UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934

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

OR

Commission File Number 0-15829

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

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class

Common stock, no par value

Series X Junior Participating Preferred Stock Purchase Rights

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

     The aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2004 was $591,648,562.

     As of March 4, 2005 the Registrant had outstanding 30,188,721 shares of Common Stock, no par value.

Documents Incorporated by Reference

     PART III: Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with the solicitation of proxies for the Company’s 2005 Annual Meeting of Shareholders to be held on April 27, 2005. (With the exception of those portions which are specifically incorporated by reference in this Form 10-K, the Proxy Statement is not deemed to be filed or incorporated by reference as part of this report.)

FIRST CHARTER CORPORATION
AND SUBSIDIARIES

FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

TABLE OF CONTENTS

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Part I

Item 1. Business

General

     First Charter Corporation (hereinafter referred to as either the “Registrant” or the “Corporation”) is a bank holding company established as a North Carolina Corporation in 1983 and is registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Its principal asset is the stock of its subsidiary, First Charter Bank (“FCB” or the “Bank”). The principal executive offices of the Corporation are located at 10200 David Taylor Drive, Charlotte, North Carolina 28262. Its telephone number is (704) 688-4300.

     FCB, a North Carolina state bank, is the successor entity to The Concord National Bank, which was established in 1888. On April 4, 2000, the Corporation acquired Carolina First BancShares, Inc. (“Carolina First”), the holding company for Lincoln Bank, Cabarrus Bank and Community Bank & Trust, which merged into the Corporation. Carolina First was a North Carolina corporation and operated through its subsidiary banks and 31 branch offices principally in the greater Charlotte, North Carolina area. On September 1, 2000, Business Insurers of Guilford County (“Business Insurers”) was merged into First Charter Insurance Services. Each of these mergers was accounted for as a pooling of interests and accordingly, all financial information presented herein has been restated for all periods presented to reflect the mergers. On June 22, 2001, First Charter’s banking subsidiary converted from a national bank to First Charter Bank, a North Carolina state bank. The conversion was completed after a cost-benefit analysis of supervisory regulatory charges and did not represent any disagreement with the Corporation’s or the Bank’s former regulators. The Bank continues to operate its financial center network franchise under the “First Charter” brand name.

     FCB is a full service bank, which now operates 53 financial centers, seven insurance offices and one mortgage origination office in addition to its main office, as well as 110 ATMs (automated teller machines). These facilities are located in Ashe, Alleghany, Avery, Buncombe, Cabarrus, Catawba, Cleveland, Guilford, Iredell, Jackson, Lincoln, McDowell, Mecklenburg, Rowan, Rutherford, Swain, Transylvania and Union counties of North Carolina. FCB, through First Charter of Virginia Realty Investments, Inc., also operates an additional mortgage origination office in Virginia.

     The Corporation’s primary market area is located within North Carolina and predominately centers around the Metro region of Charlotte, North Carolina, including Mecklenburg County and its surrounding counties. Charlotte is the twenty-sixth largest city in the United States and has a diverse economic base. As of December 31, 2004, the unemployment rate for the Charlotte Metro region and the state of North Carolina was 5.2 percent. Primary business sectors in the Charlotte Metro region include banking and finance, insurance, manufacturing, health care, transportation, retail, telecommunications, government services and education. Thus, the Corporation believes that it is not dependent on any one or a few types of commerce due to the economic diversity in the region.

     Through its financial centers, the Bank provides a wide range of banking products, including interest-bearing and noninterest-bearing checking accounts; “Money Market Rate” accounts; certificates of deposit; individual retirement accounts; overdraft protection; commercial, consumer, agriculture, real estate, residential mortgage and home equity loans; personal and corporate trust services; safe deposit boxes; and automated banking.

     In addition, through First Charter Brokerage Services, Inc., a subsidiary of FCB, the Registrant offers full service and discount brokerage services, annuity sales and financial planning services pursuant to a third party arrangement with UVEST Investment Services. The Bank also operates two other subsidiaries: First Charter Insurance Services, Inc. and First Charter Leasing and Investments, Inc. First Charter Insurance Services, Inc. is a North Carolina corporation formed to meet the insurance needs of businesses and individuals throughout the Charlotte metropolitan area. First Charter Leasing and Investments, Inc. is a North Carolina corporation engaged in commercial equipment leasing and the

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management of investment securities. It also acts as the holding company for First Charter of Virginia Realty Investments, Inc., a Virginia corporation. First Charter of Virginia Realty Investments, Inc. is engaged in the mortgage origination business and also acts as the holding company for First Charter Realty Investments, Inc., a Delaware real estate investment trust. First Charter Realty Investments, Inc. is the holding company for FCB Real Estate, Inc., a North Carolina real estate investment trust, and First Charter Real Estate Holdings, LLC, a North Carolina limited liability company, which owns and maintains the real estate property and assets of the Corporation. FCB Real Estate, Inc. primarily invests in commercial and 1-4 family residential real estate loans. The Bank also has a majority ownership in Lincoln Center at Mallard Creek, LLC, a North Carolina limited liability company. Lincoln Center is a three-story office building occupied in part by a branch of FCB.

     At December 31, 2004, the Registrant and its subsidiaries had 1,014 full-time equivalent employees. The Registrant had no employees who were not also employees of FCB. The Registrant considers its relations with its employees to be good.

     As part of its operations, the Registrant is not dependent upon a single customer or a few customers whose loss would have a material adverse effect on the Registrant.

     As part of its operations, the Registrant regularly holds discussions and evaluates the potential acquisition of, or merger with, various financial institutions. In addition, the Registrant periodically enters new markets and engages in new activities in which it competes with established financial institutions. There can be no assurance as to the success of any such new office or activity. Furthermore, as the result of such expansions, the Registrant may from time to time incur start-up costs that could affect its financial results.

Competition

     The banking laws of North Carolina allow banks located in North Carolina to develop branches throughout the state. In addition, out-of-state institutions may open de novo branches in North Carolina as well as acquire or merge with institutions located in North Carolina. As a result of these laws, banking activities in North Carolina are highly competitive.

     FCB’s service delivery facilities are located in Ashe, Alleghany, Avery, Buncombe, Cabarrus, Catawba, Cleveland, Guilford, Iredell, Jackson, Lincoln, McDowell, Mecklenburg, Rowan, Rutherford, Swain, Transylvania and Union counties of North Carolina. These counties also have numerous branches of money-center, super-regional, regional, and statewide institutions, some of which have a major presence in Charlotte. In its market area, the Registrant faces competition from other banks, savings and loan associations, savings banks, credit unions, finance companies and major retail stores that offer competing financial services. Many of these competitors have greater resources, broader geographic coverage and higher lending limits than the Bank. The Bank’s primary method of competition is to provide quality service and fairly priced products.

Government Supervision and Regulation

     General. As a registered bank holding company, the Corporation is subject to the supervision of and regular inspection by, the Board of Governors of the Federal Reserve System (the “Federal Reserve”). FCB is a North Carolina state bank and a Federal Reserve member bank, with deposits insured by the Federal Deposit Insurance Corporation’s (“FDIC”) insurance funds: the Bank Insurance Fund (“BIF”) and the Savings Association Insurance Fund (“SAIF”). FCB is subject to extensive regulation and examination by the Office of the Commissioner of Banks of the State of North Carolina (the “NC Commissioner”) under the direction and supervision of the North Carolina Banking Commission (the “NC Banking Commission”) and by the FDIC, which insures its deposits to the maximum extent permitted by law.

     In addition to state and federal banking laws, regulations and regulatory agencies, the Corporation and FCB are subject to various other laws and regulations and supervision and examination by other

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regulatory agencies, all of which directly or indirectly affect the Corporation’s operations, management and ability to make distributions. The following discussion summarizes certain aspects of those laws and regulations that affect the Corporation.

     Gramm-Leach-Bliley Financial Modernization Act of 1999. The Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “GLB Act”) eliminated certain legal barriers separating the conduct of various types of financial service businesses, such as commercial banking, investment banking and insurance in addition to substantially revamping the regulatory scheme within which the Corporation operates. Under the GLB Act, bank holding companies meeting management, capital and Community Reinvestment Act standards, and that have elected to become a financial holding company, may engage in a substantially broader range of traditionally nonbanking activities than was permissible before enactment, including insurance underwriting and making merchant banking investments in commercial and financial companies. The Corporation has not elected to become a financial holding company. The GLB Act also allows insurers and other financial services companies to acquire banks; removes various restrictions that currently apply to bank holding company ownership of securities firms and mutual fund advisory companies; and establishes the overall regulatory structure applicable to bank holding companies that also engage in insurance and securities operations.

