UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

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

For the quarterly period ended March 31, 2005

OR

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

Commission File Number 0-15829

FIRST CHARTER CORPORATION

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

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

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).

     As of May 6, 2005 the Registrant had outstanding 30,386,262 shares of Common Stock, no par value.

First Charter Corporation

INDEX

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PART 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

First Charter Corporation and Subsidiaries

See accompanying notes to consolidated financial statements.

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First Charter Corporation and Subsidiaries

See accompanying notes to consolidated financial statements.

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First Charter Corporation and Subsidiaries

See accompanying notes to consolidated financial statements.

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First Charter Corporation and Subsidiaries

See accompanying notes to consolidated financial statements.

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First Charter Corporation and Subsidiaries

     First Charter Corporation (the “Corporation”) is a regional financial services company with assets of approximately $4.51 billion and is the holding company for First Charter Bank (“First Charter” or “the Bank”). The Bank is a full-service bank and trust company with 53 financial centers, seven insurance offices and 101 ATMs located in 18 counties throughout the piedmont and western half of North Carolina. The Bank also operates mortgage origination offices in Raleigh, NC and Reston, VA. The Bank provides businesses and individuals with a broad range of financial services, including banking, financial planning, funds management, investments, insurance, mortgages and a full array of employee benefit programs.

Note One — Accounting Policies

     The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiary, the Bank. In consolidation, all intercompany accounts and transactions have been eliminated.

     The information contained in the consolidated financial statements, excluding information as of the fiscal year ended December 31, 2004, is unaudited. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, as well as the amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

     The information furnished in this report reflects all adjustments which are, in the opinion of management, necessary to present a fair statement of the financial condition and the results of operations for interim periods. All such adjustments are of a normal and recurring nature. Certain amounts reported in prior periods have been reclassified to conform to the current period presentation. Such reclassifications have no effect on net income or shareholders’ equity as previously reported.

     Accounting policies followed by the Corporation are presented on pages 56 to 65 of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004. These policies have not materially changed from that disclosure.

Recently Adopted Accounting Pronouncements

     In December 2003, the American Institute of Certified Public Accountants (“AICPA”) issued Statement of Position 03-03 (“SOP 03-03”), which addresses the accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least in part, to credit quality. SOP 03-03 includes loans acquired in purchase business combinations and applies to all nongovernmental entities. SOP 03-03 does not apply to loans originated by the entity. SOP 03-03 is effective for loans acquired in fiscal years beginning after December 15, 2004. The Corporation adopted SOP 03-03 effective January 2005 with no material effect on its consolidated financial statements.

     In October 2004, Congress enacted the American Jobs Creation Act of 2004 (the “2004 Act”). Under this legislation, non-qualified deferred compensation plans are subject to new rules governing to the income tax treatment of contributions and distributions related to these plans. The 2004 Act could provide less favorable overall income tax treatment for mutual fund option investments beginning in 2005. As a result, participants in the First Charter Option Plan Trust and the First Charter Corporation Directors’ Option Deferral Plan may direct the administrative committee to invest their 2005 deferrals directly into mutual funds while the Corporation reviews further guidance from the Internal Revenue Service with respect to the mutual fund option investments. The Corporation does not anticipate any material effects on its consolidated financial statements from the 2004 Act.

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Note Two — Net Income Per Share

     Basic net income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding for the three months ended March 31, 2005 and 2004, respectively. Diluted net income per share reflects the potential dilution that could occur if the Corporation’s potential common stock and contingently issuable shares, which consist of dilutive stock options and restricted stock, were issued. The numerators of the basic net income per share computations are the same as the numerators of the diluted net income per share computations for all periods presented.

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

     The effects of outstanding antidilutive stock options are excluded from the computation of diluted earnings per share. These amounts were 992 thousand shares for the three months ended March 31, 2005 and 845 thousand shares for the comparable 2004 period.

     Dividends declared by the Corporation were $0.19 per share for the three months ended March 31, 2005 and $0.185 per share for the comparable 2004 period.

