As filed with the Securities and Exchange Commission on August 30, 2006

Registration No. 333-135847

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Amendment No. 1

to

 

Form S-4

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

FIRST CHARTER CORPORATION

(Exact name of registrant as specified in its charter)

 

 

10200 David Taylor Drive

Charlotte, North Carolina 28262-2373

(704) 688-4300

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

Stephen J. Antal

Executive Vice President,

General Counsel and Corporate Secretary

First Charter Corporation

10200 David Taylor Drive

Charlotte, North Carolina 28262-2373

(704) 688-4300

(Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

Copies to:

 

 

 

Approximate date of commencement of proposed sale to the public:  As soon as practicable after this registration statement becomes effective.

 

If the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.  o

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

SUBJECT TO COMPLETION, DATED AUGUST 30, 2006

 

 

MERGER PROPOSED — YOUR VOTE IS VERY IMPORTANT

 

The boards of directors of First Charter Corporation (First Charter) and GBC Bancorp, Inc. (GBC) each have approved a merger of GBC with and into First Charter. GBC shareholders will have the opportunity to elect to receive merger consideration in the form of 1.989 shares of First Charter common stock, $47.74 in cash, or a combination of First Charter common stock and cash, for each share of GBC common stock they own. However, because 70% of the total number of shares of GBC common stock outstanding at the closing will be converted into First Charter common stock and the remaining 30% of the outstanding shares will be converted into cash, you may receive a combination of cash and shares of First Charter common stock for your GBC shares that is different than what you elected, depending on the elections made by other GBC shareholders.

 

The value of the merger consideration will fluctuate with the market price of First Charter common stock. The following table shows the closing sale price of First Charter common stock and the most recent market quotation for GBC common stock as reported on June 1, 2006, the last trading day before we announced the merger, and on August 29, 2006, the last practicable trading day before the distribution of this document. This table also shows the implied value of the merger consideration proposed for each share of GBC common stock, which we calculated by assuming 70% of each share of GBC’s common stock is converted into First Charter common stock at an exchange ratio of 1.989 shares per full GBC share and the remaining 30% is converted into cash at a price of $47.74 per full GBC share.

 

 

The market prices of both First Charter common stock and GBC common stock will fluctuate before the merger. You should obtain current stock price quotations for First Charter common stock and GBC common stock. First Charter common stock is quoted on the NASDAQ Global Select Market under the symbol “FCTR.” Shares of GBC common stock are thinly traded on the OTC Bulletin Board under the symbol “GBCP.OB.” We expect that the merger will generally be tax-free to you as to shares of First Charter common stock you receive in the merger and generally taxable as to the cash you receive.

 

We cannot complete the merger unless GBC’s shareholders approve it. GBC will hold a special meeting of its shareholders to vote on this merger proposal at the main office of Gwinnett Banking Company at 165 Nash Street, Lawrenceville, Georgia 30045, on October 17, 2006, at 8:00 a.m., local time. Your vote is important. Regardless of whether you plan to attend the special shareholders’ meeting, please take the time to vote your shares in accordance with the instructions contained in this document. Failing to vote will have the same effect as voting against the merger. The GBC board of directors unanimously recommends that GBC shareholders vote FOR approval of the merger.

 

This document describes the special meeting, the merger, the documents related to the merger and other related matters. Please carefully read this entire document, including “Risk Factors” beginning on page 14 for a discussion of the risks relating to the proposed merger. You also can obtain information about our companies from documents that each of us has filed with the Securities and Exchange Commission.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved the First Charter common stock to be issued under this document or determined if this document is accurate or adequate. Any representation to the contrary is a criminal offense.

 

The date of this document is August 30, 2006, and it is first being mailed or otherwise delivered to GBC shareholders on or about September 1, 2006.

GBC Bancorp, Inc.

165 Nash Street

Lawrenceville, Georgia 30045

 

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

To Be Held on October 17, 2006

 

 

NOTICE IS HEREBY GIVEN that a special meeting of shareholders of GBC Bancorp, Inc. will be held at the main office of Gwinnett Banking Company at 165 Nash Street, Lawrenceville, Georgia 30045 on October 17, 2006, at 8:00 a.m., local time, to consider and vote upon the following matters:

 

 

The merger with First Charter is more fully described in the attached Proxy Statement/Prospectus, which you should read carefully and in its entirety before voting. A copy of the merger agreement is included as Appendix A to the accompanying Proxy Statement/Prospectus. Holders of GBC common stock may exercise dissenters’ rights under Article 13 of the Georgia Business Corporation Code. We have attached a copy of that law as Appendix C to the accompanying Proxy Statement/Prospectus.

 

Our board of directors unanimously recommends that you vote “FOR” approval of the merger.

 

Please complete, sign and return the enclosed proxy card promptly in the enclosed postage-paid envelope. Your vote is important, regardless of the number of shares that you own. Voting by proxy will not prevent you from voting in person at GBC Bancorp, Inc.’s special meeting, but will assure that your vote is counted if you are unable to attend.

 

By Order of the Board of Directors

 

 

Larry D. Key

Chairman of the Board, President and

Chief Executive Officer

GBC Bancorp, Inc.

 

Lawrenceville, Georgia

August 30, 2006

HOW TO GET COPIES OF RELATED DOCUMENTS

 

This document incorporates important business and financial information about First Charter that is not included in or delivered with this document. You may receive this information free of charge upon written or oral request. You can obtain documents incorporated by reference in this document, other than certain exhibits to those documents, by requesting them in writing or by telephone from First Charter at the following address.

 

First Charter Corporation

10200 David Taylor Drive

Charlotte, North Carolina 28262-2373

Attention: Investor Relations

Telephone: (704) 688-4300

 

You will not be charged for any of these documents that you request. GBC shareholders requesting documents should do so by October 10, 2006 in order to receive them before the special meeting.

 

See “Where You Can Find More Information” on page 102.

TABLE OF CONTENTS

 

 

 

SUMMARY

 

About This Document

 

The Companies

 

The Merger

										Implied Value per
		First Charter								Share of GBC
		Common Stock				GBC Common Stock				Common Stock
At June 1, 2006		$	24.56			$	39.00			$	48.52
At August 29, 2006		$	24.13			$	46.86			$	47.92

	•	Prior to completion of the merger, First Charter will take certain actions to appoint to the First Charter board of directors an individual from the GBC region that is mutually agreed upon by First Charter and GBC;
	•	As a condition to entering into the merger agreement, First Charter required that Larry D. Key, GBC’s Chairman of the Board, President and Chief Executive Officer, enter into an employment agreement with First Charter to serve as an Executive Vice President of First Charter Bank and Regional President for the GBC region following the completion of the merger;
	•	First Charter also required, as a condition to entering into the merger agreement, that each of Katrina M. Winberg and Michael L. Couch enter into a retention agreement with First Charter. Ms. Winberg serves as Senior Vice President, SBA Lending for GBC and Mr. Couch serves as a Senior Vice President and Senior Construction Loan Officer for GBC. Pursuant to these agreements, upon completion of the merger each of Ms. Winberg and Mr. Couch will serve in a substantially similar position for First Charter as each did for GBC. First Charter has also entered into retention agreements with nine of GBC’s employees, including Michael A. Roy and Paul C. Birkhead, Gwinnett Banking Company’s Executive Vice President and Chief Credit Officer and Senior Vice President and Senior Commercial Loan Officer, respectively. These retention agreements provide incentives and benefits, including, in some cases, cash and stock awards, to encourage these employees to remain with First Charter Bank after the completion of the merger;
	•	GBC has a deferred stock unit plan in which GBC’s and Gwinnett Banking Company’s directors are able to choose to receive deferred fee units as consideration for their directors’ fees in lieu of cash. The deferred fee units assigned to the plan participant equal the number of shares of common stock that could be purchased at the fair market value with the amount of fees deferred. When a plan participant terminates service as a director or there is a change in control of GBC, such as will occur in connection with the merger with First Charter, the units will be settled in cash at the fair market value of GBC’s common stock. Each participant will receive a lump sum cash payment for the value of his or her units.
	•	Several years prior to the transaction with First Charter, GBC entered into Executive Supplemental Retirement Agreements (“SERPs”) with five of its executive officers to provide retirement benefits in addition to those available under the tax-qualified plans that GBC has sponsored for its employees. Immediately prior to the execution of the merger agreement, GBC and the five executives amended the SERPs (i) to convert the SERPs from a plan providing the payment of an account balance over a specified period of years during retirement to a defined benefit-type plan that pays at least a minimum specified retirement benefit for the lifetime of the executive, (ii) to set the minimum benefit payable under each SERP at a specified dollar amount equal to 40% of the executive’s annualized compensation; and (iii) to provide that if the investment return on the insurance policies that have been earmarked to provide benefits under the SERPs provides a fund that exceeds the amount needed to provide the minimum benefits in retirement, then the benefits would be increased correspondingly.

	•	GBC leases its main office banking facilities and associated land, which are located at 165 Nash Street, Lawrenceville, Georgia, from GBC Properties, LLC, a limited liability company owned by members of the GBC board of directors. Prior to entering into the transaction with First Charter, GBC and GBC Properties, LLC reached an understanding whereby the GBC main office banking facilities would be sold to GBC in the event of a change in control of GBC. The merger agreement requires that such purchase occur prior to the consummation of the merger; and
	•	Directors and executive officers of GBC have indemnification rights that will survive completion of the merger.