     In addition, the GLB Act also modifies current law related to financial privacy and community reinvestment. The privacy provisions generally prohibit financial institutions from disclosing nonpublic personal financial information to nonaffiliated third parties unless the customer has the opportunity to “opt out” of the sharing of the customer’s nonpublic information with unaffiliated third parties.

     Restrictions on Bank Holding Companies. The Federal Reserve is authorized to adopt regulations affecting various aspects of bank holding companies. Under the BHCA, the Corporation’s activities, and those of companies which it controls or in which it holds more than five percent of the voting stock, are limited to banking or managing or controlling banks or furnishing services to or performing services for its subsidiaries, or any other activity which the Federal Reserve determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determinations, the Federal Reserve is required to consider whether the performance of such activities by a bank holding company or its subsidiaries reasonably can be expected to produce benefits to the public such as greater convenience, increased competition or gains in efficiency that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest or unsound banking practices. The BHCA, as amended by the GLB Act, generally limits the activities of a bank holding company (unless the bank holding company has elected to become a financial holding company) to activities that are closely related to banking and a proper incident thereto.

     Generally, bank holding companies are required to obtain prior approval of the Federal Reserve to engage in any new activity not previously approved by the Federal Reserve or to acquire more than five percent of any class of voting stock of any company. The BHCA also requires bank holding companies to obtain the prior approval of the Federal Reserve before acquiring more than five percent of any class of voting stock of any bank which is not already majority-owned by the bank holding company.

     The Corporation is also subject to the North Carolina Bank Holding Company Act of 1984. As required by this state legislation, the Corporation, by virtue of its ownership of FCB, has registered as a bank holding company with the NC Commissioner. The North Carolina Bank Holding Company Act also prohibits the Corporation from acquiring or controlling certain non-bank banking institutions which have offices in North Carolina.

     Interstate Banking and Branching Legislation. Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company may acquire banks in states other than its home state, without regard to the permissibility of those acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and the requirement that the bank holding company, after the proposed acquisition, controls no more than 10 percent of the total amount of

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deposits of insured depository institutions in the United States and no more than 30 percent or such lesser or greater amount set by state law of such deposits in that state.

     The Interstate Banking and Branching Act also authorized banks to merge across state lines, thereby creating interstate branches. Under this legislation, each state had the opportunity either to “opt out” of this provision, thereby prohibiting interstate branching in such states, or to “opt in”. The State of North Carolina elected to “opt in” to such legislation. Furthermore, pursuant to the Interstate Banking and Branching Act, a bank is now able to open new branches in a state in which it does not already have banking operations, if the laws of such state permit such de novo branching.

     Consumer Protection. In connection with its lending and leasing activities, FCB and its subsidiaries are subject to a number of federal and state laws designed to protect borrowers and promote lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, as well as state law counterparts.

     Title V of the GLB Act, along with other provisions of federal law, currently contain extensive consumer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship, and annually thereafter, the financial institution’s policies and procedures for collecting, disclosing, and protecting nonpublic personal financial information. These provisions also provide that, except for certain limited exceptions, a financial institution may not provide that nonpublic personal information to nonaffiliated third parties unless the financial institution discloses to the customer that the information may be provided and the customer is given the opportunity to opt out of that disclosure. Federal law makes it a criminal offense, except in limited circumstances, to obtain or attempt to obtain customer information of a financial nature by fraudulent or deceptive means.

     The Community Reinvestment Act of 1977 requires FCB’s primary federal regulatory agency, in this case, the FDIC, to assess FCB’s record in meeting the credit needs of the communities served by FCB, including low- and moderate-income neighborhoods and persons. Financial institutions are assigned one of four ratings: “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.” At December 31, 2004 FCB’s rating was “Satisfactory”. This assessment is reviewed by any bank that applies to merge or consolidate with or acquire the assets or assume the liabilities of an insured depository institution, or to open or relocate a branch office.

     The USA PATRIOT Act. After the September 11, 2001 terrorist attacks in New York and Washington, D.C., the United States government acted in several ways to tighten control on activities perceived to be connected to money laundering and terrorist funding. A series of orders were issued which identify terrorists and terrorist organizations and require the blocking of property and assets of, as well as prohibiting all transactions or dealings with, such terrorists, terrorist organizations and those that assist or sponsor them. The USA Patriot Act substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposed new compliance and due diligence obligations, created new crimes and penalties, compelled the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarified the safe harbor from civil liability to customers. In addition, the United States Treasury Department issued regulations in cooperation with the federal banking agencies, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Department of Justice to require customer identification and verification, expand the money-laundering program requirement to the major financial services sectors, including insurance and unregistered investment companies, such as hedge funds, and facilitate and permit the sharing of information between law enforcement and financial institutions, as well as among financial institutions themselves. The United States Treasury Department also has created the Treasury USA PATRIOT Act Task Force to work with other financial regulators, the regulated community, law enforcement and consumers to continually improve the regulations.

     Sarbanes-Oxley Act of 2002. On July 30, 2002, the Sarbanes-Oxley Act was enacted which addressed corporate governance and securities reporting requirements. Among its requirements are

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changes in auditing and accounting, executive compensation, certifications by Chief Executive Officers and Chief Financial Officers of certain securities filings, expanded reporting of information in current reports filed with the Securities and Exchange Commission, more detailed reporting information in securities disclosure documents and more timely filings of corporate information. The Nasdaq National Market has also issued its corporate governance rules that are intended to allow shareholders to more easily and efficiently monitor the performance and activities of companies and their executive officers and directors.

     Regulation of FCB. FCB is organized as a North Carolina state chartered bank subject to regulation, supervision and examination by the Federal Reserve and NC Banking Commission, and to regulation by the FDIC. The federal and state laws and regulations are applicable to required reserves against deposits, allowable investments, loans, mergers, consolidations, issuance of securities, payment of dividends, establishment of branches, limitations on credit to subsidiaries and other aspects of the business of such subsidiaries. The federal and state banking agencies have broad authority and discretion in connection with their supervisory and enforcement activities and examination policies, including policies involving the classification of assets and the establishment of loan loss reserves for regulatory purposes. Such actions by the regulators prohibit member banks from engaging in unsafe or unsound banking practices. The Bank is also subject to certain reserve requirements established by the Federal Reserve Board and is a member of the Federal Home Loan Bank (“FHLB”) of Atlanta, which is one of the 12 regional banks comprising the FHLB System.

Capital and Operational Requirements

     The Federal Reserve and the FDIC issued substantially similar minimum capital adequacy standards with which both the Corporation and the Bank must comply. The risk-based guidelines define a three-tier capital framework, under which the Corporation and the Bank are required to maintain a minimum ratio of Tier 1 Capital (as defined) to total risk-weighted assets of 4.00 percent and a minimum ratio of Total Capital (as defined) to risk-weighted assets of 8.00 percent. Tier 1 Capital generally consists of total shareholders’ equity calculated in accordance with generally accepted accounting principles less certain intangibles. Tier 2 Capital includes, among other items, cumulative perpetual preferred stock, long-term preferred stock, hybrid capital instruments, qualifying subordinated debt, and the allowance for credit losses up to 1.25 percent of risk-weighted assets. Tier 3 capital includes subordinated debt that is unsecured, fully paid, has an original maturity of at least two years, is not redeemable before maturity without prior approval of the Federal Reserve and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank’s risk-based capital ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier 2 Capital less investments in unconsolidated subsidiaries is equal to qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and Total Capital by risk-weighted assets. Risk-weighted assets refer to the on- and off-balance sheet exposures of the Corporation and the Bank, as adjusted for one of four categories of applicable risk-weights established in Federal Reserve regulations, based primarily on relative credit risk. At December 31, 2004, the Corporation and the Bank were in compliance with the risk-based capital requirements. The Corporation’s Tier 1 and Total Capital Ratios at December 31, 2004 were 10.08 percent and 10.99 percent, respectively. The Corporation did not have any subordinated debt that qualified as Tier 3 Capital at December 31, 2004.

     The leverage ratio is calculated by dividing Tier 1 Capital by adjusted total assets. The Corporation’s leverage ratio at December 31, 2004 was 6.76 percent. The Corporation meets its leverage ratio requirement.

     In addition to the above described capital requirements, the federal regulatory agencies may from time to time require that a banking organization maintain capital above the minimum levels whether because of its financial condition or actual or anticipated growth.

     Prompt Corrective Action under FDICIA. The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically

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undercapitalized) and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. In addition, pursuant to FDICIA, the various regulatory agencies have prescribed certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation, and such agencies may take action against a financial institution that does not meet the applicable standards.