Note Three — Business Segment Information

     The Corporation has only one reportable segment, the Bank, the Corporation’s primary banking subsidiary. The Bank provides businesses and individuals with commercial loans, retail loans, and deposit banking services. Other Operating Segments include brokerage, insurance, mortgage, leasing and investments, and financial management, which provide comprehensive financial planning and investments. The results of operations of the Bank constitute a substantial majority of the consolidated net income, revenues and assets of the Corporation. Included in Other are revenue, expenses and assets of the parent company, which include cash, equity investments and investments in venture capital limited partnerships, and eliminating intercompany transactions.

     Business segments are determined based on the Corporation’s internal management accounting process. The internal management accounting process, unlike financial accounting in accordance with generally accepted accounting principles, is based on the method management uses to view its business and is not necessarily comparable with information disclosed by other financial institutions. The accounting policies of the business segments differ from those described in Note One in that management allocations have been made for overhead expenses. Certain expenses not directly attributable to a specific business segment are allocated to the segments based on pre-determined means. Occupancy costs are allocated based on headcount and certain payroll benefits are allocated based on a predetermined percentage of salary expense. The results of operations and segment assets are based upon monthly internal management reports. There are no significant intersegment transactions, and there are no significant reconciling items between the reportable segments and consolidated amounts.

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     Information regarding the reportable segment’s separate results of operations and segment assets is illustrated in the following tables:

Note Four — Goodwill and Other Intangible Assets

     The following is a summary of the gross carrying amount and accumulated amortization of amortized intangible assets and the carrying amount of unamortized intangible assets as of March 31, 2005 and December 31, 2004:

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     Amortization expense, excluding amortization of mortgage servicing rights, totaled $131 thousand and $118 thousand for the three months ended March 31, 2005 and 2004, respectively.

     The following table presents the estimated amortization expense for intangible assets for the years ended December 31, 2005, 2006, 2007, 2008, 2009, and 2010 and thereafter:

Note Five — Comprehensive Income

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

     The Corporation’s total comprehensive income for the three months ended March 31, 2005 was a loss of $0.5 million compared to total comprehensive income for the three months ended March 31, 2004 of $14.3 million. Information concerning the Corporation’s other comprehensive income for three months ended March 31, 2005 and 2004 is as follows:

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Note Six — Securities-Available-for-Sale

     Securities-available-for-sale at March 31, 2005 and December 31, 2004 are summarized as follows:

     Securities with an aggregate carrying value of $998.7 million at March 31, 2005 were pledged to secure public deposits, securities sold under agreements to repurchase and Federal Home Loan Bank FHLB borrowings.

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

     At March 31, 2005 and December 31, 2004, the Bank owned stock in the Federal Home Loan Bank of Atlanta with a cost basis (par value) of $59.1 million and $59.3 million, respectively, which is included in equity securities. While these securities have no quoted fair value, they are redeemable at par value from the FHLB. In addition, the Bank owned Federal Reserve Bank stock with a cost basis (par value) of $4.1 million at both March 31, 2005 and December 31, 2004, which is included in equity securities.

     At March 31, 2005, mortgage-backed securities of $577.3 million were considered temporarily impaired. Mortgage-backed securities are investment grade securities backed by a pool of mortgages or trust deeds. Principal and interest payments on the underlying mortgages are used to pay monthly interest and principal on the securities. Because some mortgage pools will pay off faster than others, mortgaged-backed securities are typically issued as a series of several different bonds, each having a different maturity date. U.S. government agency obligations of $597.1 million were considered temporarily impaired at March 31, 2005. U.S. government agency obligations are interest-bearing debt securities of U.S.

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government agencies (i.e. FNMA and FHLMC). U.S. government obligations of $14.5 million were considered temporarily impaired at March 31, 2005. These obligations are securities issued by the U.S. Treasury. State, county and municipal obligations of $15.3 million were considered temporarily impaired at March 31, 2005. These obligations are debt instruments that are obligations of a state, county or municipality.

     The unrealized losses shown in the following table resulted primarily from an increase in short-term and intermediate rates.

