			448			30.9
Other		719		591			128			21.7

Total noninterest income	$	18,241	$	15,814		$	2,427			15.3	%

Noninterest Expense

Noninterest expense is primarily comprised of operating expenses for the Corporation. The major components are salaries and employee benefits, occupancy and equipment, professional fees and other operating expenses.

Noninterest expense increased $2.6 million to $31.5 million compared to the first quarter of 2005. Of this, $1.3 million is attributable to expenses related to the Corporation’s Raleigh investments and a recent de novo financial center in Charlotte.

Salaries and employee benefits increased $2.1 million compared to the first quarter of 2005, of which $0.8 million is due to additional personnel related to the Raleigh market expansion and the Charlotte de novo branch. Expenses associated with equity-based compensation (SFAS No. 123(R)) totaled $0.5 million, while increased commission-based compensation and higher medical costs contributed $0.4 million and $0.1 million, respectively, toward the increase. In addition, occupancy and equipment increased $0.4 million due to additional financial center lease and depreciation expenses, of which $0.3 million was related to additional financial centers in Raleigh and Charlotte.

Marketing costs increased $0.2 million over the first quarter of 2005 primarily due to the Raleigh market entry and other initiatives.

The following table compares noninterest expense for the periods indicated.

Table Five
Noninterest Expense


	Three Months
	Ended March 31				Increase/(Decrease)
(Dollars in thousands)	2006		2005		Amount			Percent

Salaries and employee benefits	$	17,693	$	15,569	$	2,124			13.6	%
Occupancy and equipment		4,770		4,381		389			8.9
Data processing		1,453		1,321		132			10.0
Marketing		1,288		1,080		208			19.3
Postage and supplies		1,231		1,208		23			1.9
Professional services		1,950		1,913		37			1.9
Amortization of intangibles		150		131		19			14.5
Telephone		579		528		51			9.7
Other		2,398		2,738		(340	)		(12.4	)

Total noninterest expense	$	31,512	$	28,869	$	2,643			9.2	%

Income Tax Expense

Income tax expense for the three months ended March 31, 2006 was $5.9 million for an effective tax rate of 33.9 percent, compared to $5.3 million representing an effective tax rate of 34.0 percent for the same period of 2005.

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. Valuations are determined as of a date within close proximity to the end of the reporting period based on available quoted market prices or quoted market prices for similar securities if a quoted market price is not available.

At March 31, 2006, securities available-for-sale were $900.4 million or 22.9 percent of total earning assets, compared to $899.1 million or 23.3 percent of total earning assets at December 31, 2005. Pre-tax unrealized net losses on securities available-for-sale were $20.1 million at March 31, 2006, compared to pre-tax unrealized net losses of $18.6 million at December 31, 2005. To mitigate the risk of unrealized losses increasing due to rising interest rates, the Corporation’s current investment strategy focuses on holding shorter duration securities with more predictable cash flows in a variety of interest rate scenarios. This will allow the Corporation to reinvest the cash flows of the portfolio into higher rate securities or fund loan growth in a rising interest rate environment. The weighted average duration of the portfolio was 2.3 years at March 31, 2006 compared to 2.5 years at December 31, 2005.

Loan Portfolio

The Corporation’s loan portfolio consists of six major categories: Commercial Non Real Estate, Commercial Real Estate, Construction, Mortgage, Consumer, and Home Equity. 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 tenor can range out to 30 years. In addition, the Corporation has a program in which it buys and sells portions of commercial real estate, commercial non real estate and construction 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 program enables the Corporation to diversify both its geographic and its total exposure risk.

Gross loans increased $65.2 million, or 9 percent annualized, to $3.01 billion at March 31, 2006 compared to $2.95 billion at December 31, 2005. The growth was driven by construction and commercial real estate loans which increased $65.9 million and $39.7 million, respectively. Mortgage loans declined $7.8 million due, in part, to normal loan amortization and the Corporation’s strategy of selling most of its new mortgage production in the secondary market. Home equity loans declined $9.6 million partly as a result of customers refinancing adjustable rate home equity loans into fixed rate first mortgage loans. Commercial non real estate loans declined $20.1 million and consumer loans declined $3.0 million. In late 2005 and early 2006, the Corporation expanded into the Raleigh, North Carolina market with four de novo financial centers. On March 31, 2006 First Charter had $42.1 million in loans balances from the Raleigh market.