     The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the Total Risk-Based Capital, Tier 1 Risk-Based Capital and Leverage Capital Ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have (1) a Tier 1 Capital ratio of at least 6.00 percent, (2) a Total Capital ratio of at least 10.00 percent, (3) a Leverage ratio of at least 5.00 percent and (4) not be subject to a capital directive order. An “adequately capitalized” institution must have a Tier 1 Capital ratio of at least 4.00 percent, a Total Capital ratio of at least 8.00 percent and a leverage ratio of at least 4.00 percent, or 3.00 percent in some cases. Under these guidelines, FCB is considered well capitalized as of December 31, 2004. See Note Twenty of the consolidated financial statements.

     Banking agencies have also adopted regulations which mandate that regulators take into consideration (i) concentrations of credit risk, (ii) interest rate risk (when the interest rate sensitivity of an institution’s assets does not match the sensitivity of its liabilities or its off-balance sheet position) and (iii) risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation is made as a part of the institution’s regular safety and soundness examination. In addition, the banking agencies have amended their regulatory capital guidelines to incorporate a measure for market risk. In accordance with amended guidelines, a Corporation or Bank with significant trading activity (as defined in the amendment) must incorporate a measure for market risk in its regulatory capital calculations. The revised guidelines do not materially impact the Corporation’s or FCB’s regulatory capital ratios or FCB’s well-capitalized status.

     Distributions. The Corporation is a legal entity separate and distinct from its subsidiaries. The primary source of funds for distributions paid by the Corporation to its shareholders is dividends received from FCB. Federal regulatory and other requirements, as well as laws and regulations of the State of North Carolina, restrict the lending of funds by FCB to the Corporation and the amount of dividends that FCB can pay to the Corporation. The Federal Reserve regulates the amount of FCB dividends payable to the Corporation based on net profits for the current year combined with the undivided profits for the last two years, less dividends already paid. See Note Twenty of the consolidated financial statements.

     In addition to the foregoing, the ability of the Corporation and FCB to pay dividends may be affected by the various minimum capital requirements and the capital and non-capital standards established under FDICIA, as described above. Furthermore, if in the opinion of a federal regulatory agency, a bank under its jurisdiction is engaged in or is about to engage in an unsafe or unsound practice (which, depending on the financial condition of the bank, could include the payment of dividends), such agency may require, after notice and hearing, that such bank cease and desist from such practice. The right of the Corporation, its shareholders and its creditors to participate in any distribution of assets or earnings of FCB is further subject to the prior claims of creditors against the Bank.

     Deposit Insurance. The deposits of FCB are insured up to applicable limits by the FDIC. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against banking institutions, after giving the institution’s primary regulator an opportunity to take such action. In addition, the Bank is subject to deposit premium assessments by the FDIC. As mandated by FDICIA, the FDIC has adopted regulations for a risk-based insurance assessment

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system. Under this system, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at a risk assessment for a banking institution, the FDIC places it in one of nine risk categories using a process based on capital ratios and on other relevant information from supervisory evaluations of the bank by the bank’s primary federal regulator, the Federal Reserve, statistical analyses of financial statements and other relevant information.

     The deposits of FCB are insured by the BIF, administered by the FDIC. Under the FDIC’s risk-based insurance system, assessments for BIF members currently can range from no assessment to an assessment of 27 basis points per $100 of insured deposits, with the exact assessment determined by a bank’s capital and other regulatory factors. The range of deposit insurance assessment rates can change from time to time, in the discretion of the FDIC, subject to certain limits. Presently FCB is not required to pay any additional assessment to the FDIC. At this time, the amount of any future premiums required to be paid by FCB is not known.

     Source of Strength. According to Federal Reserve policy, bank holding companies are expected to act as a source of financial strength to subsidiary banks and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guaranty provisions of the Federal Deposit Insurance Act, in the event of a loss suffered or anticipated by the FDIC, either as a result of default of a banking or thrift subsidiary of the Corporation or related to FDIC assistance provided to a subsidiary in danger of default, the other banking subsidiaries of the Registrant may be assessed for the FDIC’s loss, subject to certain exceptions.

     Future Legislation. Proposals to change the laws and regulations governing the banking industry are frequently introduced in Congress, in the state legislatures and before the various bank regulatory agencies. The likelihood and timing of any such proposals or bills being enacted and the impact they might have on the Corporation and FCB cannot be determined at this time.

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

     During the third quarter of 2003, the Bank entered into a written agreement (the “Written Agreement”) with the Federal Reserve Bank of Richmond (the “Federal Reserve Bank”) and the Office of the North Carolina Commissioner of Banks (the “Banking Commissioner”), the Bank’s primary federal and state regulatory agencies. The Written Agreement required the Bank to take appropriate actions to improve its programs and procedures for complying with the Currency and Foreign Transactions Reporting Act and the anti-money laundering provisions of Regulation H of the Board of Governors of the Federal Reserve System. The Bank subsequently took substantial actions, and adopted and implemented a number of policies and procedures, to address the concerns of the regulatory agencies. As a result of these actions, the Federal Reserve Bank, in concurrence with the Banking Commissioner, terminated the Written Agreement effective July 2, 2004.

Other Considerations

     There are particular risks and uncertainties that are applicable to an investment in the Corporation’s common stock. Specifically, there are risks and uncertainties that bear on the Corporation’s future financial results that may cause its future earnings and financial condition to be less than its expectations. Some of the risks and uncertainties relate to economic conditions generally and would affect other financial institutions in similar ways. These aspects are discussed under the heading “Factors that May Affect Future Results” in the accompanying “Management’s Discussion and Analysis of Financial Condition and Results of Operations”. This section addresses particular risks and uncertainties that are specific to the Corporation’s business.

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Available Information

     The Corporation’s Internet address is www.FirstCharter.com. The Corporation makes available, free of charge, on or through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934, and beneficial ownership reports on Forms 3, 4 and 5 as soon as reasonably practicable after electronically filing such material with, or furnishing it to, the Securities Exchange Commission.

Item 2. Properties

     The principal offices of the Corporation are located in the 230,000 square foot First Charter Center located at 10200 David Taylor Drive in Charlotte, North Carolina, which is owned by the Bank through its subsidiaries. The First Charter Center contains the corporate offices of the Corporation as well as the operations, mortgage loan and data processing departments of FCB.

     In addition to its main office, FCB has 53 financial centers, seven insurance offices and 110 ATMs located in 18 counties throughout North Carolina. As of December 31, 2004, the Corporation and its subsidiaries owned 35 financial center locations, leased 18 financial center locations and leased seven insurance offices. The Corporation also leases a facility in Reston, Virginia for the origination of real estate loans. These operations also serve as a holding company for certain subsidiaries that own real estate and real estate-related assets, including first and second residential mortgage loans. In addition, the Corporation leases a facility in Winston-Salem, North Carolina for the operations of its third party benefits administrator.

Item 3. Legal Proceedings

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

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

     There were no matters submitted to a vote of shareholders during the quarter ended December 31, 2004.

Item 4A. Executive Officers of the Registrant

     The following table sets forth certain information about each of the current executive officers of the registrant, including his name, age, positions and offices held with the Registrant and the Bank, the period served in such positions or offices and, if such person has served in such position and office for less than five years, the prior employment of such person. Mr. Bratton is scheduled to retire from the Registrant, effective March 31, 2005. No executive officer has a family relationship as close as first cousin with any other executive officer or director.

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PART II

Item 5. Market For Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information, Holders and Dividends

     The principal market on which the Common Stock is traded is the Nasdaq National Market. The following table sets forth the high and low sales prices of the Common Stock for the periods indicated, as reported on the Nasdaq National Market:

     As of March 4, 2005, there were 7,517 record holders of the Corporation’s Common Stock. During 2003 and 2004, the Corporation paid dividends on the Common Stock on a quarterly basis. The following table sets forth dividends declared per share of Common Stock for the periods indicated:

     For additional information regarding the Corporation’s ability to pay dividends, see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Management.

Recent Sales of Unregistered Securities

     On December 1, 2004, the Corporation, through First Charter Bank, its primary banking subsidiary, acquired substantially all of the assets of Smith & Associates Insurance Services, Inc., a property and casualty insurance agency (the “Agency”), pursuant to an Asset Purchase Agreement, dated as of the same date (the “Purchase Agreement”). No underwriters were used in connection with this transaction. In connection with this transaction, the Corporation issued an aggregate of 27,726 shares of the Corporation’s common stock valued at $750,000 to the Agency. The issuance of the shares in connection with this transaction was exempt from the registration requirements of the Securities Act of 1933, as amended, in accordance with Section 4(2) thereof, as a transaction by an issuer not involving a public offering. The Purchase Agreement also contemplates additional, subsequent issuances of the Corporation’s common stock based upon the future performance of the Agency. The Corporation expects the value of future issuances, if earned, to total approximately $750,000.