     Investments that are in a gross unrealized loss position include three U.S. government obligations, forty-seven U.S. agency securities, forty-five mortgage-backed securities and thirteen municipal obligations. The unrealized losses associated with these securities are not considered to be other-than-temporary, because they are related to changes in interest rates and do not affect the expected cash flows of the underlying collateral or the issuer. In addition, investments that have been in an unrealized loss position for longer than one year have an external credit rating of AA1 or higher. At March 31, 2005, the Corporation has the ability to hold these investments to maturity.

Note Seven — Derivatives

     The Corporation accounts for interest rate swaps as a hedge of the fair value of designated liabilities. For both the three months ended March 31, 2005 and 2004, the Corporation recognized a net loss of $1 thousand for the ineffective portion of the interest rate swaps. At March 31, 2005, the derivative hedging instruments were recorded at fair value in other assets. These instruments had gross unrealized gains of $0.9 million and gross unrealized losses of $10.2 million at March 31, 2005.

     Information concerning the Corporation’s derivative instruments for the three months ended March 31, 2005 is as follows:

     According to the provisions of 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. Of the $222.0 million aggregate notional amount of interest rate swap agreements entered into during 2004, three out of seven agreements totaling $90.0 million qualify for the “short cut” method; therefore, there was no impact on earnings during the three months ended March 31, 2005 from those interest rate swap agreements.

Note Eight — Loans and Allowance for Loan Losses

     The Corporation’s primary market area includes North Carolina, and predominately centers around the Metro region of Charlotte, North Carolina. At March 31, 2005, the majority of the total loan portfolio was to borrowers within this region. The diversity of the region’s economic base provides a stable lending

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environment. No areas of significant concentrations of credit risk have been identified due to the diverse industrial base in the region.

     Loans at March 31, 2005 and December 31, 2004 were:

     Loans held for sale consist primarily of 15- and 30-year mortgages which the Corporation intends to securitize or sell as whole loans. Loans held for sale are carried at the lower of aggregate cost or market. Loans held for sale were $6.0 million and $5.3 million at March 31, 2005 and December 31, 2004, respectively. No valuation allowance to reduce these loans to lower of cost or market was required at March 31, 2005 or December 31, 2004.

     The following is a summary of the changes in the allowance for loan losses for the three months ended March 31, 2005 and 2004:

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

     The recorded investment in individually impaired loans was $4.0 million (all of which were on nonaccrual status) and $7.7 million (all of which were on nonaccrual status) at March 31, 2005 and December 31, 2004, respectively. The related allowance for loan losses on these loans was $1.3 million and $2.1 million at March 31, 2005 and December 31, 2004, respectively. The average recorded investment in individually impaired loans for the three months ended March 31, 2005 and 2004 was $5.5 million and $5.0 million, respectively.

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Note Nine — Stock-Based Compensation

     The Corporation accounts for stock-based compensation under the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees.” The following table present’s the Corporation’s net income and earnings per share as reported, and proforma net income and proforma earnings per share assuming compensation cost for the Corporation’s stock option plans had been determined based on the fair value at the grant dates for awards under those plans granted, pursuant to the provisions of the Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”.

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

     Commitments and Off-Balance Sheet Risk. The Corporation is party to various financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated financial statements. Commitments to extend credit are agreements to lend to a customer so long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates and may require collateral from the borrower if deemed necessary by the Corporation. Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party up to a stipulated amount and with specified terms and conditions. Standby letters of credit are recorded as a liability by the Corporation at the fair value of the obligation undertaken in issuing the guarantee. The fair value and carrying value at March 31, 2005 of standby letters of credit issued or modified during the three months ended March 31, 2005 was immaterial. Commitments to extend credit are not recorded as an asset or liability by the Corporation until the instrument is exercised. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for instruments reflected in the consolidated financial statements. The creditworthiness of each customer is evaluated on a case-by-case basis.