The table below summarizes loans in the classifications indicated.

Table Six
Loan Portfolio Composition


	March 31,			%			December 31,			%
(Dollars in thousands)	2006			of Total Loans			2005			of Total Loans

Commercial real estate	$	820,318			27.2	%	$	780,597			26.5	%
Commercial non real estate		213,338			7.1			233,409			7.9
Construction		583,288			19.4			517,392			17.6
Mortgage		565,166			18.8			573,007			19.4
Consumer		355,636			11.8			358,592			12.2
Home equity		473,342			15.7			482,921			16.4

Total loans		3,011,088			100.0			2,945,918			100.0

Less — allowance for loan losses		(29,505	)		(1.0	)		(28,725	)		(1.0	)
Unearned income		(125	)		(0.0	)		(173	)		(0.0	)

Loans, net	$	2,981,458			99.0	%	$	2,917,020			99.0	%

Deposits

Deposits totaled $2.80 billion at March 31, 2006, a slight increase from December 31, 2005. The growth in deposits was primarily focused in lower-cost core deposits. Period-end core deposits increased $32.4 million to $1.5 billion at March 31, 2006. Retail certificates of deposit (“CDs”) declined $38.8 million from December 31, 2005 to $877.8 million due in large part to maturing municipal CDs which the Corporation elected not to bid on at unprofitable levels. The Corporation utilizes brokered CDs, which increased $7.3 million to $412.5 million, as an alternative source of cost-effective funding.

Other Borrowings

Other borrowings consist of Federal Funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term borrowings, and long-term borrowings. At March 31, 2006, the Bank had available federal funds lines totaling $100.0 million with $12.5 million outstanding compared to $25.0 million outstanding at December 31, 2005. Securities sold under agreements to repurchase totaled $249.1 million at March 31, 2006 compared to $287.3 million at December 31, 2005.

The Corporation issues commercial paper as another source of short-term funding. Commercial paper outstanding at March 31, 2006 was $24.3 million compared to $58.4 million at December 31, 2005.

Other short-term borrowings include FHLB borrowings with an original maturity of one year or less. During the first quarter of 2006, short-term FHLB borrowings increased $35 million to $175.0 million, as rates were lower than other wholesale funding sources.

Long-term borrowings represent FHLB borrowings with original maturities greater than one year and subordinated debentures related to trust preferred securities. At March 31, 2006, the Bank had $581.0 million of long-term FHLB borrowings compared to $496.0 million at December 31, 2005. In addition, the Corporation had $61.9 million of subordinated debentures at both March 31, 2006 and December 31, 2005.

Credit Risk Management

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

Loan Administration and Underwriting

The Bank’s Chief Risk Officer is responsible for the continuous assessment of the Bank’s risk profile as well as making any necessary adjustments to policies and procedures. Commercial loan relationships less than $750,000 may be approved by experienced commercial loan officers, within their loan authority. Commercial and commercial real estate loans are approved by signature authority requiring at least two experienced officers for relationships greater than $750,000. The exceptions to this include City Executives (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. Commitments over $5.0 million are further reviewed by senior lending officers of the Bank, the Chief Risk Officer and the Credit Risk Management Committee comprised of executive and senior management. In addition, commitments over $10.0 million are reviewed by the Board of Directors Loan Committee. These oversight committees provide policy, process, product and specific relationship direction to the lending personnel. As of March 31, 2006, the Corporation had a legal lending limit of $58.8 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.

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 decisioning 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, 2006, the substantial majority of the total loan portfolio, as well as a substantial portion of the commercial and real estate portfolio, represents loans to borrowers within the Charlotte and Raleigh

Metro regions. The diversity of the Charlotte and Raleigh Metro regions’ economic base tends to provide a stable lending environment; however, an economic downturn in 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 the 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 previously discussed, the Corporation repositioned its balance sheet in the fourth quarter of 2005. As a result, the Corporation extinguished $222 million in debt and terminated the related interest rate swaps. As of March 31, 2006 and December 31, 2005, 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, 2006, no loans were 90 days or more past due and still accruing interest.

The table below summarizes the Corporation’s nonperforming assets and loans 90 days or more past due and still accruing interest as of the dates indicated.