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Issuer Purchases of Equity Securities

     The following table summarizes the Corporation’s repurchases of its common stock during the quarter ended December 31, 2004.

Item 6. Selected Financial Data

     See Table One in Item 7 for Selected Financial Data.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion and analysis should be read in conjunction with the consolidated financial statements of the Corporation and the notes thereto.

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Factors that May Affect Future Results

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

     Factors that may cause actual results to differ materially from those contemplated by such forward looking statements include, among others, the following possibilities: (1) projected results in connection with the implementation of the Corporation’s business plan and strategic initiatives are lower than expected; (2) competitive pressure among financial services companies increases significantly; (3) costs or difficulties related to the integration of acquisitions or expenses in general are greater than expected; (4) general economic conditions, in the markets in which the Corporation does business, are less favorable than expected; (5) risks inherent in making loans, including repayment risks and risks associated with collateral values, are greater than expected; (6) changes in the interest rate environment reduce interest margins and affect funding sources; (7) changes in market rates and prices may adversely affect the value of financial products; (8) legislation or regulatory requirements or changes thereto adversely affect the businesses in which the Corporation is engaged; (9) regulatory compliance cost increases are greater than expected; and (10) the passage of future tax legislation, or any negative regulatory, administrative or judicial position, may adversely impact the Corporation.

     The Corporation is a bank holding company established as a North Carolina Corporation in 1983, with one wholly-owned banking subsidiary, FCB. The Corporation’s principal executive offices are located in Charlotte, North Carolina. FCB is a full service bank and trust company with 53 financial centers and seven insurance offices located in 18 counties throughout the piedmont and western half of North Carolina. The Corporation also maintains operations in Reston, Virginia for the origination of real estate loans. These operations also serve as a holding company for certain subsidiaries that own real estate and real estate-related assets, including first and second residential mortgage loans.

     The Corporation’s primary market area is located within North Carolina and predominately centers around the Metro region of Charlotte, North Carolina, including Mecklenburg County and its surrounding counties. Charlotte is the twenty-sixth largest city in the United States and has a diverse economic base. Primary business sectors in the Charlotte Metro region include banking and finance, insurance, manufacturing, health care, transportation, retail, telecommunications, government services and education. The Corporation believes that it is not dependent on any one or a few types of commerce due to the region’s diverse economic base. Since the North Carolina economy has historically relied on the manufacturing and transportation sectors, it has been significantly impacted by global competition and rising energy prices. As a result, the North Carolina economy is transitioning to a more service-oriented economy. Recently, the education, healthcare, information technology, finance and business services industries have shown the most growth. The unemployment rate for the Charlotte Metro region was 5.2 percent in December 2004 compared to 6.2 percent in December 2003. This decrease is the result of structural changes taking place in the economy of the region. The service industry is now the major employer in the Charlotte Metro region, followed by wholesale and retail trade.

     The Corporation’s operations are divided into five primary lines of business: community banking, mortgage, brokerage, insurance, and financial management. Community banking provides a variety of depository accounts including interest-bearing and noninterest-bearing checking accounts, certificates of deposit and money market accounts. In addition, community banking offers numerous loan products including commercial, consumer, real estate and home equity loans. The community bank also maintains 110 ATM’s and enables customers to access their accounts on-line. The mortgage business provides both fixed-rate and variable-rate mortgage products and loan servicing pursuant to a third party arrangement. First Charter Brokerage Services offers full service and discount brokerage services,

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annuity sales and financial planning services pursuant to a third party arrangement with UVEST Investment Services. First Charter Insurance Services, Inc. is a North Carolina corporation formed to meet the insurance needs of businesses and individuals throughout the Charlotte Metro region. Financial management provides comprehensive financial planning, funds management, investments and record keeping services for many national companies.

     The Corporation derives interest income through traditional banking activities such as generating loans and earning interest on securities. Additional sources of income are derived from fees on deposit accounts and from the Corporation’s various lines of business including mortgage, brokerage, insurance and financial management. Also, as a part of the Corporation’s management of its securities portfolio, income is recognized on the sale of bond and equity securities.

     Increasing the net interest income is critical to the Corporation’s strategy of earnings growth in a rising rate environment. There are three primary components to achieve this goal: maintain an asset-sensitive balance sheet, improve the net interest margin and increase earning assets. The first component involves the Corporation maintaining an asset-sensitive balance sheet under a broad range of interest rate scenarios. This has been accomplished by managing the level of fixed-rate loans and focusing on variable-rate lending. A balance sheet is considered asset-sensitive when its assets (loans and securities) reprice faster or to a greater extent than liabilities (deposits and borrowings). An asset-sensitive balance sheet will produce more net interest income when interest rates rise and less net interest income when interest rates decline.

     The second component toward achieving an increase in net interest income is improving the net interest margin. Enhancing the net interest margin is divided into two parts, improving asset yields and reducing funding costs. The yields in the Corporation’s loan portfolio should increase as the Corporation’s floating rate and variable rate loans reprice upward with the increase in interest rates. In addition, rising interest rates will increase the effective yields on mortgage-backed securities by decreasing the amortization of premiums due to slowing prepayment speeds.

     The Corporation continues its focus on reducing funding costs by growing deposit balances and shifting funding sources from higher-cost retail certificates of deposit to lower-cost, transaction-based accounts. The Corporation’s Checking Account Marketing Program (“CHAMP”) continues to attract new customers and deposits. In addition, during the first quarter of 2004 the Corporation introduced a new money market account called Performance Plus. These programs are designed to develop new customer relationships, shift the Corporation’s funding mix towards lower-cost funding sources and generate additional fee income opportunities.

     The asset-sensitive nature of the Corporation’s balance sheet should improve the net interest margin resulting in more interest income. However, competitive pricing pressure on both sides of the balance sheet may mitigate the asset-sensitive nature of the Corporation’s balance sheet resulting in a relatively flat margin. In addition, a flattening of the yield curve may result in additional pressure on the net interest margin. Thus the increase in net interest income may come from the final component, an increase in earning assets and in particular loans.

     Loan growth is a major focus of the Corporation. The lending environment continues to be highly competitive. However, the loan portfolio has shown steady growth during 2004 in home equity, mortgage, commercial real estate, and consumer loans. Management believes the Corporation is positioned for future loan growth due to an improving market for commercial loans, an increased number of commercial lenders and an increased focus on small business loans.

     Maintaining sound asset quality is another major focus for the Corporation. As a result of this focus and the initiatives taken in 2003 and in the first quarter of 2004, the Corporation’s asset quality ratios have improved significantly and remain strong. During the second quarter of 2003, the Corporation sold $60.9 million in nonaccruing and accruing higher risk loans (the ”2003 Loan Sale”) to improve the asset quality of the loan portfolio by containing the financial risk of these loans. Additionally, the Corporation sold its $11.7 million credit card portfolio in the first quarter of 2003. Similarly, in the first quarter of 2004, $6.4 million in

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nonaccruing and accruing higher risk mortgage loans were sold. These activities have had a positive impact on earnings by reducing the credit risk profile of the Corporation and eliminating significant future collection costs. Nevertheless, the business of lending to commercial and consumer customers carries with it significant credit risk, which must be continually managed. Management monitors asset quality and credit risk on an ongoing basis.

     The Corporation is also focused on retaining existing customers and attracting new customers. The Corporation’s primary methods of competition are to provide exceptional customer service and to proactively market its products. The Corporation uses a quarterly independent survey of customers to review its level of customer service. During the fourth quarter of 2004, 83 percent of the customers surveyed reported that they were “very satisfied” with the service at First Charter, compared to the industry average of 58 percent. The Corporation’s main strategy for obtaining new customers is CHAMP, a disciplined, proactive approach to attracting new accounts and customers. Its success has provided the Corporation with opportunities to develop new customer relationships, to generate additional fee income and to shift its funding mix towards lower-cost funding sources. To meet the convenience needs of existing and potential customers, the Corporation has recently replaced five existing branches, opened one new branch, introduced extended hours in select branches and its call center and added bilingual personnel. The Corporation will continue to update existing branches and expand into new areas as both market and economic conditions warrant.