	•	the merger agreement is duly terminated by First Charter and prior to such termination, an Alternative Transaction was received, commenced, publicly proposed or publicly disclosed, and within 12 months after such termination, GBC has entered into a definitive written agreement relating to an Alternative Transaction or consummated an Alternative Transaction, or
	•	after receiving an Alternative Proposal (as defined in the merger agreement and described in greater detail under “The Merger Agreement — Agreement Not to Solicit Other Offers”), GBC’s board of

		directors fails to convene the special meeting to approve the merger with First Charter or recommend that the GBC shareholders approve the merger agreement, and within 12 months of receiving the Alternative Proposal, GBC has entered into a definitive written agreement relating to an Alternative Transaction or consummated an Alternative Transaction.

	•	must file a written notice of intent to dissent prior to the vote;
	•	must not vote in favor of the merger; and
	•	must strictly comply with the procedural requirements of Georgia law.

 

The GBC Special Meeting Will be Held on October 17, 2006

	•	approve the merger on substantially the terms set forth in the merger agreement; and
	•	approve the adjournment of the special meeting, if necessary, to solicit additional proxies, in the event that there are not sufficient votes at the time of the special meeting to approve the merger.

 

SELECTED CONSOLIDATED HISTORICAL FINANCIAL DATA OF FIRST CHARTER

																						Six Months
																						Ended
		Years Ended December 31,																				June 30,
		2005				2004				2003				2002				2001				2006				2005
		(Dollars in thousands, except per share amounts)
Income statement
Interest income			$ 224,605				$ 187,303				$ 178,292				$ 196,388				$ 215,276				$ 123,388				$ 106,886
Interest expense			99,722				64,293				70,490				83,227				109,912				58,651				45,022
Net interest income			124,883				123,010				107,802				113,161				105,364				64,737				61,864
Provision for loan losses			9,343				8,425				27,518				8,270				4,465				2,399				4,778
Noninterest income			50,213				60,896				63,933				47,410				38,773				35,481				33,131
Noninterest expense			131,222				111,017				126,785				97,551				87,579				62,948				58,233
Income before income taxes			34,531				64,464				17,432				54,750				52,093				34,871				31,984
Income tax expense			9,220				22,022				3,286				14,947				16,768				11,881				10,395
Net income			$ 25,311				$ 42,442				$ 14,146				$ 39,803				$ 35,325				$ 22,990				$ 21,589
Per common share
Basic net income			$ 0.83				$ 1.42				$ 0.47				$ 1.30				$ 1.12				$ 0.74				$ 0.71
Diluted net income			0.82				1.40				0.47				1.30				1.12				0.74				0.71
Cash dividends declared			0.76				0.75				0.74				0.73				0.72				0.385				0.38
Period-end book value			10.53				10.47				10.08				10.80				10.06				10.83				10.73
Average shares outstanding — basic			30,457,573				29,859,683				29,789,969				30,520,125				31,480,109				30,959,711				30,285,244
Average shares outstanding — diluted			30,784,406				30,277,063				30,007,435				30,702,107				31,660,985				31,249,049				30,607,931
Ratios
Return on average shareholders’ equity			7.86	%			14.05	%			4.50	%			12.52	%			11.03	%			13.95	%			13.67	%
Return on average assets			0.56				0.98				0.35				1.13				1.14				1.09				0.97
Net interest margin			3.05				3.14				3.00				3.52				3.72				3.38				3.04
Average loans to average deposits			102.01				92.86				86.60				94.30				95.43				107.20				100.42
Average equity to average assets			7.18				6.99				7.85				9.02				10.31				7.84				7.09
Efficiency ratio(1)			60.05				60.44				65.79				64.29				60.97				62.11				60.54
Dividend payout			92.68				53.57				157.45				56.15				64.29				52.03				53.52

																						Six Months
																						Ended
		Years Ended December 31,																				June 30,
		2005				2004				2003				2002				2001				2006				2005
		(Dollars in thousands, except per share amounts)
Selected period end balances
Securities available for sale			$ 899,111				$ 1,652,732				$ 1,601,900				$ 1,129,212				$ 1,076,324				$ 884,370				$ 1,412,885
Loans held for sale			6,447				5,326				5,137				158,404				7,334				8,382				8,159
Loans, net			2,917,020				2,412,529				2,227,030				2,045,266				1,921,718				3,042,768				2,829,127
Allowance for loan losses			28,725				26,872				25,607				27,204				25,843				29,520				29,032
Total assets			4,232,420				4,431,605				4,206,693				3,745,949				3,332,737				4,363,274				4,633,236
Total deposits			2,799,479				2,609,846				2,427,897				2,322,647				2,162,945				2,988,802				2,751,385
Borrowings			1,068,574				763,738				473,106				1,042,440				808,512				995,707				1,503,322
Total liabilities			3,908,825				4,116,918				3,907,254				3,421,263				3,023,396				4,026,339				4,305,538
Total shareholders’ equity			323,595				314,687				299,439				324,686				309,341				336,935				327,698
Selected average balances
Loans and loans held for sale			2,795,711				2,363,107				2,152,748				2,122,890				1,990,406				2,988,596				2,670,810
Earning assets			4,164,969				4,004,678				3,662,460				3,261,844				2,881,295				3,914,969				4,179,586
Total assets			4,489,083				4,322,727				4,009,511				3,525,090				3,104,952				4,240,006				4,492,094
Total deposits			2,740,742				2,544,865				2,485,711				2,251,256				2,085,669				2,787,928				2,659,757
Borrowings			1,375,910				1,428,124				1,159,889				906,263				652,298				1,079,295				1,467,904
Total shareholders’ equity			322,226				302,101				314,562				317,952				320,215				332,391				318,455

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

 

Set forth below are highlights from GBC’s consolidated financial data as of and for the years ended December 31, 2001 through 2005 and GBC’s unaudited consolidated financial data as of and for the six months ended June 30, 2005 and 2006. The results of operations for the six months ended June 30, 2006 are not necessarily indicative of the results of operations for the full year or any other interim period. The unaudited information was prepared on the same basis as GBC’s audited consolidated financial statements. In the opinion of GBC management, this information reflects all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of this data for those dates. You should read this information in conjunction with GBC’s audited consolidated financial statements as of and for the year ended December 31, 2005 and GBC’s unaudited consolidated financial statements as of and for the six months ended June 30, 2006, which are included with this Proxy Statement/Prospectus as Appendix E and are incorporated by reference herein and from which this information is derived.

 

 

 

 

COMPARATIVE PER SHARE DATA

		First								Pro				Per
		Charter				GBC				Forma				Equivalent
		Historical				Historical				Combined				GBC Share(1)
Net income from continuing operations for the twelve months ended December 31, 2005:
Basic		$	0.83			$	3.54			$	0.89			$	1.77
Diluted		$	0.82			$	3.17			$	0.88			$	1.75
Net income from continuing operations for the six months ended June 30, 2006:
Basic		$	0.74			$	2.01			$	0.79			$	1.57
Diluted		$	0.74			$	1.85			$	0.78			$	1.55
Dividends Paid:
For the twelve months ended December 31, 2005		$	0.76				—			$	0.76			$	1.51
For the six months ended June 30, 2006		$	0.385				—			$	0.385			$	0.77
Book Value:
As of December 31, 2005		$	10.53			$	18.62			$	11.86			$	23.59
As of June 30, 2006		$	10.83			$	19.21			$	11.98			$	23.83

(1)		Reflects GBC shares at the exchange ratio of 1.989.

 

In addition to the other information contained in or incorporated by reference in this Proxy Statement/Prospectus, including the matters addressed under the caption “Cautionary Statement Regarding Forward-Looking Statements,” you should carefully consider the following risk factors in deciding whether to vote for the merger.

 

You may not receive the form of merger consideration that you elect.

 

The merger agreement contains provisions that are generally designed to ensure that 70% of the outstanding shares of GBC common stock are exchanged for shares of First Charter common stock and the other 30% of the shares are exchanged for cash. If elections are made by GBC shareholders that would otherwise result in more or less than 70% of such shares being converted into a right to receive First Charter common stock, either those electing to receive all or a portion of their consideration in cash or those electing to receive all or a portion of their consideration in shares of First Charter common stock, will have the consideration of the type they selected reduced by a pro rata amount and will receive a portion of their consideration in the form that they did not elect to receive. Accordingly, there is a risk that you will not receive a portion of the merger consideration in the form that you elect, which could result in, among other things, tax consequences that differ from those that would have resulted had you received the form of consideration you elected (including the recognition of gain for federal income tax purposes with respect to the cash received). If you do not make an election, you will receive the merger consideration in a combination of cash and/or shares of common stock as provided for in the merger agreement.

 

We may fail to realize all of the anticipated benefits of the merger.

 

The success of the merger will depend, in part, on our ability to realize the anticipated benefits and cost savings from combining the businesses of First Charter and GBC. However, to realize these anticipated benefits and cost savings, we must successfully combine the businesses of First Charter and GBC. If we are not able to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully or at all or may take longer to realize than expected.

 

First Charter and GBC have operated and, until the completion of the merger, will continue to operate, independently. It is possible that the integration process could result in the loss of key employees, the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the merger. Integration efforts between the two companies will also divert management attention and resources. These integration matters could have an adverse effect on each of GBC and First Charter during such transition period.