Table Seven
Nonperforming Assets


	March 31			December 31			September 30			June 30			March 31
(Dollars in thousands)	2006			2005			2005			2005			2005

Nonaccrual loans	$	9,211		$	10,811		$	7,071		$	9,858		$	9,282
Other real estate owned		6,072			5,124			6,079			6,390			7,648

Total nonperforming assets		15,283			15,935			13,150			16,248			16,930

Loans 90 days or more past due and still accruing interest		—			—			—			—			—

Total nonperforming assets and loans 90 days or more past due and still accruing interest	$	15,283		$	15,935		$	13,150		$	16,248		$	16,930


Nonperforming assets as a percentage of:
Total assets		0.36	%		0.38	%		0.28	%		0.35	%		0.38	%
Total loans and other real estate owned		0.51			0.54			0.45			0.57			0.62
Nonaccrual loans as a percentage of loans		0.31			0.37			0.24			0.34			0.34
Ratio of allowance for loan losses to nonperforming loans		3.20	x		2.66	x		4.21	x		2.95	x		2.96	x

Nonaccrual loans totaled $9.2 million at March 31, 2006, representing a $1.6 million decrease from $10.8 million at December 31, 2005. The decrease was primarily due to a previously disclosed $1.6 million paydown of one commercial loan which moved to nonaccrual status in the fourth quarter of 2005 and the transfer of several consumer loans to OREO. Correspondingly, OREO increased $1.0 million from December 31, 2005. Nonperforming assets as a percentage of total loans and other real estate owned decreased to 0.51 percent at March 31, 2006 compared to 0.54 percent at December 31, 2005 and 0.62 percent at March 31, 2005.

Nonaccrual loans at March 31, 2006 and December 31, 2005 were not concentrated in any one industry and primarily consisted of loans secured by real estate. Nonaccrual loans as a percentage of loans may increase as economic conditions change. Management has taken 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 No. 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 by Credit Risk Management and, along with a narrative analysis, comprise the Corporation’s allowance for loan losses model. The resulting components are used by management to determine the adequacy of the allowance for loan losses.

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

During the three months ended March 31, 2006, 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, 2006, the Corporation noted that economic conditions are mixed; however, management concluded that the impact on borrowers and local industries in the Corporation’s primary market area did not change significantly during the period. Accordingly, the Corporation did not modify its loss estimate percentage attributable to economic factors in its allowance for loan losses model.

The Corporation continuously reviews its portfolio for any concentrations of loans to any one borrower or industry. To analyze its concentrations, the Corporation prepares various reports showing total loans to borrowers by industry, as well as reports showing total loans to one borrower. At the present time, the Corporation does not believe it is overly concentrated 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. The percent of additional allocation for the operational reserve has not changed in recent periods.

Table Eight
Allowance For Loan Losses


	Three Months Ended
	March 31,
(Dollars in thousands)	2006			2005

Balance, January 1	$	28,725		$	26,872

Loan charge-offs:
Commercial non real estate		251			511
Commercial real estate		75			553
Mortgage		11			49
Consumer		501			601
Home equity		391			204

Total loans charged-off		1,229			1,918

Recoveries of loans previously charged-off:
Commercial non real estate		328			439
Consumer		162			190

Total recoveries of loans previously charged-off		490			629

Net charge-offs		739			1,289

Provision for loan losses		1,519			1,900

Balance, March 31	$	29,505		$	27,483


Average loans	$	2,939,233		$	2,547,226
Net charge-offs to average loans (annualized)		0.10	%		0.21	%
Allowance for loan losses to gross loans		0.98			1.02

The allowance for loan losses was $29.5 million or 0.98 percent of gross loans at March 31, 2006 compared to $28.7 million or 0.98 percent of gross loans at December 31, 2005 and $27.5 million or 1.02 percent of gross loans at March 31, 2005. The lower allowance for loan loss ratio compared to a year ago is related to the Corporation’s improved credit quality trends.

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 mix of types of loans; (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 amounts of loans outstanding, which are used to estimate current probable loan losses. In addition, the Corporation considers other, more subjective factors which impact the credit quality of the portfolio as a whole and estimates allocations of allowance for loan losses for these factors, as well. These factors include loan concentrations, economic conditions and operational risks. Changes in these components of the allowance can arise from fluctuations in the underlying percentages used as related loss estimates for these factors, as well as variations in the portfolio balances to which they are applied. The net change in all of these components of

the allowance for loan losses results in the provision for loan losses. For a more detailed discussion of the Corporation’s process for estimating the allowance for loan losses, see Allowance for Loan Losses.