     Another focus for the Corporation is growing fee income through other lines of business. These sources of income provide stability to the Corporation’s earnings with minimal credit risk and less exposure to interest rate risk than its community bank’s traditional lines of business. In addressing this area of focus, the Corporation, through a subsidiary of FCB, acquired an insurance agency during each of the third and fourth quarters of 2003 and the fourth quarter of 2004. These acquisitions expanded the reach of the Corporation’s insurance services with businesses and individuals throughout the Charlotte Metro region. In addition, the Corporation, through a subsidiary of FCB, acquired a third party benefits administrator during the third quarter of 2003. This acquisition added new customers, expanded the Corporation’s product line and improved its technology platform. Also, during 2003 and early 2004, First Charter Brokerage Services, Inc. increased its number of licensed sales associates. As a result of these actions and the continued success of CHAMP, income from service charges, financial management services, brokerage services and insurance services increased in 2004. The Corporation continuously reviews other opportunities for new products, new services and expansion as conditions warrant.

     The Corporation competes against other banks, savings and loan associations, savings banks, credit unions, finance companies and major retail stores that offer competing financial services. Several larger competitors have greater resources, broader geographic coverage and higher lending limits than the Corporation. However, the Corporation has the fourth largest deposit market share in the Charlotte Metro region, which allows the Corporation to compete against both larger and smaller financial institutions.

Performance Overview

     Net income amounted to $42.4 million, or $1.40 per diluted share, for the year ended December 31, 2004, an increase from net income of $14.1 million, or $0.47 per diluted share, for the year ended December 31, 2003. The return on average common shareholders equity was 14 percent in 2004 compared to 5 percent in 2003. Earnings for 2003 were impacted by a higher provision for loan losses primarily attributable to the 2003 Loan Sale and by $19.1 million of costs associated with the refinancing of fixed-term advances.

     The Corporation experienced strong core business fundamentals in the areas of deposits and customer satisfaction during 2004 that is expected to continue to provide strong momentum for 2005. As previously discussed, customer satisfaction scores were 83 percent “very satisfied” for the fourth quarter of 2004. The continued success of CHAMP resulted in 38,607 new checking accounts being opened, an average of 728 new checking accounts per branch. This is well above the industry average of 245 new checking accounts per branch per year. In addition, during 2004, core households, which are households with a checking account, increased 10 percent to 101,249 primarily due to the success of CHAMP.

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Financial Summary

     For the year ended December 31, 2004, net interest income increased $15.2 million, or 14 percent, to $123.0 million from the year ended December 31, 2003 due to the strong loan growth, a decrease in prepayment speeds in the securities-available-for-sale portfolio, the refinancing of fixed-term advances in 2003 and certain asset-liability management transactions entered into during 2004.

     For the year ended December 31, 2004, noninterest income decreased $3.0 million, or 5 percent, to $60.9 million primarily due to lower gains on the sale of securities, lower trading gains and a gain recognized on the sale of the credit card portfolio during 2003, which did not recur in 2004. However, the Corporation’s primary noninterest income lines of business continued to generate strong revenue growth compared to 2003, with financial management income up 58 percent, insurance services income up 20 percent and service charges up 15 percent.

     Noninterest expense decreased $15.8 million, or 12 percent, to $111.0 million primarily due to $19.1 million of prepayment costs associated with refinancing $131.0 million in fixed-term advances in 2003 which did not recur in 2004. In addition, professional service fees decreased $2.0 million. These decreases were partially offset by a $3.7 million increase in salaries and employee benefits due to additional personnel, including the acquisition of a third party benefits administrator and three insurance agencies, increased incentive compensation and employee benefit accruals resulting from an increase in 2004 earnings.

     Income tax expense increased $18.7 million to $22.0 million due to an increase in taxable income relative to nontaxable adjustments and an increase in accrued taxes resulting from a proposed tax assessment received in the third quarter of 2004. The Corporation is appealing this assessment.

Fourth Quarter 2004 Results

     Net income amounted to $11.6 million, or $0.38 per diluted share, for the three months ended December 31, 2004, compared to a net loss of $0.5 million, or $0.02 per diluted share for the same period in 2003. Net income for the three months ended December 31, 2003 were impacted by $11.7 million of costs associated with the refinancing of fixed-term advances.

     Net interest income increased $2.8 million to $31.8 million compared to the fourth quarter of 2003. The increase was due to a $5.5 million increase in interest income primarily resulting from strong loan growth and an increase in interest rates. The increase in interest income was partially offset by a $2.7 million increase in interest expense due to an increase in interest rates and higher levels of deposits and other borrowings. The effect of the increase in rates was partially mitigated by the refinancing of $81 million of fixed-term advances in the fourth quarter of 2003 and by certain asset-liability management transactions entered into during 2004.

     During the fourth quarter of 2004, noninterest income increased $1.8 million to $15.3 million, compared to the fourth quarter of 2003. The increase was primarily due to the following: a $1.1 million increase in service charges; an $0.8 million increase in other noninterest income due to growth in ATM, debit card and other miscellaneous fees and a $0.7 million increase in insurance service income primarily due to increases in contingency income. These increases were partially offset by a $0.2 million decrease in brokerage income, and a $0.2 million decrease in gains on sale of securities.

     Noninterest expense decreased $13.7 million to $27.7 million, compared to the fourth quarter of 2003. The decrease was primarily due to $11.7 million of prepayment costs associated with refinancing $81 million in fixed term advances in 2003 that did not recur in 2004. In addition, professional service fees decreased $1.2 million and salaries and employee benefits decreased $1.0 million primarily due to lower medical and dental expenses and decreased commission-based compensation.

     Total income tax expense for the fourth quarter of 2004 was $6.1 million compared to an income tax benefit of $2.0 million for the fourth quarter of 2003.

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Critical Accounting Estimates and Policies

     The Corporation’s significant accounting policies are described in Note One of the consolidated financial statements and 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 in applying the complex accounting principles to complicated transactions to determine the most appropriate treatment.

     The following is a summary of the more judgmental estimates and complex accounting principles. 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 we believe 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.

Allowance for Loan Losses

     The Corporation considers its policy regarding the allowance for loan losses to be one of its most critical accounting policies, as it requires management’s most subjective and complex judgments. The allowance for loan losses is maintained at a level the Corporation believes is adequate to absorb probable losses inherent in the loan portfolio as of the date of the consolidated financial statements. The Corporation has developed appropriate policies and procedures for assessing the adequacy of the allowance for loan losses that reflect its careful evaluation of credit risk considering all information available to us.

     The determination of the level of the allowance and, correspondingly, the provision for loan losses, rests upon various judgments and assumptions, including: (i) general economic conditions, (ii) loan portfolio composition, (iii) prior loan loss experience, (iv) management’s evaluation of credit risk related to both individual borrowers and pools of loans and (v) observations derived from the Corporation’s ongoing internal audit and examination processes and those of its regulators. Depending on changes in circumstances, future assessments of credit risk may yield materially different results, which may require an increase or decrease in the allowance for loan losses.

     The Corporation employs a variety of statistical modeling and estimation tools in developing the appropriate allowance. The following provides a description of each of the components involved in the allowance for loan losses, the techniques the Corporation used and the estimates and judgments inherent to each component.

     The first component of the allowance for loan losses, the valuation allowance for impaired and certain classified loans, is computed based on documented reviews performed by the Corporation’s Credit Risk Management. The reviews are completed for impaired commercial relationships greater than $150,000 and classified relationships greater than $250,000. Credit Risk Management typically estimates these valuation allowances by considering the fair value of the underlying collateral for each impaired loan using current appraisals or estimates of values. The results of these estimates are updated quarterly or periodically as circumstances change. Changes in the dollar amount of impaired loans or in the estimates of the fair value of the underlying collateral can impact the valuation allowance on impaired loans and, therefore, the overall allowance for loan losses.

     The second component of the allowance for loan losses, the portion attributable to all other loans without specific reserve amounts, is determined by applying historical loss rates to the outstanding balance of loans. The portfolio is segmented into two major categories: commercial loans and consumer loans, which include mortgage, general consumer, consumer real estate, home equity and consumer unsecured loans. Commercial loans are segmented further by risk grade, so that separate loss factors are applied to each pool of commercial loans. The historical loss factors applied to the commercial segments are determined using a migration analysis tool that computes current loss estimates by credit grade using a trailing loss history database. Since the migration analysis is based on trailing data, the percentage loss estimates can change based on actual losses. Changes in commercial loan credit grades or in the mix of

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the portfolio can also impact this component of the allowance for loan losses from period to period. Consumer loans are segmented further by collateral types in order to apply separate loss factors to each pool of consumer loans. The historical loss factors applied to the consumer segments are a twelve-month rolling average of losses. Since the loss factors are based on historical data, the percentage loss estimates can change based on actual losses.