 

First Charter has not previously operated in the Atlanta metropolitan market area.

 

Gwinnett Banking Company’s primary service area is Gwinnett and Fulton Counties, which are a part of the greater Atlanta metropolitan market area. The banking business in the greater Atlanta metropolitan market area is extremely competitive, and the level of competition may increase further. First Charter has not previously participated in this market and there may be unexpected challenges and difficulties that could adversely affect First Charter following the consummation of the merger.

 

The market price of First Charter common stock after the merger may be affected by factors different from those affecting the shares of GBC or First Charter currently.

 

The businesses of First Charter and GBC differ in important respects and, accordingly, the results of operations of the combined company and the market price of the combined company’s shares of common stock may be affected by factors different from those currently affecting the independent results of operations of GBC. For a discussion of the business of First Charter and of certain factors to consider in connection with

its business, see the documents incorporated by reference in this document and referred to under “Where You Can Find More Information.” For a discussion of the business of GBC and of certain factors to consider in connection with its business, see the information provided under “Information About the Companies — GBC Bancorp, Inc.”

 

GBC shareholders who make elections will be unable to sell their GBC shares in the market after making their election.

 

GBC shareholders may elect to receive the merger consideration in the form of cash or stock. Shareholders making an election must turn in their GBC stock certificates with their election form. During the time between when the election is made and when First Charter stock certificates are received by shareholders following the completion of the merger, GBC shareholders will be unable to sell their GBC common stock. If the merger is unexpectedly delayed, this period could extend for a significant period of time. Elections received after the close of the election period will not be accepted or honored.

 

The opinion obtained by GBC from its financial advisor will not reflect changes in circumstances between signing the merger agreement and the merger.

 

GBC has not obtained an updated opinion as of the date of this document from its financial advisor. Changes in the operations and prospects of First Charter or GBC, general market and economic conditions and other factors which may be beyond the control of First Charter and GBC, and on which the financial advisor’s opinion was based, may significantly alter the value of First Charter or GBC or the prices of shares of First Charter common stock or GBC common stock by the time the merger is completed. The opinion does not speak as of the time the merger will be completed or as of any date other than the date of such opinion. Because GBC currently does not anticipate asking its financial advisor to update its opinion, the opinion will not address the fairness of the merger consideration, from a financial point of view, at the time the merger is completed. For a description of the opinion that GBC received from its financial advisor, please refer to “The Merger — Opinion of GBC’s Financial Advisor.” For a description of the other factors considered by GBC’s board of directors in determining to approve the merger, please refer to “The Merger — GBC’s Reasons for the Merger; Recommendation of the GBC Board of Directors.”

 

The merger is subject to the receipt of consents and approvals from government entities that may impose conditions that could have an adverse effect on First Charter.

 

Before the merger may be completed, various approvals or consents must be obtained from the Federal Reserve Board and various state bank regulatory and other authorities. These governmental entities, including the Federal Reserve Board, may impose conditions on the completion of the merger or require changes to the terms of the merger. Although First Charter and GBC do not currently expect that any such conditions or changes would be imposed, there can be no assurance that they will not be, and such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of First Charter following the merger, any of which might have a material adverse effect on First Charter following the merger. First Charter is not obligated to complete the merger if the regulatory approvals received in connection with the completion of the merger include any conditions or restrictions that, in the aggregate, would reasonably be expected to have a material adverse effect on GBC or First Charter, measured relative to GBC, but First Charter could choose to waive this condition.

 

GBC directors and executive officers have financial interests in the merger that are different from, or in addition to, the interests of GBC shareholders.

 

Executive officers of GBC negotiated the terms of the merger agreement with their counterparts at First Charter, and GBC’s board of directors adopted and approved the merger agreement and unanimously recommended that GBC shareholders vote to approve the merger on substantially the terms set forth in the merger agreement. In considering these facts and the other information contained in this document, you should be aware that GBC’s directors and executive officers have financial interests in the merger that are different from, or in addition to, the interests of GBC shareholders. For example, certain executive officers have entered

into agreements with GBC that provide, among other things, retention payments, restricted stock awards, severance and/or other benefits following the merger. In addition, at or before the closing of the merger, Gwinnett Banking Company will purchase its main office banking facilities and associated land, which are located at 165 Nash Street, Lawrenceville, Georgia, from GBC Properties, LLC, a limited liability company owned by members of the GBC board of directors. These and some other additional interests of GBC directors and executive officers may create potential conflicts of interest and cause some of these persons to view the proposed transaction differently than you may view it, as a shareholder. Please see “The Merger — GBC’s Directors and Officers Have Financial Interests in the Merger” for information about these financial interests.

 

First Charter is subject to interest rate risk.

 

First Charter’s earnings and cash flows are largely dependent upon its net interest income. Net interest income is the difference between interest income earned on interest-earning assets such as loans and securities and interest expense paid on interest-bearing liabilities such as deposits and borrowed funds. Interest rates are highly sensitive to many factors that are beyond First Charter’s control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the Board of Governors of the Federal Reserve System. Changes in monetary policy, including changes in interest rates, could influence not only the interest First Charter receives on loans and securities and the amount of interest it pays on deposits and borrowings, but such changes could also affect (i) First Charter’s ability to originate loans and obtain deposits, (ii) the fair value of First Charter’s financial assets and liabilities, and (iii) the average duration of First Charter’s mortgage-backed securities portfolio. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, First Charter’s net interest income, and therefore earnings, could be adversely affected. Earnings could also be adversely affected if the interest rates received on loans and other investments fall more quickly than the interest rates paid on deposits and other borrowings.

 

Although management believes it has implemented effective asset-liability management strategies, including the potential use of derivatives as hedging instruments, to reduce the potential effects of changes in interest rates on First Charter’s results of operations, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on First Charter’s financial condition and results of operations.

 

First Charter is subject to lending risk.

 

There are inherent risks associated with First Charter’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions of the markets where First Charter operates as well as those across the State of North Carolina and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. First Charter is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject First Charter to regulatory enforcement action that could result in the assessment of significant civil money penalties.

 

As of December 31, 2005, approximately 52 percent of First Charter’s loan portfolio consisted of commercial non-real estate, construction and commercial real estate loans. These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans are also typically larger than residential real estate loans and consumer loans. Because First Charter’s loan portfolio contains a significant number of commercial non-real estate, construction and commercial real estate loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in nonperforming loans could result in a net loss of earnings from these loans, an increase in a provision for loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on First Charter’s financial condition and results of operations.

First Charter’s allowance for loan losses may be insufficient.

 

First Charter maintains an allowance for loan losses, which is a reserve established through a provision for loan losses charged to expense that represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The level of the allowance reflects management’s continuing evaluation of industry concentrations; specific credit risks; loan loss experience; current loan portfolio quality; present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires management to make significant estimates of current credit risks and future trends, all of which may undergo material changes. Changes in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of First Charter’s control, may require an increase in the allowance for loan losses. In addition, bank regulatory agencies periodically review First Charter’s allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments different than those of management. In addition, if charge-offs in future periods exceed the allowance for loan losses, First Charter will need additional provisions to increase the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, possibly, capital, and may have a material adverse effect on First Charter’s financial condition and results of operations.

 

First Charter is subject to environmental liability risk associated with lending activities.

 

A significant portion of First Charter’s loan portfolio is secured by real property. During the ordinary course of business, First Charter may foreclose on and take title to properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous or toxic substances are found, First Charter may be liable for remediation costs, as well as for personal injury and property damage. Environmental laws may require First Charter to incur substantial expenses and may materially reduce the affected property’s value or limit First Charter’s ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase First Charter’s exposure to environmental liability. Although First Charter has policies and procedures to perform an environmental review before initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on First Charter’s financial condition and results of operations.

 

First Charter’s profitability depends significantly on economic conditions in the Carolinas.

 

First Charter’s success depends primarily on the general economic conditions of the Carolinas and the specific local markets in which First Charter operates. Unlike larger national or other regional banks that are more geographically diversified, First Charter currently provides banking and financial services to customers primarily in the metropolitan areas of Charlotte-Gastonia-Concord, Lincolnton, Statesville-Mooresville, Shelby, Forest City, Salisbury, Asheville, Brevard and Raleigh-Cary. The local economic conditions in these areas have a significant impact on the demand for First Charter’s products and services as well as the ability of First Charter’s customers to repay loans, the value of the collateral securing loans and the stability of First Charter’s deposit funding sources. A significant decline in general economic conditions, caused by inflation, recession, or unemployment in First Charter’s primary markets, or changes in securities markets or other factors could impact these local economic conditions and, in turn, have a material adverse effect on First Charter’s financial condition and results of operations.

 

First Charter operates in a highly competitive industry and market area.

 

First Charter faces substantial competition in all areas of its operations from a variety of different competitors, many of which are larger and may have more financial resources than First Charter. Such competitors primarily include national, regional and local financial institutions within the various markets First

Charter operates. Additionally, various out-of-state banks have begun to enter or have announced plans to enter the market areas in which First Charter currently operates. First Charter also faces competition from many other types of financial institutions, including, without limitation, savings and loan associations, savings banks, credit unions, finance companies, brokerage firms, insurance companies, and major retail stores that offer competing financial services. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Many of First Charter’s competitors have fewer regulatory constraints and may have lower cost structures. Additionally, due to their size, many competitors may be able to achieve economies of scale and, as a result, may offer a broader range of products and services as well as better pricing for those products and services than First Charter can.