The provision for loan losses for the three months ended March 31, 2006 amounted to $1.5 million compared to $1.9 million a year ago. The decrease in the provision for loan losses was primarily attributable to a $0.6 million decrease in net charge-offs. Net charge-offs for the three months ended March 31, 2006 amounted to $0.7 million, or 0.10 percent of average loans, compared to $1.3 million, or 0.21 percent of average loans for the same 2005 period.

Market Risk Management

Asset-Liability Management and Interest Rate Risk

The Corporation’s primary interest rate risk management objective is to maximize net interest income across a broad range of interest rate scenarios, subject to risk tolerance approval by Management and the Board of Directors. Management primarily analyzes interest rate risk in two fundamentally different ways: earnings simulation and market value of equity. The first method uses an earnings simulation model to assess the amount of near-term earnings at risk (net interest income at risk over a 12 month horizon) due to changes in interest rates. In analyzing interest rate sensitivity for policy measurement, net interest income is simulated in plus and minus 200 basis point rate shock scenarios relative to the implied forward interest rate scenario for the next 12 months. Under the Corporation’s policy, the limit for near-term earnings at risk is 10 percent of net interest income. At March 31, 2006, First Charter estimated that its net interest income at risk to a plus and minus 200 basis point rate shock relative to the implied forwards was a positive 5 percent and negative 5 percent, respectively.

The second method management uses to analyze interest rate risk is to calculate the market value of equity for the Corporation. This calculation discounts the anticipated cash flows of a static balance sheet using current rates. Management then recalculates the Corporation’s market value of equity in plus and minus 200 basis point rate shock scenarios. The Corporations has established a 15 percent limit for the market value of equity at risk for a 200 basis point rate shock. At March 31, 2006, the Corporation’s market value at risk for a 200 basis point increase and decrease relative to the implied forward rate forecast was a negative 8 percent and positive 5 percent, respectively.

Management also analyzes interest rate risk in parallel current and forward interest rate scenarios beyond the 200 basis point rate shocks mentioned above. In addition, Management analyzes interest rate risk under various interest rate scenarios that involve changes in the relationship between various market rate indices.

Management uses a variety of tools to manage the Corporation’s interest rate risk including, but not limited to, loan and deposit pricing, its choice of tenor and repricing characteristics on its wholesale borrowings, its choice of the tenor and repricing characteristics of its investment portfolio, and from time to time, various derivative products.

Table Nine summarizes 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 Nine as their respective carrying values approximate fair values. These financial instruments generally expose the Corporation to insignificant market risk as they have either no stated maturities or an average maturity of less than 30 days and interest rates that approximate market rates. However, these financial instruments could expose the Corporation to interest rate risk by requiring more or less reliance on alternative funding sources, such as long-term debt. The mortgage-backed securities are shown at their weighted average expected life, obtained from an outside evaluation of the average remaining life of each security based on expected prepayment speeds of the underlying mortgages at March 31, 2006. These expected maturities, weighted average effective yields and fair values will change if interest rates change. Demand deposits, money market accounts and certain savings deposits are presented in the earliest maturity window

because they have no stated maturity. For interest rate risk analytical purposes, these non-maturity deposits are believed to have average lives longer than shown here.

Table Nine
Market Risk


March 31, 2006
				Expected Maturity
(Dollars in thousands)	Total			1 Year		2 Years		3 Years		4 Years		5 Years		Thereafter

Assets
Debt securities
Fixed rate
Book value	$	768,912		$	198,004	$	272,597	$	185,871	$	38,731	$	33,707	$	40,002
Weighted average effective yield		4.31	%
Fair value	$	752,211
Variable rate
Book value	$	102,513			37,657		38,005		21,851		—		—		5,000
Weighted average effective yield		4.37	%
Fair value	$	98,808
Loans and loans held for sale
Fixed rate
Book value	$	774,589			155,002		144,011		155,908		83,645		106,933		129,090
Weighted average effective yield		6.40	%
Fair value	$	762,951
Variable rate
Book value	$	2,245,093			850,520		343,983		249,173		103,396		100,128		597,893
Weighted average effective yield		7.31	%
Fair value	$	2,249,593