     The third component of the allowance for loan losses is intended to capture the various risk elements of the loan portfolio which may not be sufficiently captured in the historical loss rates. These factors currently include intrinsic risk, operational risk and concentration risk. Intrinsic risk relates to the impact of current economic conditions on the Corporation’s borrower base, the effects of which may not be realized by the Corporation in the form of charge-offs for several periods. The Corporation monitors and documents various local, regional and national economic data, and makes subjective estimates of the impact of changes in economic conditions on the allowance for loan losses. Operational risk includes factors such as the likelihood of loss on a loan due to procedural error. Historically, the Corporation has made additional loss estimates for certain types of loans that were either acquired from other institutions in mergers or were underwritten using policies that are no longer in effect at the Corporation. These identified loans are considered to have higher risk of loss than currently reflected in historical loss rates of the Corporation, so additional estimates of loss are made by management. Concentration risk includes the risk of loss due to extensions of credit to a particular industry, loan type or borrower that may be troubled. The Corporation monitors its portfolio for any excessive concentrations of loans during each period, and if any excessive concentrations are noted, additional estimates of loss would be made. Changes in the allowance for loan losses for these subjective factors can arise from changes in the balance and types of outstanding loans, as well as changes in the underlying conditions which drive a change in the percentage used. As more fully discussed below, the Corporation continually monitors the portfolio in an effort to identify any other factors which may have an impact on loss estimates within the portfolio.

     All estimates of the loan portfolio risk, including the adequacy of the allowance for loan losses, are subject to general and local economic conditions, among other factors, which are unpredictable and beyond the Corporation’s control. Since a significant portion of the loan portfolio is comprised of real estate loans and loans to area businesses, the Corporation is subject to continued risk that the real estate market and economic conditions in general could continue to change and therefore result in additional losses and require increases in the provision for loan losses. If management had made different assumptions about probable loan losses, the Corporation’s financial position and results of operations could have differed materially. For additional discussion concerning the Corporation’s allowance for loan losses and related matters, see Allowance for Loan Losses.

Tax Contingencies

     In accounting for tax contingencies, the Corporation assesses the relative merits and risks of the appropriate tax treatment of transactions taking into account statutory, judicial and regulatory guidance in the context of the Corporation’s tax position. For those matters where it is probable that the Corporation will have to pay additional taxes, interest or penalties and a loss or range of loss can be reasonably estimated, the Corporation has recorded reserves in the consolidated financial statements.

     Changes to the Corporation’s tax contingency estimate occur periodically due to implementation of new tax planning strategies, resolution with taxing authorities of issues with previously taken tax positions and newly enacted statutory, judicial and regulatory guidance. These changes, which are often driven by the Corporation’s judgments, affect current taxes payable and can be material to the Corporation’s operating results for any particular period.

Derivative Instruments

     The Corporation enters into interest rate swap agreements as business conditions warrant. These interest rate swap agreements provide an exchange of interest payments computed on notional amounts that will offset any undesirable change in fair value resulting from market rate changes on designated hedged items. A swap agreement is a contract between two parties to exchange cash flows based on

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specified underlying notional amounts, assets and/or indices. The interest rate swap agreements utilized by the Corporation qualify for hedge accounting as fair value hedges.

     The fair value of the interest rate swaps is determined by a third party at inception and is valued subsequently on a quarterly basis. The valuation is determined using a discounted cash flow model and a volatility index. The Corporation performs a quarterly assessment based on the third party valuations to assess whether the derivative used in its hedging transaction has been highly effective in offsetting changes in the fair value of the hedged item. The effectiveness assessment is conducted using the cumulative dollar offset method.

     The Corporation accounts for these interest rate swaps as a hedge of the fair value of the designated Federal Home Loan Bank (“FHLB”) advances. Currently, three of the Corporation’s seven interest rate swaps meet the criteria for the short-cut accounting method. According to the provisions of Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), the “short cut” method assumes that the change in the fair value of the derivative hedging instrument and the hedged debt obligation is one hundred percent correlated, which results in no ineffectiveness and no income statement effect. For interest rate swaps that do not meet the criteria for the short-cut accounting method, the Corporation records on a quarterly basis, in noninterest income, the net change in the fair value of the interest rate swap and the designated FHLB advances, attributed to changes in interest rates, provided the criteria for hedge accounting continue to be met. In the event the criteria for hedge accounting are not met in a future period, the Corporation will cease recording the change in fair value of the FHLB advances and will amortize into earnings the then carrying value of the interest rate swap over the life of the hedged item. The derivative hedging instruments are recorded at fair value in other assets or other liabilities.

     The Corporation formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions as required by Statement of Financial Accounting Standards No. 133. This documentation includes analysis at inception and is ongoing relative to the effectiveness of the hedging relationship. If the Corporation’s initial judgments were inappropriate, hedge accounting would be reversed and only the change in fair value of the derivative would be recognized through the income statement. The Corporation will discontinue hedge accounting when it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and will reflect changes in fair value through the income statement. See Asset-Liability Management and Interest Rate Risk for further details regarding these interest rate swap agreements.

Net Interest Income and Margin

     Net interest income, the difference between total interest income and total interest expense, is the Corporation’s principal source of earnings. An analysis of the Corporation’s net interest income on a taxable-equivalent basis and average balance sheets for the last three years is presented in Table Two. 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) from year to year are analyzed in Table Three. The discussion below is based on net interest income computed under accounting principles generally accepted in the United States of America.

     For the year ended December 31, 2004, net interest income amounted to $123.0 million, an increase of approximately 14 percent from net interest income of $107.8 million in 2003. This increase was primarily due to a $9.0 million or 5 percent increase in interest income due mainly to strong loan growth, increases in the securities-available-for-sale portfolio and a decrease in prepayment speeds in the securities-available-for-sale portfolio. In addition, net interest income was impacted by a $6.2 million or 9 percent decrease in interest expense compared to 2003. This decrease was primarily due to the following: a shift in funding sources from higher-cost retail CDs to lower-cost transaction based accounts; the

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repricing of retail CDs at lower rates in 2003 and 2004; the refinancing of $131.0 million of fixed-term advances in 2003 and certain asset-liability management transactions entered into during 2004. These decreases were partially offset by an increase in interest rates.

     The net interest margin (tax-adjusted net interest income divided by average interest-earning assets) increased 13 basis points to 3.13 percent in 2004, compared to 3.00 percent in 2003 due to the asset-sensitive nature of the balance sheet. The effective yield on earning assets during 2004 was negatively impacted by earning assets that repriced at lower interest rates during 2003 and the first half of 2004. Rates paid on interest-bearing liabilities decreased 36 basis points primarily due to the previously mentioned deposit-mix shift, refinancings and the Corporation’s Asset Liability Management (“ALM”) transactions. This was partially offset by the 125 basis point increase in the Fed Funds rate. The primary objective of the Corporation in interest rate risk management is to maximize the net interest margin across a broad range of interest rate scenarios, while maintaining an appropriate interest rate risk profile.

     Average interest earning assets increased $342.2 million to $4.0 billion for the year ended December 31, 2004 compared to $3.7 billion for the same 2003 period. These increases were primarily due to growth in the Corporation’s average loans and loans held for sale portfolio, which increased $210.4 million during 2004, compared to the same 2003 period. These increases were mainly due to growth in the home equity, mortgage, consumer and commercial real estate loan categories. The increases in average loans and loans held for sale were partially offset by mortgage loan securitizations of $40.7 million and the sale of $6.4 million of nonaccruing and accruing higher risk mortgage loans in 2004. Average interest earning assets were also impacted by increases in the Corporation’s securities-available-for-sale portfolio of $158.4 million during 2004, compared to 2003.

     In addition to the increase in average interest earning assets, the Corporation experienced an increase in average interest-bearing liabilities. Average other borrowings increased $268.2 million for the year ended December 31, 2004, compared to the same 2003 period and were used to fund loan growth and securities purchases. In addition, average deposits increased $59.2 million from the year ended December 31, 2003. While certificates of deposits declined on average $41.6 million for the year ended December 31, 2004, noninterest-bearing and other core deposit categories increased $100.8 million, primarily due to the continued success of CHAMP.

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     The following table includes for the years ended December 31, 2004, 2003 and 2002 interest income on interest earning assets and related average yields, as well as interest expense on interest-bearing liabilities and related average rates paid. In addition, the table includes the net interest margin. Average balances were calculated based on daily balances.

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

⁽³⁾ Includes amortization of deferred loan fees of approximately $2,616, $2,576, and $2,187, for 2004, 2003 and 2002, respectively.