     At March 31, 2005, the Corporation’s exposure to credit risk was represented by preapproved but unused lines of credit totaling $386.9 million, loan commitments totaling $495.0 million and standby letters of credit in an aggregate amount of $9.3 million. Of the $386.9 million of preapproved unused lines of credit, $28.0 million were at fixed rates and $358.9 million were at floating rates. Of the $495.0 million of loan commitments, $121.0 million were at fixed rates and $374.0 million were at floating rates. Of the $9.3 million of standby letters of credit, $9.1 million expire in less than one year and $0.2 million expire in one to three years. The maximum amount of credit loss of standby letters of credit is represented by the contract amount of the instruments. Management expects that these commitments can be funded through normal operations. The amount of collateral obtained if deemed necessary by the Corporation upon extension of

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credit is based on management’s credit evaluation of the borrower at that time. The Corporation generally extends credit on a secured basis. Collateral obtained may include, but is not limited to, accounts receivable, inventory and commercial and residential real estate.

     The Bank primarily makes commercial and installment loans to customers throughout its market area. The Corporation’s primary market area includes the state of North Carolina, and predominately centers on the Metro region of Charlotte, North Carolina. The real estate loan portfolio can be affected by the condition of the local real estate markets.

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

     During the third quarter of 2004, the Corporation received a proposed income tax assessment from the North Carolina Department of Revenue for the 1999 and 2000 tax years. As a result of this assessment, the Corporation increased its tax reserves by $818 thousand during 2004. The Corporation’s maximum exposure related to this assessment in excess of the current reserve is approximately $1.5 million, net of tax. The Corporation may also have similar exposure related to its 2001 — 2004 state tax filings. The Corporation is in the process of appealing this assessment. The Corporation believes it has substantial authority for its reporting and believes that the ultimate outcome will not result in an adverse impact to its results of operations. The Corporation will re-evaluate the adequacy of this reserve as new information or circumstances warrant.

Note Eleven — Related Party Transactions

     In the ordinary course of business, the Corporation engages in business transactions with certain of its directors. Such transactions are competitively negotiated at arms-length by the Corporation and are not considered to include terms which are unfavorable to the Corporation.

     During 2001, the Corporation implemented an automatic overdraft product, which allows customers the ability to overdraw their account and have their transactions honored for a fee. During the fourth quarter of 2001, the Corporation engaged Impact Financial Services (“Impact”) to provide this product. Impact received a fee from the Corporation equal to 15 percent of the incremental income from this new product for a twenty four-month period commencing the fourth full month after the Corporation began to offer the product. John Godbold, a director of the Corporation, is the president and owner of Godbold Financial Associates, Inc. (“GFA”), which acts as an independent sales representative for Impact for Maryland, North Carolina, South Carolina and Virginia, and as such GFA and Mr. Godbold received commissions from Impact based on fees earned by Impact. Management believes that the transaction was at arms-length. Pursuant to the Corporation’s conflict of interest policy for directors and executive officers, the members of the Corporation’s Board of Directors who did not have a direct or indirect interest in the related party transaction reviewed this related party transaction and determined that it was fair to the Corporation and subsequently approved and ratified the transaction. As described above, no fees were required to be paid to Impact until the fourth full month following introduction of the new product, therefore, no fees were payable to Impact and no commissions were payable to GFA and Mr. Godbold until March 2002. This arrangement terminated on March 31, 2004. For the three months ended March 31, 2004, the Corporation received revenues of approximately $1.1 million, which resulted in fees of $164 thousand to Impact and resulted in Impact paying commissions to GFA (and Mr. Godbold) of $115 thousand.

     During the third quarter of 2004, the Corporation entered into a three-year contract pertaining to a software licensing agreement and regulatory compliance guarantee with Impact. The aggregate cost for the three-year period is $76 thousand. Mr. Godbold has a 50 percent financial interest in this transaction. Pursuant to the Corporation’s conflict of interest policy for directors and executive officers, the members of the Corporation’s Board of Directors who did not have a direct or indirect interest in the related party transaction reviewed this related party transaction and determined that it was fair to the Corporation and subsequently approved the transaction.

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Note Twelve — Subsequent Event

     On April 27, 2005 the Corporation modified a legacy short-term disability employee benefit plan. As a result, the Corporation will take a charge to earnings in the second quarter of 2005 of up to $1.1 million to provide for anticipated obligations related to this modification of the legacy plan.