Liabilities
Deposits
Fixed rate
Book value	$	1,290,254			1,064,822		178,800		34,434		7,904		3,966		328
Weighted average effective yield		3.75	%
Fair value	$	1,288,791
Variable rate
Book value	$	1,087,908			277,718		277,206		276,403		121,705		63,582		71,294
Weighted average effective yield		1.87	%
Fair value	$	1,025,956
Long-term borrowings
Fixed rate
Book value	$	260,986			110,052		50,054		50,057		60		50,074		689
Weighted average effective yield		4.09	%
Fair value	$	257,098
Variable rate
Book value	$	381,857			200,000		—		120,000		—		—		61,857
Weighted average effective yield		5.66	%
Fair value	$	382,341

Off-Balance Sheet Risk

The Corporation is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated financial statements. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Corporation. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Standby letters of credit are recorded as a liability by the Corporation at the fair value of the obligation undertaken in issuing the guarantee. Commitments to extend credit are not recorded as an asset or liability by the Corporation until the instrument is exercised. Refer to Note Nine of the consolidated financial statements for further discussion of commitments. The Corporation does not have any off-balance sheet financing arrangements, other than the Trust Securities.

The following table presents aggregated information about commitments of the Corporation, which could impact future periods.

Table Ten
Commitments

As of March 31, 2006


	Amount of Commitment Expiration Per Period
	Less than								Total Amounts
(Dollars in thousands)	1 year		1-3 Years		4-5 Years		Over 5 Years		Committed

Lines of Credit	$	32,345	$	2,741	$	1,841	$	421,629	$	458,556
Standby Letters of Credit		13,496		2,534		—		—		16,030
Loan Commitments		500,401		131,338		32,482		14,997		679,218

Total Commitments	$	546,242	$	136,613	$	34,323	$	436,626	$	1,153,804

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 each of 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 equity securities. In addition, the Corporation had a $25.0 million bank line of credit with no outstandings and commercial paper outstandings of $24.3 million at March 31, 2006. Primary uses of funds for the Corporation include repayment of commercial paper, share repurchases and dividends paid to shareholders. During the second and third quarter of 2005, the Corporation issued Trust Securities through specially formed trusts. The Trust Securities 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 securities available-for-sale. 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, 2006, the Bank had an available line of credit with the FHLB totaling $1.27 billion with $756.0 million outstanding. At March

31, 2006, the Bank also had $100.0 million of federal funds lines with $12.5 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.

Shareholders’ equity at March 31, 2006 increased to $333.6 million, representing 7.8 percent of period-end assets compared to $323.6 million or 7.6 percent of period-end assets at December 31, 2005. The increase was due mainly to net income of $11.4 million partially offset by cash dividends of $0.19 per share, which resulted in cash dividend payments of $5.5 million for the three months ended March 31, 2006. In addition, the after-tax unrealized loss on securities-available-for-sale increased $0.9 million to $12.1 million at March 31, 2006 compared to $11.3 million at December 31, 2005. This increase was due to a rise in interest rates across the yield curve.

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, 2006, the Corporation had repurchased a total of 1.4 million shares of its common stock at an average per-share price of $17.52 under this authorization, which has reduced shareholders’ equity by $24.5 million. No shares were repurchased under this authorization during the three months ended March 31, 2006.

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, 2006 no shares had been repurchased under this authorization.

The Corporation anticipates repurchasing shares under one or both of these plans in 2006 under certain conditions.

During the second quarter and third quarter of 2005, the Corporation issued Trust Securities through specially formed trusts. The Trust Securities 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 statements. At March 31, 2006, 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 are presented in the table below:

Table Eleven
Capital Ratios

For Capital

Adequacy Purposes

To Be Well Capitalized

Actual

Minimum

(Dollars in thousands)

Amount

Ratio

Amount

Ratio

Amount

Ratio

At March 31, 2006:

Total Capital (to Risk Weighted Assets)

First Charter Corporation

413,690

12.08

273,939

8.00

None

First Charter Bank

392,171

11.49

273,022

8.00

341,277

10.00

Tier I Capital (to Risk Weighted Assets)

First Charter Corporation

384,035

11.22

136,970

4.00

None

First Charter Bank

362,665

10.63

136,511

4.00

204,766

6.00

Tier I Capital (to Adjusted Average Assets)

First Charter Corporation

384,035

9.14

167,993

4.00

None

First Charter Bank

362,665

8.67

167,414

4.00

209,267

5.00

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.