⁽⁴⁾ Yields on nontaxable securities and loans are stated on a taxable-equivalent basis, assuming a Federal tax rate of 35 percent, applicable state taxes and TEFRA disallowances for 2004, 2003 and 2002. The adjustments made to convert to a taxable-equivalent basis were $1,828, $2,241, and $2,714 for 2004, 2003 and 2002, respectively.

⁽⁵⁾ Amounts in 2003 and 2002 periods have been adjusted to correct a calculation error with respect to average balances.

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     The following table presents the changes in net interest income between the years ended December 31, 2004 and December 31, 2003 and between the years ended December 31, 2003 and December 31, 2002.

⁽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 as well as other banking products and services from the Corporation’s various lines of business including brokerage, mortgage, insurance and financial management. In addition, the Corporation realizes gains from the sale of bond and equity securities and income from its investment in Bank Owned Life Insurance (“BOLI”).

     Noninterest income decreased $3.0 million, or 5 percent, to $60.9 million compared to the same period in 2003. A number of factors contributed to the decrease. Gains on the sale of securities totaling $2.4 million were recognized in 2004, compared to gains of $10.3 million in 2003, representing a decrease of $7.9 million. In 2003, additional gains of $2.3 million from the sale of the First Charter credit card portfolio and $1.8 million of trading gains were recognized. In addition, 2004 mortgage loan fees decreased $1.2 million as origination volume declined and the bank retained a larger portion of mortgage loans. These decreases in noninterest income were partially offset by the following: a $3.4 million increase in service charges primarily due to growth in checking accounts; a $2.1 million increase in financial management income primarily due to the acquisition of a third party benefits administrator in the third quarter of 2003; and a $2.9 million increase in other noninterest income due to growth in ATM and debit card fees, property sale gains of $0.8 million and a gain of $0.3 million recognized on the sale of deposits and loans. In addition, insurance services income increased $1.9 million. The increase in insurance services income was partially due to a full year impact of the successful integration of two insurance agencies acquired in 2003 and a partial year impact for the acquisition of one insurance agency acquired in the fourth quarter of 2004. In addition, insurance services income was impacted by a $0.8 million increase in contingency income, as the Corporation was able to guarantee a higher amount of contingency income compared to 2003. Contingency income is subject to fluctuations based on events beyond the Corporation’s control.

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     The following table compares noninterest income for the years ended December 31, 2004 and 2003.

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 decreased $15.8 million, or 12 percent, to $111.0 million compared to the same period in 2003. The decrease was due to $19.1 million of prepayment costs associated with refinancing $131.0 million in fixed-term advances in 2003 that did not recur in 2004. In addition, professional service fees decreased $2.0 million. These decreases were partially offset by a $3.7 million increase in salaries and employee benefits due to additional personnel, including the acquisition of a third party benefits administrator and three insurance agencies, increased incentive compensation and employee benefit accruals resulting from an increase in 2004 earnings. The decrease in noninterest expense was also offset by a $1.2 million increase in data processing expense primarily related to the implementation of a new deposit platform and a conversion of the Corporation’s ATMs to a new network during 2004 and a $0.7 million increase in occupancy and equipment due to higher lease and depreciation expense from branch expansion.

     The efficiency ratio, noninterest expense divided by the sum of taxable equivalent net interest income plus noninterest income less gain on the sale of securities, decreased to 60.55 percent for the year ended December 31, 2004 compared to 77.45 percent for the year-ended December 31, 2003. A significant portion of the decrease in the efficiency ratio relates to the costs associated with the prepayment of Federal Home Loan Bank advances. Gains on sale of securities of $2.4 million and $10.3 million are excluded from this calculation for the years ended December 31, 2004 and 2003, respectively.

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     The following table compares noninterest expense for the years ended December 31, 2004 and 2003.

Income Tax Expense

     The income tax expense for the year ended December 31, 2004 amounted to $22.0 million for an effective tax rate of 34.2 percent, compared to $3.3 million for an effective tax rate of 18.9 percent for the year ended December 31, 2004. The increase in the effective tax rate for 2004 was due to an increase in taxable income relative to nontaxable adjustments and an increase in accrued taxes resulting from a proposed tax assessment received in the third quarter of 2004. The Corporation is appealing this assessment. For further discussion, see Note Fourteen of the consolidated financial statements.

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     The following table provides certain selected quarterly financial data:

⁽²⁾ Amounts and ratios in prior periods have been adjusted to correct a calculation error with respect to average balances.

⁽³⁾ Noninterest expense divided by the sum of taxable equivalent net interest income plus noninterest income less gain on sale of securities.

Business Segments

     The Corporation’s operations are divided into six operating segments: commercial banking, brokerage, insurance, mortgage, leasing and investments, and financial management. These segments are identified based on the Corporation’s organizational structure, and the review by the Corporation’s chief operating decision makers of the separate results of operations of each of these operating segments. For purposes of segment reporting, the Corporation has only one reportable segment, FCB, the Corporation’s primary banking subsidiary. FCB provides businesses and individuals with commercial loans, retail loans, and deposit banking services. Brokerage, insurance, mortgage, leasing and investments, and financial management are reported as Other Operating Segments. Of these segments, the results of operations of FCB constitute a substantial majority of the consolidated net income, revenues

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and assets of the Corporation, as set forth in Note Two of the consolidated financial statements. Included in Other are revenue, expenses and assets of the parent company and eliminating intercompany transactions.

     The following table for First Charter’s reportable business segment compares total income for the years ended December 31, 2004, 2003 and 2002:

     FCB’s net income was $42.1 million for the year ended December 31, 2004 compared to $15.0 million for the same year-ago period. The increase was primarily due to the following: (i) a $19.1 million decrease in the provision for loan losses primarily attributable to the 2003 Loan Sale, (ii) an $18.2 million decrease in noninterest expense due to $19.1 million of prepayment costs associated with refinancing $131.0 million in fixed-term advances in the 2003, (iii) an $8.8 million increase in interest income due mainly to strong loan growth, increases in the securities-available-for-sale portfolio and a decrease in prepayment speeds in the securities-available-for-sale portfolio, and (iv) a $6.4 million decrease in interest expense due to the previously mentioned deposit-mix shift, refinancings and ALM transactions. These items were partially offset by (i) an $ 18.3 million increase in income tax expense due to an increase in taxable income relative to nontaxable adjustments and an increase in accrued taxes resulting from a proposed tax assessment received in the third quarter of 2004 and (ii) a $7.0 million decrease in noninterest income primarily resulting from a decrease in gains on the sale of securities, the recognition of the gain on the sale of the credit card portfolio in the first quarter of 2003 and lower trading gains.

     Other Operating Segments reported net income of $0.1 million for the year ended December 31, 2004 compared to a net loss of $0.4 million for the same year-ago period. Noninterest income increased $2.8 million due to the following: increases in insurance services revenues resulting from an increase in contingency income and the successful integration of two insurance agencies acquired in 2003 and one insurance agency acquired in the fourth quarter of 2004 and financial management income primarily due to the acquisition of a third party benefits administrator in 2003, partially offset by decreased mortgage services income. The increase in noninterest income was partially offset by increased noninterest expense of $2.3 million resulting from an increase in salaries and employee benefits due to additional personnel, including the acquisition of a third party benefits administrator and three insurance agencies.

     Other reported net income of $0.2 million for the year ended December 31, 2004 compared to a net loss of $0.5 million for the same year-ago period. The increase was primarily attributable to higher noninterest income of $1.2 million resulting from gains on the sale of equity securities during 2004, which was partially offset by increased income tax expense.

Securities-Available-for-Sale

     The securities portfolio, all of which is classified as available-for-sale, is a component of the Corporation’s ALM strategy. The decision to purchase or sell securities is based upon liquidity needs, changes in interest rates, changes in prepayment risk, and other factors. Securities-available-for-sale are accounted for at fair value, with unrealized gains and losses recorded net of tax as a component of other comprehensive income in shareholders’ equity.

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

     At December 31, 2004, securities-available-for-sale were $1.65 billion or 37 percent of total assets, compared to $1.60 billion or 38 percent of total assets at December 31, 2003. The increase in the securities-available-for-sale portfolio was primarily due to the purchase of agency securities funded by the proceeds from the sale of $40.7 million of primarily fixed-rate mortgage loans that were moved to securities-available-for-sale (“securitized”) during 2004. The securities-available-for-sale portfolio also was impacted by an increase in the pre-tax unrealized net losses in the portfolio due to a rise in short- and intermediate-term interest rates. Pre-tax unrealized net losses on securities-available-for-sale were $8.0 million at December 31, 2004 compared to pre-tax unrealized net gains of $10.1 million at December 31, 2003.