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

     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, the Bank. The Corporation’s principal executive offices are located in Charlotte, North Carolina. The Bank 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 Raleigh, NC and Reston, Virginia for the origination of real estate loans. The operation in Reston, Virginia also serves 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 5.1 percent in March 2005 compared to 6.6 percent in March 2004. 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

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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, 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.

     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 the first quarter of 2005 in home equity, mortgage, construction, 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 loan officers and an increased focus on small business loans.

     In addition, as part of its growth strategy, the Bank entered the Raleigh market by opening a loan production office in the first quarter of 2005 and introducing teams to originate mortgage and construction loans to individuals and residential builders. In addition, the Corporation anticipates offering consumer loans in the Raleigh market later this year.

     During the first quarter of 2005, the Corporation purchased $215.5 million of adjustable-rate mortgage (“ARM”) loans. This purchase was executed under a previously disclosed strategy in which the sale of investment securities and portfolio cash flows would fund the ARM purchases.

     The Corporation continues its focus on reducing funding costs through its strategy of growing deposit balances and shifting funding sources from higher-cost retail certificates of deposit to lower-cost, transaction-based accounts, including noninterest bearing deposit, savings, money market and demand deposit accounts. The Corporation’s Checking Account Marketing Program (“CHAMP”) continues to attract new customers and deposits. 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.

     Maintaining sound asset quality is another major focus for the Corporation. As a result of this focus, the Corporation’s asset quality ratios have improved significantly and remain solid. 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 conducts a quarterly independent survey of customers to review its level of customer service. During the first quarter of 2005, 85 percent of the customers surveyed reported that they were “very satisfied” with the service at the Bank, compared to the industry average of 58 percent. To meet the convenience needs of existing and potential customers, the Corporation opened one de novo branch and upgraded two existing branches during 2004, recently 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 markets as both market and economic conditions warrant. At this time, one de novo branch and three branch upgrades are in process, with the expectation that all of these will be completed by December 31, 2005.

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     Another focus for the Corporation is growing fee income through complementary lines of business. These business lines diversify the Corporation’s earnings with minimal credit risk. The Corporation, through a subsidiary of the Bank, acquired an insurance agency during the fourth quarter of 2004. This acquisition expanded the reach of the Corporation’s insurance services with businesses and individuals throughout the Charlotte Metro region. As a result of this acquisition and the continued success of CHAMP, income from service charges and insurance services increased from the first quarter of 2004. The Corporation continuously reviews other opportunities for new products, new services and expansion as conditions warrant.

     Competitive pricing pressure on both sides of the balance sheet has mitigated the asset-sensitive nature of the Corporation’s balance sheet resulting in a compression of the margin. In addition, a flattening of the yield curve has added additional margin pressure.

     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 different resources, broader geographic coverage and higher lending limits than the Corporation. The Corporation has the fourth largest deposit market share in the Charlotte Metro region, which gives the Corporation greater opportunity to attract new customers and increase its market share.

Financial Overview

     Net income was $10.3 million, or $0.34 per diluted share, for the three months ended March 31, 2005, an increase from net income of $9.2 million, or $0.31 per diluted share, for the same period in 2004. First quarter 2005 earnings included $1.0 million of pre-tax expenses associated with the previously reported separation agreement entered into with the Corporation’s former CFO in connection with his retirement from the Corporation.

     The annualized return on average assets and common shareholders equity was 0.94 percent and 13.2 percent in for the three months ended March 31, 2005, respectively, compared to 0.88 percent and 12.2 percent for the same period in 2004.

     Net interest income was $30.6 million during the three months ended March 31, 2005 compared to $30.4 million for the three months ended March 31, 2004, representing a 1 percent increase. A primary driver of this increase was an increase in loan volume, including the previously discussed ARM purchases. The provision for loan losses was $1.9 million for the three months ended March 31, 2005 compared to $3.0 million for the same period a year ago. The decrease was primarily due to improved credit quality trends, including lower net charge-offs. For the three months ended March 31, 2005, noninterest income increased $1.1 million, or 8 percent, to $15.8 million primarily due to increases in service charges, other miscellaneous fees, and insurance service income. Noninterest expense increased $0.6 million, or 2 percent, to $28.9 million primarily due to the aforementioned separation agreement and increased data processing expense.