 

First Charter’s ability to compete successfully depends on a number of factors, including, among other things:

 

 

Failure to perform in any of these areas could significantly weaken First Charter’s competitive position, which could adversely affect First Charter’s growth and profitability, which, in turn, could have a material adverse effect on First Charter’s financial condition and results of operation.

 

First Charter is subject to extensive government regulation and supervision.

 

First Charter, primarily through First Charter Bank and certain non-bank subsidiaries, is subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not shareholders. These regulations affect First Charter’s lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect First Charter in substantial and unpredictable ways. Such changes could subject First Charter to additional costs, limit the types of financial services and products First Charter may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on First Charter’s business, financial condition and results of operations. While First Charter has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

 

First Charter’s controls and procedures may fail or be circumvented.

 

Management regularly reviews and updates First Charter’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances

that the objectives of the systems are met. Any failure or circumvention of First Charter’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on First Charter’s business, results of operations and financial condition.

 

New lines of business or new products and services may subject First Charter to additional risks.

 

From time to time, First Charter may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services First Charter may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of First Charter’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on First Charter’s business, results of operations and financial condition.

 

First Charter relies on dividends from First Charter Bank for most of its revenue.

 

First Charter Corporation is a separate and distinct legal entity from First Charter Bank. It receives substantially all of its revenue from dividends received from First Charter Bank. These dividends are the principal source of funds to pay dividends on First Charter’s common stock and interest and principal on its outstanding debt securities. Various federal and/or state laws and regulations limit the amount of dividends that First Charter Bank may pay to First Charter. In the event First Charter Bank is unable to pay dividends to First Charter, First Charter may not be able to service debt, pay obligations or pay dividends on First Charter’s common stock. The inability to receive dividends from First Charter Bank could have a material adverse effect on First Charter’s business, financial condition, and results of operations.

 

Potential acquisitions may disrupt First Charter’s business and dilute shareholder value.

 

From time to time First Charter may seek merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale or expanded services. Acquiring other banks, businesses, or branches involves risks commonly associated with acquisitions, including, among other things:

 

 

First Charter regularly evaluates merger and acquisition opportunities and conducts due diligence activities related to possible transactions with other financial institutions and financial services companies. As a result, merger or acquisition discussions and, in some cases, negotiations may take place and future mergers or acquisitions involving cash, debt or equity securities may occur at any time. Acquisitions typically involve the payment of a premium over book and market values, and, therefore, some dilution of First Charter’s tangible book value and net income per common share may occur in connection with any future transaction.

Furthermore, failure to realize the expected revenue increases, cost savings, increases in geographic or product presence, and/or other projected benefits from an acquisition could have a material adverse effect on First Charter’s financial condition and results of operations.

 

First Charter may not be able to attract and retain skilled personnel.

 

First Charter’s success depends, in large part, on its ability to attract and retain key personnel. Competition for these individuals in most businesses engaged in by First Charter can be intense and First Charter may not be able to hire or retain them. The unexpected loss of services of one or more of First Charter’s key personnel could have a material adverse impact on First Charter’s business because of their skills, knowledge of First Charter’s market, years of financial services experience and the difficulty of promptly finding qualified replacement personnel. First Charter has employment agreements or non-competition agreements with several of its senior and executive officers in an attempt to partially mitigate this risk.

 

First Charter’s information systems may experience an interruption or breach in security.

 

First Charter relies heavily on communications and information systems to conduct its business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in First Charter’s customer relationship management, general ledger, deposit, loan and other systems. While First Charter has policies and procedures designed to prevent or limit the effect of the failure, interruptions or security breach of its information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of First Charter’s information systems could damage First Charter’s reputation, result in a loss of customer business, subject First Charter to additional regulatory scrutiny, or expose First Charter to civil litigation and possible financial liability, any of which could have a material adverse effect on First Charter’s financial condition and results of operations.

 

First Charter continually encounters technological advancements.

 

The financial services industry is continually undergoing rapid technological advancements with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. First Charter’s future success depends, in large part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in First Charter’s operations. Many of First Charter’s competitors have substantially greater resources to invest in technological improvements. First Charter may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological advancements affecting the financial services industry could have a material adverse impact on First Charter’s business and, in turn, First Charter’s financial condition and results of operations.

 

First Charter is subject to claims and litigation pertaining to fiduciary responsibility.

 

From time to time, customers make claims and take legal action pertaining to First Charter’s performance of its fiduciary responsibilities. Whether customer claims and legal action related to First Charter’s performance of its fiduciary responsibilities are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to First Charter they may result in significant financial liability and/or adversely affect the market perception of First Charter and its products and services as well as impact customer demand for those products and services. Any financial liability or reputational damage could have a material adverse effect on First Charter’s business, which, in turn, could have a material adverse effect on First Charter’s financial condition and results of operations.

First Charter may need additional capital resources in the future which may not be available when needed or at all.

 

First Charter may need to obtain additional debt or equity financing in the future for growth, investment or strategic acquisitions. There can be no assurance that such financing will be available to First Charter on acceptable terms or at all. If First Charter is unable to obtain such additional financing, First Charter may not be able to grow or make strategic acquisitions or investments when desired, which could have a material adverse impact on First Charter’s business and, in turn, First Charter’s financial condition and results of operations.

 

Severe weather, natural disasters and other adverse external events could significantly impact First Charter’s business.

 

Severe weather, natural disasters and other adverse external events could have a significant impact on First Charter’s ability to conduct business. Such events could affect the stability of First Charter’s deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and or cause First Charter to incur additional expenses. The Southeast region of the Untied States is periodically impacted by hurricanes. For example, during 1989, Hurricane Hugo made landfall along the South Carolina coast and subsequently caused extensive flooding and destruction in the metropolitan area of Charlotte, North Carolina and other communities where First Charter conducts business. While the impact of hurricanes may not significantly affect First Charter, other severe weather or natural disasters, acts of war or terrorism or other adverse external events may occur in the future. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on First Charter’s business, which, in turn, could have a material adverse effect on First Charter’s financial condition and results of operations.

 

First Charter’s stock price can be volatile.

 

Stock price volatility may make it more difficult for a shareholder to resell First Charter’s common stock when desired and at favorable prices. First Charter’s stock price can fluctuate significantly in response to a variety of factors including, among other things:

 

 

The trading volume in First Charter’s common stock is less than that of other larger financial services companies.

 

Although First Charter’s common stock is listed for trading on the NASDAQ Global Select Market, the trading volume in its common stock is less than that of other larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of First Charter’s common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which First Charter has no control. Given the lower trading volume of First Charter’s common stock, significant sales of First Charter’s common stock, or the expectation of these sales, could cause First Charter’s stock price to fall.

 

An investment in First Charter’s common stock is not an insured deposit.

 

First Charter’s common stock is not a bank deposit and, therefore, is not insured against loss by the Federal Deposit Insurance Corporation (FDIC), any other deposit insurance fund or by any other public or private entity. Investment in First Charter’s common stock is inherently risky for the reasons described in this “Risk Factors” section and elsewhere in this report and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire First Charter’s common stock, you may lose some or all of your investment.

 

First Charter’s articles of incorporation, bylaws and shareholder protection rights agreement as well as certain banking laws may have an anti-takeover effect.

 

Provisions of First Charter’s articles of incorporation and bylaws, federal banking laws, including regulatory approval requirements, and First Charter’s Shareholder Protection Rights Agreement could make it more difficult for a third party to acquire First Charter, even if doing so would be perceived to be beneficial to First Charter’s shareholders. The combination of these provisions effectively inhibits a non-negotiated merger or other business combination, which, in turn, could adversely affect the market price of First Charter’s common stock.

 

The earnings of financial services companies are significantly affected by general business and economic conditions.

 

First Charter’s operations and profitability are impacted by general business and economic conditions in the United States and abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, and the strength of the U.S. economy and the local economies in which First Charter operates, all of which are beyond First Charter’s control. A deterioration in economic conditions could result in an increase in loan delinquencies and non-performing assets, decreases in loan collateral values and a decrease in demand for First Charter’s products and services, among other things, any of which could have a material adverse impact on First Charter’s financial condition and results of operations.

 

Financial services companies depend on the accuracy and completeness of information about customers and counterparties.

 

In deciding whether to extend credit or enter into other transactions, First Charter may rely on information furnished by or on behalf of customers and counterparties, including financial statements, credit reports and other financial information. First Charter may also rely on representations of those customers, counterparties or other third parties, such as independent auditors, as to the accuracy and completeness of that information. Reliance on inaccurate or misleading financial statements, credit reports or other financial

information could have a material adverse impact on First Charter’s business and, in turn, First Charter’s financial condition and results of operations.

 

Consumers may decide not to use banks to complete their financial transactions.

 

Technology and other changes are allowing parties to complete financial transactions that historically have involved banks through alternative methods. For example, consumers can now maintain funds that would have historically been held as bank deposits in brokerage accounts or mutual funds. Consumers can also complete transactions such as paying bills and/or transferring funds directly without the assistance of banks. The process of eliminating banks as intermediaries, known as “disintermediation,” could result in the loss of fee income, as well as the loss of customer deposits and the related income generated from those deposits. The loss of these revenue streams and the lower cost deposits as a source of funds could have a material adverse effect on First Charter’s financial condition and results of operations.