     Proceeds from the sale of securities-available-for-sale were $139.3 million and $1.0 billion for the years ended December 31, 2004 and 2003, respectively. Gross gains of $7.2 million and gross losses of $15.2 million were realized in 2004, compared to gross gains of $19.2 million and gross losses of $9.1 million realized in 2003. The weighted average life of the portfolio was 3.84 years at December 31, 2004 compared to 3.66 years at December 31, 2004.

     With market indicators predicting a continued rise in interest rates, the unrealized net losses in the securities-available-for-sale portfolio could increase. However, it is anticipated that the effective yields in the portfolio would increase as the amortization of premiums decreases due to slowing prepayment speeds. To mitigate the risk of rising interest rates on the securities-available-for-sale portfolio, the Corporation has maintained a shortened average life in the portfolio over the past two years. 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. Management is evaluating the purchase of up to $300 million of whole ARM-mortgage loans in the seconday market during 2005, which will be funded by the sales and cash flows from the securities-available-for-sale portfolio. This will reduce the size of the securities-available-for-sale portfolio, and will result in an investment in earning assets with similar average lives and higher yields.

     The following table shows, as of December 31, 2004, 2003, and 2002, the carrying value of (i) U.S. government obligations, (ii) U.S. government agency obligations, (iii) mortgage-backed securities, (iv) state and municipal obligations, and (v) equity securities, which are primarily comprised of Federal Reserve and Federal Home Loan Bank stock.

Loans Held for Sale

     Loans held for sale consist primarily of 15- and 30-year residential mortgage loans which the Corporation intends to sell as whole loans or securitize. Loans held for sale increased to $5.3 million at December 31, 2004 as compared to $5.1 million at December 31, 2003. During 2004, $40.7 million of residential mortgage loans were securitized and subsequently sold.

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Loan Portfolio

     The Corporation’s loan portfolio at December 31, 2004 consisted of six major categories: Commercial Non Real Estate, Commercial Real Estate, Construction, Mortgage, Consumer, and Home Equity. Within these six segments the Corporation targets customers in its geographic area, works within most business segments and focuses on a relationship-based business model. Pricing is driven by quality, loan size, the Corporation’s relationship with the customer and by competition. The Corporation is primarily a secured lender in all these loan categories. The Corporation’s loans are generally five years or less in duration with the exception of home equity lines and residential mortgages, for which the terms range from 15 to 30 years. In addition, the Corporation has a program in which it buys and sells portions of loans (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. Current balances of loans purchased and sold through the strategic partners program were $239.8 million and $19.9 million, respectively, at December 31, 2004. This portfolio includes commercial real estate, commercial non real estate and construction loans. This program enables the Corporation to diversify both its geographic and its total exposure risk.

Commercial Non Real Estate

     The Corporation’s commercial non real estate lending program is generally targeted to serve small-to-middle market businesses with sales of $50 million or less in the Corporation’s geographic area. Commercial lending includes commercial, financial, agricultural and industrial loans. Pricing on commercial non real estate loans, driven largely by the Corporation’s relationship with the customer and by competition, is usually tied to widely recognized market indexes, such as the prime rate, the London Interbank Offer Rate (“LIBOR”) or rates on U.S. Treasury securities.

Commercial Real Estate

     Similar to commercial non real estate lending, the Corporation’s commercial real estate lending program is generally targeted to serve small-to-middle market business with sales of $50 million or less in the Corporation’s geographic area. The real estate loans are both owner occupied and project related. As with commercial non real estate loans, pricing on commercial real estate loans, driven largely by the Corporation’s relationship with the customer and by competition, is usually tied to widely recognized market indexes, such as the prime rate, LIBOR or rates on U.S. Treasury securities.

Construction

     Real estate construction loans include both commercial and residential construction/permanent loans, which are intended to convert to permanent loans upon completion of the construction project. Loans for commercial construction are usually to in-market developers, builders, businesses, individuals or real estate investors for the construction of commercial structures primarily in the Corporation’s market area. From time to time, the Corporation purchases construction loans in other market areas through a correspondent relationship. At December 31, 2004, loans purchased through this relationship represented 24 percent of the total construction loan portfolio. Construction loans purchased are typically serviced by third parties. Loans are made for purposes including, but not limited to, the construction of industrial facilities, apartments, shopping centers, office buildings, homes and warehouses. The properties may be constructed for sale, lease or owner-occupancy.

Mortgage

     The Corporation originates 1-4 family residential mortgage loans throughout the Corporation’s footprint and in Reston, Virginia, which is a loan origination office. The Corporation offers a full line of products, including conventional, conforming, and jumbo fixed rate and adjustable rate mortgages which are originated and securitized or sold into the secondary market; however, from time to time a portion of this production is retained and serviced through a third party arrangement.

Consumer

     The Corporation offers a wide variety of consumer loan products. Various types of secured and unsecured loans are marketed to qualifying existing customers and to other creditworthy candidates in the Corporation’s market area. Unsecured loans, including revolving credits (e.g. checking account overdraft

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protection and personal lines of credit) are provided and various installment loan products such as vehicle loans are offered. All consumer lending is centrally decisioned and documented.

Home Equity

     Home Equity loans and lines are secured by first and second deeds of trust on the borrower’s residential real estate. As with all consumer lending, home equity loans are centrally decisioned and documented to ensure the underwriting conforms to the corporate lending policy.

     Gross loans increased $186.9 million, or 8 percent, to $2.44 billion at December 31, 2004 compared to $2.25 billion at December 31, 2003. The growth in loans was primarily due to (i) a $74.1 million increase in home equity loans partially due to the Corporation’s direct mailing campaign, (ii) a $66.9 million increase in primarily adjustable rate mortgage loans, (iii) a $52.1 million increase in commercial real estate loans and (iv) a $19.7 million increase in consumer loans. These increases were partially offset by a $26.0 million decrease in construction loans. In addition, $6.4 million of nonaccruing and accruing higher risk residential mortgage loans were sold to investors during the first quarter of 2004 and $40.7 million of primarily fixed-rate mortgage loans originated in 2004 were classified as held for sale, securitized and subsequently sold.

     The mix of variable-rate, adjustable-rate and fixed-rate loans is incorporated in the Corporation’s ALM strategy. As of December 31, 2004, of the $2.44 billion loan portfolio, approximately $1.57 billion was tied to variable interest rates, most of which reprice within one day of any interest rate change; approximately $0.6 billion was tied to fixed interest rates with scheduled maturities and $0.3 billion was tied to adjustable interest rates, which are ARM loans and reprice on a fixed schedule.

     The table below summarizes loans in the classifications indicated as of December 31, 2004, 2003, 2002, 2001, and 2000.

Deposits

     The Corporation’s CHAMP continues to attract new customers and deposits. During 2004, 38,607 new checking accounts were opened. This program is designed to develop new customer relationships, shift the Corporation’s funding mix towards lower-cost funding sources and generate additional fee income opportunities.

     Total deposits increased $181.9 million, or 7 percent, to $2.61 billion at December 31, 2004 compared to $2.43 billion at December 31, 2003. The increase in deposits was due to a $95.3 million increase in CDs resulting primarily from a promotional campaign launched in November. In addition, low-cost interest checking, savings and noninterest-bearing deposits increased $78.9 million and money market accounts increased $7.8 million. Table Two provides information on the average deposit balances for the years ended December 31, 2004, 2003 and 2002, respectively.

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Other Borrowings

     Other borrowings consist of Federal Funds purchased, securities sold under agreement to repurchase, FHLB borrowings and other miscellaneous borrowings. Federal funds purchased represent unsecured overnight borrowings from other financial institutions by the Bank. Securities sold under agreements to repurchase represent short-term borrowings by the Bank with maturities less than one year collateralized by a portion of the Corporation’s securities investment portfolio of the United States government or its agencies. These borrowings are an important source of funding to the Corporation. Access to alternate short-term funding sources allows the Corporation to meet funding needs without relying on increasing deposits on a short-term basis. FHLB borrowings are collateralized by securities from the Corporation’s investment portfolio and a blanket lien on certain qualifying commercial and single family loans held in the Corporation’s loan portfolio. FHLB borrowings are an alternative to other funding sources with similar maturities. Other borrowings increased slightly during the year, to $1.45 billion at December 31, 2004, from $1.43 billion at December 31, 2003. Deposit growth was the primary funding source for the growth in earning assets.

     The following is a schedule of other borrowings which consists of the following categories: securities sold under repurchase agreements, federal funds purchased and FHLB borrowings for the years ended December 31, 2004, 2003 and 2002.