Accounting Matters

In July 2005, the FASB issued an exposure draft, “Accounting for Uncertain Tax Positions”, a proposed interpretation of SFAS No. 109, “Accounting for Income Taxes” (the proposed Interpretation). The proposed Interpretation would clarify the accounting for uncertain tax positions and require the Corporation to recognize management’s best estimate of the impact of a tax position. The initial proposed effective date of the Interpretation was fiscal years ending after December 31, 2005; however, the provisions of the Interpretation have not been finalized. Management is currently evaluating the effect of the initial proposed Interpretation and its impact on the consolidated financial statements.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 is an amendment of SFAS No. 133 and SFAS No. 140. SFAS No. 155 permits companies to elect, on a deal by deal basis, to apply a fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Corporation does not expect SFAS No. 155 to have a material impact on the consolidated financial statements of the Corporation.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156 amends SFAS No. 140. SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value. For subsequent measurements, SFAS No. 156 permits companies to choose between using an amortization method or a fair value measurement method for reporting purposes. SFAS No. 156 is effective as of the beginning of a company’s first fiscal year that begins after September 15, 2006. The Corporation does not expect SFAS No. 156 to have a material impact on the consolidated financial statements of the Corporation.

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 page 29 for Quantitative and Qualitative Disclosures about Market Risk.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. As of the end of the period covered by this report, an evaluation of the effectiveness of the Registrant’s disclosure controls and procedures (as defined in Rule 13(a)-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) was performed under the supervision and with the participation of the Registrant’s management, including the Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the Registrant’s Chief Executive Officer and Chief Financial Officer have concluded that the Registrant’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Registrant in its reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities Exchange Commission rules and forms.

(b) Changes in internal control over financial reporting. During the Registrant’s first fiscal quarter, there has been no change in the Registrant’s internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal controls over financial reporting.

PART 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 operations, liquidity or financial position of the Corporation or the Bank.

Item 1A. Risk Factors

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, 2005.

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, 2006.


					Total Number of		Maximum Number
					Shares Purchased as		of Shares that May
					Part of Publicly		Yet Be Purchased
	Total Number of		Average Price Paid		Announced Plans or		Under the Plans or
Period	Shares Purchased		per Share		Programs ⁽¹⁾		Programs

January 1, 2006-January 31, 2006		—		—		—		1,625,400

February 1, 2006-February 28, 2006		—		—		—		1,625,400

March 1, 2006-March 31, 2006		—		—		—		1,625,400

Total		—		—		—		1,625,400

(1) On January 24, 2002, the Corporation announced that its Board of Directors had 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 September 30, 2005, the Corporation had repurchased 1,374,600 shares under this authorization. No shares were repurchased under this authorization during the quarter ended March 31, 2006. On November 3, 2003, the Corporation announced that its Board of Directors had 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, 2006, no shares have been repurchased under this authorization. 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.
(per Exhibit Table
in item 601 of
Regulation S-K)		Description of Exhibits
10.1		Description of 2006 Compensation for Non-Employee Directors, incorporated herein by reference to Item 1.01 of the Corporation’s Current Report on Form 8-K dated January 25, 2006.

10.2		Form of Performance Shares Award Agreement under the First Charter Corporation 2000 Omnibus Stock Option and Award Plan, incorporated herein by reference to Exhibit 10.1 of the Corporation’s Current Report on Form 8-K dated February 27, 2006.

10.3		Form of Restricted Stock Award Agreement under the First Charter Corporation 2000 Omnibus Stock Option and Award Plan, incorporated herein by reference to Exhibit 10.2 of the Corporation’s Current Report on Form 8-K dated February 27, 2006.

10.4		Form of First Charter Corporation Restricted Stock Award Agreement for use with the First Charter Corporation Restricted Stock Award Program, incorporated herein by reference to Exhibit 10.5 of the Corporation’s Current Report on Form 8-K dated February 27, 2006.

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

SIGNATURES

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, 2006	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)