 

This document contains or incorporates by reference a number of forward-looking statements, including statements about the financial conditions, results of operations, earnings outlook and prospects of First Charter, GBC and the potential combined company and may include statements for the period following the completion of the merger. You can find many of these statements by looking for words such as “plan,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “project,” “potential,” “possible” or other similar expressions.

 

The forward-looking statements involve certain risks and uncertainties. The ability of either First Charter or GBC to predict results or the actual effects of its plans and strategies, or those of the combined company, is subject to inherent uncertainty. Factors that may cause actual results or earnings to differ materially from such forward-looking statements include, among others, the following:

 

 

 

Because these forward-looking statements are subject to assumptions and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements. You are cautioned not to place undue reliance on these statements, which speak only as of the date of this document or the date of any document incorporated by reference in this document.

 

All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this document and attributable to First Charter or GBC or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this document. Except to the extent required by applicable law or regulation, First Charter and GBC undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.

 

This section contains information about the special meeting of GBC shareholders that has been called to consider and approve the merger on substantially the terms set forth in the merger agreement.

 

Together with this document, we are also sending you a notice of the special meeting and a form of proxy that is solicited by the GBC board of directors. The special meeting will be held at the main office of Gwinnett Banking Company at 165 Nash Street, Lawrenceville, Georgia 30045 on October 17, 2006, at 8:00 a.m., local time.

 

Matters to be Considered

 

The purpose of the special meeting is to vote on a proposal for approval of the merger on substantially the terms set forth in the merger agreement.

 

You also will be asked to vote upon a proposal to approve the adjournment of the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the merger.

 

Proxies

 

Each copy of this document mailed to holders of GBC common stock is accompanied by a form of proxy with instructions for voting. If you hold stock in your name as a shareholder of record, you should complete and return the proxy card accompanying this document to ensure that your vote is counted at the special meeting, or at any adjournment or postponement of the special meeting, regardless of whether you plan to attend the special meeting.

 

If you hold your stock in “street name” through a bank or broker, you must direct your bank or broker to vote in accordance with the instructions you have received from your bank or broker.

 

If you hold stock in your name as a shareholder of record, you may revoke any proxy at any time before it is voted by signing and returning a proxy card with a later date, delivering a written revocation letter to GBC’s Secretary, or by attending the special meeting in person, notifying the Secretary, and voting by ballot at the special meeting.

 

Any shareholder entitled to vote in person at the special meeting may vote in person regardless of whether a proxy has been previously given, but the mere presence of a shareholder at the special meeting will not constitute revocation of a previously given proxy.

 

Written notices of revocation and other communications about revoking your proxy should be addressed to:

 

GBC Bancorp, Inc.

165 Nash Street

Lawrenceville, Georgia 30045

Corporate Secretary

Phone Number: (770) 995-9561

 

If your shares are held in “street name” by a bank or broker, you should follow the instructions of your bank or broker regarding the revocation of proxies.

 

All shares represented by valid proxies that we receive through this solicitation, and that are not revoked, will be voted in accordance with your instructions on the proxy card. If you make no specification on your proxy card as to how you want your shares voted before signing and returning it, your proxy will be voted “FOR” approval of the merger and “FOR” approval of the proposal to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the merger.

GBC shareholders should NOT send stock certificates with their proxy cards. GBC shareholders will be sent election forms and instructions, at which time they will be requested to submit their stock certificates. If the merger is completed, GBC shareholders who did not make a timely or proper election will be mailed a transmittal form promptly following the completion of the merger with instructions on how to exchange their GBC stock certificates for the merger consideration.

 

Solicitation of Proxies

 

GBC and First Charter will bear equally the cost of printing and mailing this Proxy Statement/Prospectus and all filing and other fees paid to the SEC in connection with the merger, however, GBC solely will bear any additional costs of soliciting proxies from you. In addition to solicitation of proxies by mail, GBC will request that banks, brokers, and other record holders send proxies and proxy material to the beneficial owners of GBC common stock and secure their voting instructions. GBC and First Charter will reimburse the record holders for their reasonable expenses in taking those actions. If necessary, several of GBC’s regular employees, who will not be specially compensated, may solicit proxies from GBC shareholders, either personally or by telephone, facsimile, letter or other electronic means. Prior to the special meeting, GBC may hire a proxy solicitation firm to assist GBC in soliciting proxies from you. In this event, GBC would bear the proxy solicitor’s fee plus reasonable expenses.

 

Record Date

 

The close of business on August 25, 2006 has been fixed as the record date for determining the GBC shareholders entitled to receive notice of and to vote at the special meeting. At that time, 2,136,608 shares of GBC common stock were outstanding, held by approximately 750 holders of record.

 

Voting Rights and Vote Required

 

The presence, in person or by properly executed proxy, of the holders of a majority of the outstanding shares of GBC common stock entitled to vote is necessary to constitute a quorum at the special meeting. Abstentions will be counted for the purpose of determining whether a quorum is present.

 

Approval of the merger requires the affirmative vote of the holders of a majority of the issued and outstanding shares of GBC common stock entitled to vote at the special meeting. You are entitled to one vote for each share of GBC common stock you held as of the record date.

 

Approval of any proposal to adjourn or postpone the meeting, if necessary, for the purpose of soliciting additional proxies may be obtained by the affirmative vote of the holders of a majority of the shares present in person or by proxy, even if less than a quorum. Because approval of such adjournments is based on the affirmative vote of a majority of shares present in person or by proxy, abstentions will have the same effect as a vote against this proposal.

 

Shareholders will vote at the meeting by ballot. Votes cast at the meeting, in person or by proxy, will be tallied by GBC’s transfer agent.

 

Because the affirmative vote of the holders of a majority of the issued and outstanding shares of GBC common stock entitled to vote at the special meeting is needed for us to proceed with the merger, the failure to vote by proxy or in person will have the same effect as a vote against the merger. Abstentions and broker non-votes also will have the same effect as a vote against the merger. Accordingly, the GBC board of directors urges GBC shareholders to promptly vote by completing, dating, and signing the accompanying proxy card and to return it promptly in the enclosed postage-paid envelope, or, if you hold your stock in “street name” through a bank or broker, by following the voting instructions of your bank or broker.

 

Voting Agreement

 

As an inducement to and a condition of First Charter’s willingness to enter into the merger agreement, each of the directors and executive officers of GBC entered into a voting agreement with First Charter. Pursuant to the voting agreement, each of the directors and executive officers of GBC agreed, among other

things, to vote (or cause to be voted), all the shares owned beneficially by each of them, (i) in favor of the approval and adoption of the merger agreement (or any amended version thereof), the merger and the other transactions contemplated thereby, (ii) against any action or agreement that is or would be reasonably likely to result in any condition to GBC’s obligations or First Charter’s obligations under the merger agreement not being fulfilled and (iii) against any Alternative Proposal (as defined in the merger agreement and as further described under “The Merger Agreement — Agreement Not to Solicit Other Offers”). As of the record date, the directors and executive officers of GBC beneficially owned 557,785 shares, or approximately 26% of the outstanding shares of GBC common stock.

 

Each of the directors and executive officers of GBC also granted First Charter an irrevocable proxy coupled with an interest to vote such shareholder’s shares as provided in the voting agreement. Each proxy will expire automatically and without further action by the parties upon the termination of the voting agreement, which terminates upon termination of the merger agreement. Except for shares of GBC common stock that may be attributable to them pursuant to the voting agreement, none of the directors or executive officers of First Charter beneficially own any shares of GBC common stock.

 

A copy of the voting agreement is attached as Appendix D of this Proxy Statement/Prospectus and is incorporated herein by reference. GBC shareholders are urged to read the voting agreement in its entirety.

 

Beneficial Stock Ownership of GBC Management and Directors

 

The following table provides information concerning beneficial ownership of GBC common stock as of August 25, 2006, by:

 

 

The following table lists the applicable percentage of beneficial ownership based on 2,136,608 shares of common stock outstanding as of August 25, 2006.

 

 

 

 

First Charter Corporation is a North Carolina corporation and a bank holding company under U.S. law. Its principal asset is the stock of its subsidiary, First Charter Bank. First Charter’s primary market area is located within North Carolina and is centered primarily around the Charlotte Metro region, 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 June 30, 2006, First Charter had total consolidated assets of approximately $4.4 billion, total consolidated deposits of approximately $3.0 billion and total consolidated shareholders’ equity of approximately $337 million.

 

At June 30, 2006, First Charter Bank, a full service bank, operated 58 financial centers and four insurance offices, as well as 139 ATMs (automated teller machines) throughout North Carolina. First Charter Bank also operates loan origination offices in Asheville, North Carolina and Reston, Virginia. Through its financial centers, First Charter Bank provides a wide range of banking products, including interest-bearing and noninterest-bearing checking accounts, money market accounts, certificates of deposit, individual retirement accounts, full service and discount brokerage services including annuity sales, overdraft protection, financial planning services, personal and corporate trust services, safe deposit boxes, and online banking. First Charter Bank also provides commercial, consumer, real estate, residential mortgage and home equity loans. First Charter Bank also operates other lines of business through various subsidiaries, including insurance services.

 

First Charter’s common stock is traded under the symbol “FCTR” on the NASDAQ Global Select Market. The principal executive offices of First Charter are located at 10200 David Taylor Drive, Charlotte, North Carolina 28262. The telephone number is (704) 688-4300.