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     The Corporation’s significant accounting policies are described in Note One of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2004, on pages 56 to 65, 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 Corporation has identified three accounting policies as being critical in terms of judgments and the extent to which estimates are used: allowance for loan losses, tax contingencies and derivative instruments. In many cases, there are numerous alternative judgments that could be used in the process of estimating values of assets or liabilities. Where alternatives exist, the Corporation has used the factors that 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. For more information on our critical accounting policies, please refer to pages 19 to 21 of our Annual Report on Form 10-K for the year ended December 31, 2004.

Net Interest Income and Margin

     Net interest income, the difference between total interest income and total interest expense, is the Corporation’s principal source of earnings. An analysis of the Corporation’s net interest income on a taxable-equivalent basis and average balance sheets for the three months ended March 31, 2005 and 2004 is presented in Table Two. Net interest income on a taxable-equivalent basis (“FTE”) is a non-GAAP (Generally Accepted Accounting Principles) performance measure used by management in operating the business which management believes provides investors with a more accurate picture of the interest margin for comparative purposes. The changes in net interest income (on a taxable-equivalent basis) for the three months ended March 31, 2005 and 2004 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 three months ended March 31, 2005, net interest income amounted to $30.6 million, an increase of approximately 1 percent from net interest income of $30.4 million for the three months ended March 31, 2004. The increase was primarily due to an increase in average earning assets, specifically in loans as a result of strong loan growth. This was partially offset by a more rapid increase in rates paid on interest bearing liabilities than asset yields.

     The net interest margin (tax-adjusted net interest income divided by average interest-earning assets) decreased 13 basis points to 3.06 percent for the three months ended March 31, 2005, compared to 3.19 percent in the same 2004 period. The net interest margin was negatively impacted by a 56 basis point increase in the cost of interest bearing liabilities. Partially offsetting this increase was a 35 basis point increase in earning asset yields for the three months ended March 31, 2005 as compared to the same 2004 period.

     The cost of interest bearing liabilities during the first quarter of 2005, was impacted by a 93 basis point increase in other borrowing costs and a 34 basis point increase in deposit yields compared to the same 2004 time period. Average interest-bearing liabilities increased $165.5 million compared to March 31, 2004. The increase was primarily due to a $151.8 million increase in interest-bearing deposits compared to March 31, 2004, as average retail certificates of deposits increased $83.8 million and average wholesale deposits increased $50.0 million. In addition, average other borrowings increased $13.9 million.

     The yields on earning assets were impacted by an increase of 62 basis points in the yields on loans, and a decrease of 21 basis points in the yields on securities-available-for-sale, for the first quarter of 2005 compared to 2004. Average interest earning assets increased $237.2 million to $4.12 billion at March 31,

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2005 compared to $3.88 billion for the same 2004 period. These increases were primarily due to growth in the Corporation’s average loans and loans held for sale portfolio, which increased $278.3 million, compared to March 31, 2004. A portion of the increase in loans was due to the purchase of ARM loans during the first quarter, which increased average loans and loans held for sale $106.8 million. This purchase was executed under a previously disclosed strategy in which the sale of investment securities and portfolio cash flows would fund the ARM loan purchases. These ARM loans have similar average lives and a higher yield than the securities sold. These transactions also resulted in a $29.2 million decrease in the average balance of securities-available-for-sale, compared to March 31, 2004.

     The Corporation’s primary interest rate risk management objective is to maximize net interest income across a broad range of interest rate scenarios, subject to risk tolerance approval by Management and the Board of Directors.

     The following table compares interest income and yields for average interest earning assets and interest expense and rates paid on average interest bearing liabilities for the three months ended March 31, 2005 and 2004. In addition, the table includes the net interest margin.