 

Additional information about First Charter and its subsidiaries is included in documents incorporated by reference in this document. See “Where You Can Find More Information.”

 

General

 

GBC was organized in August 1996 as a Georgia corporation for the purpose of acquiring all of the common stock of Gwinnett Banking Company, a Georgia bank that subsequently opened for business in October 1997. GBC is a bank holding company within the meaning of the Bank Holding Company Act of 1956, and the Georgia Bank Holding Company Act. GBC was organized to facilitate Gwinnett Banking Company’s ability to serve its customers’ requirements for financial services.

 

Gwinnett Banking Company

 

Gwinnett Banking Company is a full service commercial bank with locations at 165 Nash Street, Lawrenceville, Gwinnett County, Georgia and 11675 Rainwater Drive, Alpharetta, Fulton County, Georgia. Gwinnett Banking Company’s primary service area is Gwinnett and Fulton Counties, but also serves the adjacent Georgia counties, or parts thereof, of Cherokee, Cobb, DeKalb, Forsyth, Fulton, Hall and Walton. The principal business of Gwinnett Banking Company is to accept deposits from the public and to make loans and other investments. The principal source of funds for Gwinnett Banking Company’s loans and investments are demand, time, savings, and other deposits (including negotiable orders of withdrawal or NOW accounts), amortization and prepayments of loans and borrowings. The principal sources of income for Gwinnett Banking Company are interest and fees collected on loans, interest and dividends collected on other investments and service charges. The principal expenses of Gwinnett Banking Company are interest paid on savings and other deposits (including NOW accounts), interest paid on other borrowings by Gwinnett Banking Company, employee compensation, office expenses and other overhead expenses.

Industry and Competition

 

Gwinnett Banking Company opened its main office in Lawrenceville, Gwinnett County, Georgia, followed by a second branch in Alpharetta, Fulton County, Georgia in 2001. Gwinnett and Fulton Counties boast some of the strongest demographic growth trends in the nation. Gwinnett County’s population, for example, is projected to grow at a 23.5% rate from 2005 to 2010. This is significantly faster growth than the 11.3% projected for Georgia or the 6.3% projected nationally over the same time period. The 2005 median household income in Gwinnett County is $71,149 and Fulton County is $61,147, significantly higher than the $51,646 median income for Georgia and $46,059 for the Southeast.

 

Gwinnett Banking Company competes with national and state banks, financial institutions, brokerage firms and credit unions for loans and deposits. These competitors offer a range of banking services and compete vigorously to offer these services, especially deposits. In addition, in certain aspects of its banking business, Gwinnett Banking Company also competes with credit unions, small loan companies, consumer finance companies, brokerage firms, insurance companies, money market funds and other financial institutions which have recently been invading traditional banking markets. Gwinnett Banking Company competes with these institutions primarily on the basis of price and customer service. The competition has increased significantly within the past few years as a result of federal and state legislation deregulating financial institutions. Many of Gwinnett Banking Company’s competitors enjoy competitive advantages, including greater financial resources, a wider geographic presence, more accessible branch office locations, the ability to offer additional services, more favorable pricing alternatives and lower origination and operating costs. Some of the competitors have been in business for a long time and have an established customer base and name recognition.

 

Employees

 

Gwinnett Banking Company had 45 full-time and 2 part-time employees as of August 1, 2006. GBC does not have any employees who are not also employees of Gwinnett Banking Company.

 

Supervision and Regulation

 

Supervision, regulation and examination of GBC and Gwinnett Banking Company is intended primarily for the protection of depositors rather than holders of GBC common stock. GBC is a bank holding company registered with the Federal Reserve Board and the Georgia Department of Banking and Finance under the Bank Holding Company Act of 1956, as amended, (the “BHC Act”) and the Georgia Bank Holding Company Act, respectively. As a result, it is subject to the supervision, examination and reporting requirements of these acts and the regulations of the Federal Reserve Board and the Georgia Department of Banking and Finance issued under these acts.

 

The BHC Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before (1) it may acquire direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will directly or indirectly own or control more than five percent of the voting shares of the bank; (2) it or any of its subsidiaries, other than a bank, may acquire all or substantially all of the assets of any bank; or (3) it may merge or consolidate with any other bank holding company.

 

The Gramm-Leach-Bliley Act (“GLB Act”) permits bank holding companies meeting certain management, capital and community reinvestment standards to engage in a substantially broader range of non-banking activities than were permitted previously, including insurance underwriting and merchant banking activities. The GLB Act repealed sections 20 and 32 of the Glass Steagall Act, permitting affiliations of banks with securities firms and registered investment companies. The GLB Act permits banks to be under common control with securities firms, insurance companies, investment companies and other financial interests if these companies are subsidiaries of a financial holding company. Some of these affiliations are also permissible for bank subsidiaries. The GLB Act includes significant provisions regarding the privacy of financial information. These financial privacy provisions generally require a financial institution to adopt a privacy policy regarding its practices for sharing nonpublic personal information and to disclose that policy to its customers, both at the

time the customer relationship is established and at least annually during the relationship. These provisions also prohibit the Company from disclosing nonpublic personal financial information to third parties unless customers have the opportunity to opt out of the disclosure.

 

The Federal Reserve Act generally imposes certain limitations on extensions of credit and other transactions by and between banks that are members of the Federal Reserve Board and other affiliates (which includes any holding company of which a bank is a subsidiary and any other non-bank subsidiary of such holding company). Banks that are not members of the Federal Reserve Board also are subject to these limitations. Further, federal law prohibits a bank holding company and its subsidiaries from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property or the furnishing of services.

 

The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) recapitalized the Bank Insurance Fund (“BIF”), of which Gwinnett Banking Company is a member; substantially revised statutory provisions, including capital standards; restricted certain powers of state banks; gave regulators the authority to limit officer and director compensation; and required holding companies to guarantee the capital compliance of their banks in certain instances. FDICIA, among other things, requires the federal banking agencies to take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. FDICIA established five capital tiers: “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” and “critically undercapitalized,” as defined by regulations adopted by the Federal Reserve Board, the Federal Deposit Insurance Corporation (“FDIC”) and the other federal depository institution regulatory agencies. A depository institution is well capitalized if it significantly exceeds the minimum level required by regulation for each relevant capital measure, adequately capitalized if it meets such measure, undercapitalized if it fails to meet any such measure, significantly undercapitalized if it is significantly below such measure, and critically undercapitalized if it fails to meet any critical capital level set forth in the regulations. The critical capital level must be a level of tangible equity capital equal to the greater of 2 percent of total tangible assets or 65 percent of the minimum leverage ratio to be prescribed by regulation. An institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. Generally, subject to a narrow exception, FDICIA requires the banking regulator to appoint a receiver or conservator for an institution that is critically undercapitalized. The federal banking agencies have specified by regulation the relevant capital level for each category.

 

Under the agency rule implementing the prompt corrective action provisions, an institution that (i) has a Total Capital ratio of 10.0% or greater, a Tier 1 Capital ratio of 6.0% or greater, and a Leverage Ratio of 5.0% or greater and (ii) is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the appropriate federal banking agency is deemed to be “well capitalized.” An institution with a Total Capital ratio of 8.0% or greater, a Tier 1 Capital ratio of 4.0% or greater, and a Leverage Ratio of 4.0% or greater is considered to be “adequately capitalized.” A depository institution that has a Total Capital ratio of less than 8.0%, a Tier 1 Capital ratio of less than 4.0%, or a Leverage Ratio of less than 4.0% is considered to be “undercapitalized.” A depository institution that has a Total Capital ratio of less than 6.0%, a Tier 1 Capital ratio of less than 3.0%, or a Leverage Ratio of less than 3.0% is considered to be “significantly undercapitalized,” and an institution that has a tangible equity capital to assets ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.” For purposes of the regulation, the term “tangible equity” includes core capital elements counted as Tier 1 Capital for purposes of the risk-based capital standards plus the amount of outstanding cumulative perpetual preferred stock (including related surplus), minus all intangible assets with certain exceptions. A depository institution may be deemed to be in a capitalization category that is lower than is indicated by its actual capital position if it receives an unsatisfactory examination rating. An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency.

 

Under FDICIA, a bank holding company must guarantee that a subsidiary depository institution meets its capital restoration plan, subject to certain limitations. The obligation of a controlling bank holding company under FDICIA to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary’s assets and the amount required to meet regulatory capital requirements. An undercapitalized

institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches, or engaging in any new line of business, except in accordance with an accepted capital restoration plan or with the approval of the FDIC. In addition, the appropriate federal banking agency is given authority with respect to any undercapitalized depository institution to take any of the actions it is required to or may take with respect to a significantly undercapitalized institution as described below if it determines “that those actions are necessary to carry out the purpose” of FDICIA.

 

If a depository institution fails to meet regulatory capital requirements, regulatory agencies can require submission and funding of a capital restoration plan by the institution, place limits on its activities, require the raising of additional capital and, ultimately, require the appointment of a conservator or receiver for the institution. The obligation of a controlling bank holding company under FDICIA to fund a capital restoration plan is limited to the lesser of 5.0% of an undercapitalized subsidiary’s assets or the amount required to meet regulatory capital requirements. If the controlling bank holding company fails to fulfill its obligations under FDICIA and files (or has filed against it) a petition under the Federal Bankruptcy Code, the FDIC’s claim may be entitled to a priority in such bankruptcy proceeding over third party creditors of the bank holding company.

 

For those institutions that are significantly undercapitalized or undercapitalized and either fail to submit an acceptable capital restoration plan or fail to implement an approved capital restoration plan, the appropriate federal banking agency must require the institution to take one or more of the following actions: (i) sell enough shares, including voting shares, to become adequately capitalized; (ii) merge with (or be sold to) another institution (or holding company), but only if grounds exist for appointing a conservator or receiver; (iii) restrict certain transactions with banking affiliates as if the “sister bank” exception to the requirements of Section 23A of the Federal Reserve Act did not exist; (iv) otherwise restrict transactions with bank or non-bank affiliates; (v) restrict interest rates that the institution pays on deposits to prevailing rates in the institution’s region; (vi) restrict asset growth or reduce total assets; (vii) alter, reduce, or terminate activities; (viii) hold a new election of directors; (ix) dismiss any director or senior executive officer who held office for more than 180 days immediately before the institution became undercapitalized, provided that in requiring dismissal of a director or senior officer, the agency must comply with certain procedural requirements, including the opportunity for an appeal in which the director or officer will have the burden of proving his or her value to the institution; (x) employ “qualified” senior executive officers; (xi) cease accepting deposits from correspondent depository institutions; (xii) divest certain non-depository affiliates which pose a danger to the institution; or (xiii) be divested by a parent holding company. In addition, without the prior approval of the appropriate federal banking agency, a significantly undercapitalized institution may not pay any bonus to any senior executive officer or increase the rate of compensation for such an officer without regulatory approval. At December 31, 2005, GBC and Gwinnett Banking Company were both “well capitalized” and were not subject to any of the foregoing restrictions.

 

The Community Reinvestment Act of 1977 (“CRA”) and the regulations of the Federal Reserve Board and the FDIC implementing that act are intended to encourage regulated financial institutions to help meet the credit needs of their local community or communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of such financial institutions. The CRA and its implementing regulations provide that the appropriate regulatory authority will assess the records of regulated financial institutions in satisfying their continuing and affirmative obligations to help meet the credit needs of their local communities as part of their regulatory examination of the institution. The results of such examinations are made public and are taken into account upon the filing of any application to establish a domestic branch or to merge or to acquire the assets or assume the liabilities of a bank. In the case of a bank holding company, the CRA performance record of the banks involved in the transaction are reviewed in connection with the filing of an application to acquire ownership or control of shares or assets of a bank or to merge with any other bank holding company. An unsatisfactory record can substantially delay or block the transaction. Gwinnett Banking Company’s most recent CRA examination was in December 9, 2003 and Gwinnett Banking Company received a “Satisfactory” rating.

 

The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA Patriot Act”) is intended to allow the federal government to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased

information sharing and broadened anti-money laundering requirements. Title III of the USA Patriot Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act.

 

Among its provisions, the USA Patriot Act requires each financial institution: (i) to establish an anti-money laundering program, (ii) to establish due diligence policies, procedures and controls with respect to its private banking accounts and correspondent banking accounts involving foreign individuals and certain foreign banks and (iii) to avoid establishing, maintaining, administering, or managing correspondent accounts in the United States for, or on behalf of, a foreign bank that does not have a physical presence in any country. In addition, the USA Patriot Act contains a provision encouraging cooperation among financial institutions, regulatory authorities and law enforcement authorities with respect to individuals, entities and organizations engaged in, or reasonably suspected of engaging in, terrorist acts or money laundering activities. The federal banking agencies have begun proposing and implementing regulations interpreting the USA Patriot Act. Compliance with the USA Patriot Act did not have a significant impact on the financial condition or results of operations of GBC and Gwinnett Banking Company.

 

The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) intended to address systemic and structural weaknesses of the capital markets in the United States that were perceived to have contributed to recent corporate scandals. The Sarbanes-Oxley Act created the Public Company Accounting Oversight Board (“PCAOB”) to oversee the conduct of audits of public companies. The duties of PCAOB include (i) registering public accounting firms that prepare audit reports, (ii) establishing auditing, quality control, ethics, independence and other standards for the preparation of audit reports, (iii) conducting inspections of registered public accounting firms and (iv) otherwise promoting high professional standards among, and improving the quality of audit services offered by auditors of public companies. The PCAOB is funded from assessments on public companies and is subject to the oversight of the SEC. In addition, the Sarbanes-Oxley Act attempts to strengthen the independence of public company auditors by, among other things, (i) prohibiting public company auditors from providing certain non-audit services to their audit clients, (ii) requiring a company’s audit committee to preapprove all audit and non-audit services being provided by its independent auditor, (iii) requiring the rotation of audit partners and (iv) prohibiting an auditor from auditing a client that has as its chief executive officer, chief financial officer, chief accounting officer or controller a person that was employed by the auditor during the previous year.

 

The Sarbanes-Oxley Act also attempts to enhance the responsibility of corporate management by, among other things, (i) requiring the Chief Executive Officer and Chief Financial Officer of public companies to provide certain certifications in their periodic reports regarding the accuracy of the periodic reports filed with the SEC, (ii) prohibiting directors and officers of public companies from fraudulently influencing an accountant engaged in the audit of the company’s financial statements, (iii) requiring chief executive officers and chief financial officers to forfeit certain bonuses in the event of a misstatement of financial results, (iv) prohibiting directors and officers found to be unfit from serving in a similar capacity with other public companies, (v) prohibiting directors and officers from trading in the company’s equity securities during pension blackout periods and (vi) requiring the SEC to issue standards of professional conduct for attorneys representing public companies. In addition, public companies whose securities are listed on a national securities exchange or association must satisfy the following additional requirements: (i) the company’s audit committee must appoint and oversee the company’s auditors, (ii) each member of the company’s audit committee must be independent, (iii) the company’s audit committee must establish procedures for receiving complaints regarding accounting, internal accounting controls and audit-related matters, (iv) the company’s audit committee must have the authority to engage independent advisors and (v) the company must provide appropriate funding to its audit committee, as determined by the audit committee.

 

The Sarbanes-Oxley Act contains several provisions intended to enhance the quality of financial disclosures of public companies, including provisions that (i) require that financial disclosures reflect all material correcting adjustments identified by the company’s auditors, (ii) require the disclosure of all material off-balance sheet transactions, (iii) require the SEC to issue rules regarding the use by public companies of

pro forma financial information, (iv) with certain limited exceptions, including an exception for financial institutions making loans in compliance with federal banking regulations, prohibit public companies from making personal loans to its directors and officers, (v) with certain limited exceptions, require directors, officers and principal shareholders of public companies to report changes in their ownership in the company’s securities within two business days of the change, (vi) require a company’s management to provide a report of its assessment of the internal controls of the company in its annual report and requires auditors to attest to managements assertion of the internal controls, (vii) require public companies to adopt codes of conduct for senior financial officers and (viii) require companies to disclose whether the company’s audit committee has a financial expert as a member.

 

Under the Sarbanes-Oxley Act, the SEC was directed to adopt rules designed to protect the independence of research analysts and to require research analysts to disclose conflicts of interest and potential conflicts of interest. The Sarbanes-Oxley Act also directs that certain studies be conducted by the Comptroller General and the SEC, including studies regarding the function of credit rating agencies and the role of investment banks and financial advisers might have on earnings.

 

Although GBC and Gwinnett Banking Company have incurred additional expense in complying with the provisions of the Sarbanes-Oxley Act and the regulations promulgated by the SEC thereunder, such compliance has not had a material impact on GBC’s or Gwinnett Banking Company’s financial condition or results of operations.

 

Environmental Laws

 

GBC does not anticipate that compliance with environmental laws and regulations will have any material effect on capital, expenditures, earnings, or on its competitive position. However, environmentally related hazards have become a source of high risk and potentially unlimited liability for financial institutions. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, and liability to the institution for clean-up costs if it forecloses on the contaminated property. GBC is not aware of any borrower who is currently subject to any environmental investigation or clean-up proceeding that is likely to have a materially adverse effect on the financial condition or results of operations of GBC.

 

Properties

 

Gwinnett Banking Company leases its main office located at 165 Nash Street, Lawrenceville, Gwinnett County, Georgia. Gwinnett Banking Company also leases its branch banking offices located at 11675 Rainwater Drive, Suite 150, Alpharetta, Fulton County, Georgia 30004. All leased property is in good order and condition. Please see “The Merger — GBC’s Directors and Officers Have Financial Interests in the Merger — Purchase of GBC Main Office.”

 

Legal Proceedings

 

GBC is subject to claims and litigation in the ordinary course of business. GBC believes that any pending claims and litigation will not have a material adverse effect on its consolidated position.

 

Market Price of and Dividends on GBC’s Common Stock and Related Shareholder Matters

 

Shares of GBC common stock are thinly traded on the OTC Bulletin Board under the symbol “GBCP.OB.”

 

As of June 1, 2006, there were approximately 750 holders of GBC common stock. To date, GBC has not paid any dividends. Under the terms of the merger agreement, GBC may not pay cash dividends on its common stock.

No Changes in or Disagreements with Accountants on Accounting and Financial Disclosure

 

During GBC’s two most recent fiscal years and all subsequent interim periods, there were no changes in its accountants or any disagreements with its accountants on any matter of accounting principal or practice, financial statement disclosure, or auditing scope or procedure. Further, the accountant’s reports on GBC’s financial statements for the two most recent fiscal years did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principal.

 

General

 

The following is GBC’s management’s discussion and analysis of certain significant factors that have affected the financial position and operating results of GBC and Gwinnett Banking Company, during the periods included in the accompanying audited consolidated financial statements as of and for the years ended December 31, 2005 and December 31, 2004 and the unaudited consolidated financial statements as of and for the three and six months ended June 30, 2006 and June 30, 2005. The purpose of this discussion is to focus on information about GBC’s financial condition and results of operations that are not otherwise apparent from these financial statements. Reference should be made to these financial statements contained in Appendix E and the selected financial data presented elsewhere in this Proxy Statement/Prospectus for an understanding of the following discussion and analysis.

 

Critical Accounting Policies

 

GBC has adopted various accounting policies that govern the application of accounting principles generally accepted in the United States in the preparation of GBC’s financial statements. GBC’s significant accounting policies are described in the footnotes to the audited consolidated financial statements included in this proxy statement/prospectus.

 

Certain accounting policies involve significant judgments and assumptions by GBC which have a material impact on the carrying value of certain assets and liabilities. GBC considers these accounting policies to be critical accounting policies. The judgments and assumptions GBC uses are based on historical experience and other factors, which GBC believes to be reasonable under the circumstances. Because of the nature of the judgments and assumptions GBC makes, actual results could differ from these judgments and estimates which could have a material impact on GBC’s carrying values of assets and liabilities and GBC’s results of operations.

 

GBC believes the allowance for loan losses is a critical accounting policy that requires the most significant judgments and estimates used in preparation of GBC’s consolidated financial statements. Please see “— Provision for Loan Losses,” below, for a description of GBC’s processes and methodology for determining GBC’s allowance for loan losses.

 

Management’s Discussion and Analysis for the Three Months and Six Months Ended June 30, 2006 and June 30, 2005

 

GBC’s results for the first six months of 2006 were highlighted by continued increased profitability to approximately $3,707,000, compared to approximately $2,830,000 for the six months of 2005.

 

Liquidity and Capital Resources

 

The purpose of liquidity management is to ensure that there are sufficient cash flows to satisfy demands for credit, deposit withdrawals, and other needs. Traditional sources of liquidity include asset maturities and growth in core deposits. A company may achieve its desired liquidity objectives from the management of assets and liabilities and through funds provided by operations. Funds invested in short-term marketable instruments and the continuous maturing of other earning assets are sources of liquidity from the asset

perspective. The liability base provides sources of liquidity through deposit growth, the maturity structure of liabilities, and accessibility to market sources of funds.

 

Scheduled loan payments are a relatively stable source of funds, but loan payoffs and deposit flows fluctuate significantly, being influenced by interest rates and general economic conditions and competition. GBC attempts to price deposits to meet asset/liability objectives consistent with local market conditions.

 

GBC’s liquidity is monitored on a periodic basis by management and State and Federal regulatory authorities. GBC monitors its liquidity requirements under two categories, operational needs and emergency needs. The operational needs category establishes the cash requirements to sufficiently fund GBC’s deposit reserve requirements and pay operating expenses. The emergency need category establishes sufficient cash requirements to fund the volatility of deposits. As determined under these categories, GBC’s liquidity as of June 30, 2006 was considered satisfactory.

 

In the future, the primary source of funds available to GBC will be the payment of dividends by Gwinnett Banking Company. Banking regulations limit the amount of the dividends that may be paid without prior approval of Gwinnett Banking Company’s regulatory agency. As of June 30, 2006, Gwinnett Banking Company could pay approximately a $1,889,000 dividend without regulatory approval.

 

At June 30, 2006, GBC’s capital ratios were adequate based on regulatory minimum capital requirements. The minimum capital requirements and the actual capital ratios on a consolidated and bank-only basis are as follows:

 

 

These ratios may decline as asset growth continues, but are expected to exceed regulatory minimum requirements. GBC believes that anticipated future earnings will assist in keeping these ratios at satisfactory levels.

 

GBC believes that its liquidity and capital resources will be adequate and will meet its foreseeable short and long-term needs. GBC anticipates that it will have sufficient funds available to meet current loan commitments and to fund or refinance, on a timely basis, GBC’s other material commitments and liabilities.

 

GBC management is not aware of any known trends, events or uncertainties, other than those discussed above, that will have or that are reasonably likely to have a material effect on GBC’s liquidity, capital resources or operations. Management is also not aware of any current recommendations by regulatory authorities that, if they were implemented, would have such an effect.

 

At June 30, 2006, GBC had no material commitments for capital expenditures.

 

Off-Balance Sheet Arrangements

 

GBC is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of GBC’s customers. These financial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amount recognized in the balance sheet.

 

GBC’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual

amount of those instruments. GBC uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. A summary of GBC’s commitments is as follows:

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by GBC upon extension of credit, is based on GBC’s credit evaluation of the customer.

 

Standby letters of credit are conditional commitments issued by GBC to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loans to customers. Collateral is required in instances which GBC deems necessary.

 

Related Party Transactions

 

Directors and officers of GBC and their affiliates, including members of their families or businesses and other organizations with which they are associated, have banking and other transactions in the ordinary course of business with Gwinnett Banking Company. It is the policy of Gwinnett Banking Company that any loans or other transactions with those persons or entities (i) be made in accordance with applicable law and Gwinnett Banking Company’s lending policies, (ii) be made on substantially the same terms, including price, interest rates and collateral, as those prevailing at the time for comparable transactions with other unrelated parties of similar standing, and (iii) not be expected to involve more than the normal risk of collectability or present other unfavorable features to the GBC and Gwinnett Banking Company. In addition, all transactions with directors and officers of GBC and their affiliates are intended to be on terms no less favorable than could be obtained from an unaffiliated third party, and must be approved by a majority of the directors of GBC, including a majority of the directors who do not have an interest in the transaction.

 

GBC leases its main office banking facilities under a noncancelable operating lease agreement from GBC Properties, LLC, a limited liability company owned by several members of the GBC board of directors. The lease term is for 15 years with the monthly rental payment adjusting every fifth year for changes in the Consumer Price Index. The lease agreement requires GBC to pay normal operating and occupancy expenses of the facilities. Prior to the transaction with First Charter, GBC and GBC Properties, LLC reached an understanding whereby the GBC main office banking facilities would be sold to GBC in the event of a change in control of GBC. The merger agreement requires that such purchase occur prior to the consummation of the merger. Please see “The Merger — GBC’s Directors and Officers Have Financial Interests in the Merger — Purchase of GBC Main Office.”

 

Financial Condition as of June 30, 2006 and December 31, 2005

 

The following is a summary of GBC’s balance sheet for the periods indicated:

 

 

GBC’s total assets increased by 8.05% for the first six months of 2006. Deposit growth of approximately $19,511,000 was invested primarily in loans and cash due from banks. GBC increases its deposits in response to increases in loans. GBC’s net loan to deposit ratio increased to 94.11% at June 30, 2006 from 92.46% at December 31, 2005. GBC’s total equity increased by year-to-date net income of approximately $3,707,000 and proceeds from the exercise of stock options in the amount of $4,774,000. These increases were partially offset by unrealized losses on securities available-for-sale, net of tax, of approximately $421,000.

 

GBC’s securities portfolio, consisting of U.S. Agency, State, County and Municipals, and mortgage-backed securities, amounted to approximately $32,426,000 at June 30, 2006. Unrealized losses on securities amounted to approximately $1,386,000 at June 30, 2006, as compared to an unrealized loss of approximately $705,000 at December 31, 2005. Management has not specifically identified any securities for sale in future periods that, if so designated, would require a charge to operations if the market value would not be reasonably expected to recover prior to the time of sale.

 

GBC has approximately 80% of its loan portfolio collateralized by real estate located in its primary market area of Gwinnett County, Georgia and surrounding counties. GBC’s real estate construction portfolio consists of loans collateralized by loans to build one-to-four-family residential properties. GBC generally requires that loans collateralized by real estate not exceed 80%-85% of the collateral value.

 

The remaining approximately 20% of the loan portfolio consists of commercial, consumer, and other loans. GBC requires collateral commensurate with the repayment ability and creditworthiness of the borrower.

 

The specific economic and credit risks associated with GBC’s loan portfolio, especially the real estate portfolio, include, but are not limited to, a general downturn in the economy which could affect unemployment rates in GBC’s market area, general real estate market deterioration, interest rate fluctuations, deteriorated or non-existing collateral, title defects, inaccurate appraisals, financial deterioration of borrowers, fraud, and any violation of banking protection laws. Construction lending can also present other specific risks to the lender such as whether the builders can obtain financing for the construction, whether the builders can sell the home to a buyer, and whether the buyer can obtain permanent financing.

 

GBC attempts to reduce these economic and credit risks not only by adhering to loan to value guidelines, but also by investigating the creditworthiness of the borrower and monitoring the borrower’s financial position. Also, GBC establishes and periodically reviews its lending policies and procedures as well as having independent loan review. State banking regulations limit exposure by prohibiting secured loan relationships

that exceed 25% of Gwinnett Banking Company’s statutory capital and unsecured loan relationships that exceed 15% of Gwinnett Banking Company’s statutory capital.

 

Results of Operations For The Three Months Ended June 30, 2006 and 2005 and For The Six Months Ended June 30, 2006 and 2005

 

The following is a summary of GBC’s operations for the periods indicated: