As filed with the Securities and Exchange Commission on November 7, 2007

Registration No. 333-      

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form S-4

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

FIFTH THIRD BANCORP

(Exact name of registrant as specified in its charter)

 

 

 

 

 

Fifth Third Center, Cincinnati, Ohio 45263

(513) 579-5300

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

 

 

Paul L. Reynolds, Esq.

Fifth Third Bancorp

38 Fountain Square Plaza

Cincinnati, Ohio 45263

(513) 579-5300

(513) 534-6757 (Fax)

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

 

 

Copies of Communications to:

 

 

 

 

 

Approximate date of commencement of proposed sale of the securities to the public:  As soon as practicable after this registration statement becomes effective and upon the effective time of the merger of First Charter Corporation with and into Fifth Third Financial Corporation pursuant to the agreement described in the enclosed proxy statement/prospectus included in Part I of this registration statement.

 

If the securities being registered on this Form are being 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 registration statement number of the earlier effective registration statement for the same offering.  o

 

CALCULATION OF REGISTRATION FEE

 

 

 

 

 

 

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 of 1933, as amended, 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 NOVEMBER 7, 2007

 

 

 

 

PROXY STATEMENT FOR FIRST CHARTER CORPORATION

SPECIAL MEETING

 

 

 

 

PROSPECTUS OF FIFTH THIRD BANCORP

 

 

 

 

First Charter Corporation and Fifth Third Bancorp have agreed that Fifth Third will acquire First Charter in a merger. If the merger is completed, each outstanding share of First Charter common stock will be exchanged for either $31.00 in cash or such number of shares of Fifth Third common stock that have a value of $31.00. Each First Charter shareholder may elect to receive cash for all his shares, Fifth Third common stock for all his shares, or a combination of cash for some of his shares and Fifth Third common stock for the remainder of his shares, or may choose to elect no preference, in which case the merger consideration to be received will be determined by the exchange agent depending on the amount of cash and shares elected by those First Charter shareholders who make an express election. Notwithstanding the elections that may be made by the First Charter shareholders, the total consideration to be paid by Fifth Third will be approximately 70% in shares of Fifth Third common stock and approximately 30% in cash, but in no event more than 30% in cash. If the elections made by First Charter shareholders would result in an oversubscription for either stock or cash, then the exchange agent will prorate the amount of stock and cash to be issued to First Charter shareholders in the merger as necessary to obtain the 70% stock - 30% cash allocation of the merger consideration.

 

First Charter has scheduled a special meeting for its shareholders to vote on the merger agreement. The date, time and place of the special meeting are as follows:           :          .m., local time,          , 2007, the First Charter Center, 10200 David Taylor Drive, Charlotte, North Carolina 28262-2373.

 

The Board of Directors of First Charter believes that the merger is in First Charter’s and your best interests.

 

Your failure to vote will have the same effect as voting against the merger, so whether or not you plan to attend the special meeting, please promptly return the enclosed proxy card to us so that your shares are voted at the special meeting. The merger cannot be completed unless the shareholders of First Charter approve the merger agreement by the affirmative vote of 75% of the aggregate voting power of the outstanding stock of First Charter entitled to vote at the close of business on          , 2007. Your vote is very important.

 

First Charter common stock is traded on the NASDAQ Global Select Market System under the symbol “FCTR.” Fifth Third common stock is traded on the NASDAQ Global Select Market System under the symbol “FITB.”

 

 

 

 

For a description of certain significant considerations in connection with the merger and related matters described in this document, see “Risk Factors” beginning on page 15.

 

 

 

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this document. Any representation to the contrary is a criminal offense.

 

 

 

 

The shares of Fifth Third common stock are not savings accounts, deposits or other obligations of any bank or savings association and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.

 

 

 

 

The information in this document is not complete and may be changed. We may not issue these securities until the registration statement filed with the Securities and Exchange Commission is effective. This document is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

The date of this proxy statement/prospectus is November   , 2007, and it is first being mailed to First Charter shareholders on or about November   , 2007.

ADDITIONAL INFORMATION

 

This document incorporates important business and financial information about Fifth Third from other documents that are not included in or delivered with this document. This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference in this document through the Securities and Exchange Commission website at http://www.sec.gov or by requesting them from Paul L. Reynolds, Secretary, Fifth Third Bancorp, Fifth Third Center, Cincinnati, Ohio 45263 (telephone number: (513) 579-5300). In order to ensure timely delivery of the documents, any request should be made by          .

 

TABLE OF CONTENTS

 

 

 

QUESTIONS AND ANSWERS ABOUT THE MERGER

 

	•	approval of the merger agreement;
	•	the adjournment or postponement of the special meeting, if necessary or appropriate; and
	•	any other matters as are properly presented at the special meeting.

	•	approval of the merger agreement by First Charter’s shareholders;
	•	authorization for listing on the NASDAQ Global Select Market System for the shares of Fifth Third common stock to be issued to the holders of First Charter common stock upon consummation of the merger;
	•	effectiveness of the registration statement of which this document is a part, with no stop order suspending such effectiveness and no proceedings for that purpose shall have been initiated by the Securities and Exchange Commission;
	•	the receipt of certain regulatory approvals that shall not have resulted in the imposition of any materially burdensome regulatory condition under banking laws and the expiration of any statutory waiting periods;

	•	the receipt by Fifth Third of the opinion of its counsel that the merger will be treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, which counsel has subsequently been designated by Fifth Third to be Alston & Bird LLP;
	•	the receipt by First Charter of the opinion of Helms Mulliss & Wicker, PLLC that (1) the merger will be treated as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code and (2) except to the extent of any cash consideration received in the merger and except with respect to cash received in lieu of fractional share interests in Fifth Third common stock, no gain or loss will be recognized by any of the holders of First Charter common stock in the merger;
	•	the lack of any order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the merger or any of the transactions contemplated by the merger agreement, or the lack of an enactment of a statute, rule, regulation, order, injunction or decree by any governmental entity that prohibits or makes illegal the consummation of the merger;
	•	the representations and warranties of Fifth Third and First Charter shall be true and correct as of the date of the merger agreement and as of the effective time and First Charter and Fifth Third shall have received a certificate signed on behalf of the other party to such effect; and
	•	First Charter and Fifth Third shall have performed in all material respects all obligations required to be performed by it under the merger agreement at or before the effective time and First Charter and Fifth Third shall have received a certificate signed on behalf of the other party to such effect.

	•	a governmental authority that must grant a regulatory approval denies approval of the merger;
	•	a governmental entity of competent jurisdiction issues a final nonappealable order enjoining or otherwise prohibiting the merger;
	•	the merger is not completed on or before August 15, 2008 (although this termination right is not available to a party whose failure to comply with the merger agreement resulted in the failure to complete the merger by that date); or
	•	other conditions to closing the merger have not been satisfied.

	•	First Charter is in breach of its representations, warranties, covenants or agreements set forth in the merger agreement (although this termination right is not available to Fifth Third if it is then in material breach of any representation, warranty, covenant or other agreement contained in the merger agreement) and such breach is either incurable or is not cured within 45 days;
	•	First Charter’s Board of Directors shall have failed to recommend the approval and adoption of the merger agreement in the proxy statement; or
	•	First Charter’s Board of Directors authorizes, recommends, proposes or publicly announces in a manner adverse to Fifth Third, its intention to authorize, recommend or propose an acquisition proposal with any person other than Fifth Third.

	•	Fifth Third is in breach of its representations, warranties, covenants or agreements set forth in the merger agreement (although this termination right is not available to First Charter if it is then in

		material breach of any representation, warranty, covenant or other agreement contained in the merger agreement) and such breach, either individually or in the aggregate results in the failure of the conditions to obligations of Fifth Third or First Charter and is either incurable or is not cured within 45 days of notice.

	•	by Fifth Third because First Charter breached any of its covenants, agreements, representations or warranties and, a competing acquisition proposal was received by First Charter prior to termination and within 12 months of termination First Charter shall have entered into a definitive written agreement with respect to the competing acquisition proposal or the acquisition proposal shall have been consummated; or
	•	by Fifth Third after receipt by First Charter of a competing acquisition proposal if, prior to the First Charter shareholders meeting, First Charter’s Board of Directors withdrew its recommendation or refused to recommend to the shareholders that they vote to approve the merger while there was a competing acquisition proposal that had not been withdrawn or rejected by the First Charter directors and within 12 months of termination First Charter shall have entered into a definitive written agreement with respect to the competing acquisition proposal or the acquisition proposal shall have been consummated.

	•	the merger agreement is terminated by mutual agreement of the parties;
	•	the merger agreement is terminated due the failure to obtain regulatory approval by the appropriate governmental entities or due to a final and nonappealable order by a governmental entity enjoining or prohibiting the consummation of the merger; or
	•	the merger agreement is terminated by First Charter for the breach by Fifth Third of its representations, warranties, covenants or agreements set forth in the merger agreement which breach, either individually or in the aggregate results in the failure of the conditions to obligations of Fifth Third or First Charter and is either incurable or is not cured within 45 days following written notice.

		August 15, 2007				November  , 2007
Fifth Third Common Stock		$	37.38			$
First Charter Common Stock		$	20.25			$
Equivalent Price Per Share of First Charter Common Stock		$	31.00			$	31.00

		Fifth Third Common Stock												First Charter Common Stock
										Dividends												Dividends
		High				Low				Declared				High				Low				Declared
2005:
First Quarter		$	48.12			$	42.05			$	0.350			$	26.04			$	21.91			$	0.190
Second Quarter			44.67				40.24				0.350				23.34				20.43				0.190
Third Quarter			43.99				36.38				0.380				25.84				21.75				0.190
Fourth Quarter			42.50				35.04				0.380				26.95				22.04				0.190
2006:
First Quarter		$	41.43			$	36.30			$	0.380			$	25.13			$	23.11			$	0.190
Second Quarter			41.02				35.86				0.400				25.50				23.02				0.195
Third Quarter			40.18				35.95				0.400				24.82				22.93				0.195
Fourth Quarter			41.57				37.75				0.400				25.15				23.05				0.195
2007:
First Quarter		$	41.41			$	37.93			$	0.420			$	24.97			$	21.29			$	0.195
Second Quarter			43.32				37.88				0.420				22.83				19.09				0.195
Third Quarter			41.17				33.60				0.420				30.58				17.78				0.195
Fourth Quarter (through November   , 2007)

																										Equivalent Shares
																										Basis 0.7795
																										of a Share of Fifth
																										Third Common
		Fifth Third																First Charter								Stock (5)
		Historical								Pro Forma								Historical								Pro Forma(5)
		Basic				Diluted				Basic(1)				Diluted(2)				Basic				Diluted				Basic				Diluted
EARNINGS PER SHARE FROM CONTINUING OPERATIONS
Twelve Months Ended December 31, 2006:		$	2.14			$	2.13			$	2.11			$	2.10			$	1	.50		$	1.49			$	1.64			$	1.64
Six Months Ended June 30, 2007		$	1.35			$	1.34			$	1.32			$	1.31			$	0	.61		$	0.61			$	1.03			$	1.02
CASH DIVIDENDS
DECLARED PER SHARE(3)
Twelve Months Ended December 31, 2006:		$	1.58							$	1.58							$	0	.775						$	1.23
Six Months Ended June 30, 2007:		$	0.84							$	0.84							$	0	.39						$	0.65
BOOK VALUE PER SHARE(4)
At December 31, 2006:		$	18.02															$	12	.81
At June 30, 2007:		$	17.16							$	17.63							$	12	.85						$	13.74

(1)		The pro forma earnings per basic common share from continuing operations is computed by dividing pro forma income from continuing operations by the weighted average pro forma basic common shares of Fifth Third.
(2)		The pro forma earnings per diluted common share from continuing operations is computed by dividing the total of pro forma income from continuing operations and the net income effect from dilutive securities by the weighted average pro forma diluted common shares of Fifth Third.
(3)		Fifth Third pro forma cash dividends declared per share represent historical cash dividends declared per share by Fifth Third.
(4)		The pro forma book value per share is computed by dividing the pro forma total shareholders’ equity of Fifth Third by total pro forma common shares of Fifth Third.
(5)		First Charter equivalent pro forma per share amounts are computed by multiplying the Fifth Third pro forma amounts by the calculated conversion ratio of 0.7795 respectively.

 

RISK FACTORS

 

In making your determination as to how to vote on the merger, you should consider the following factors:

 

Risks Relating to the Merger

 

The conversion ratio is variable and will fluctuate due to changes in the market price of Fifth Third common stock.

 

If you receive Fifth Third common shares as merger consideration you will receive a certain amount of shares of Fifth Third common stock for each share of First Charter common stock if the merger is completed. The conversion ratio is equal to $31.00 divided by the average market price of Fifth Third common stock for the five trading days ending on the trading day immediately before the closing of the merger. Changes in the price of Fifth Third common stock from the date of the merger agreement, from the date of this proxy statement/prospectus and from the date of the special meeting will affect the conversion ratio and, thus, the number of Fifth Third common shares that you receive as merger consideration. Fifth Third’s stock price may increase or decrease before and after the effective time of the merger due to a variety of factors, including, without limitation, general market and economic conditions, changes in Fifth Third’s businesses, operations and prospects and regulatory considerations. Many of these factors are beyond Fifth Third’s control.

 

First Charter shareholders may receive a form of consideration different from what they elect.

 

The consideration to be received by First Charter shareholders in the merger is subject to the requirement that the value of the stock portion of the merger consideration be equal to approximately 70% of the total value of merger consideration and the cash portion of the merger consideration be equal to approximately 30%, but in no event more than 30% of the total merger consideration. The merger agreement contains proration and allocation methods to achieve this desired result. If you elect all cash and the available cash is oversubscribed, then you will receive a portion of the merger consideration in Fifth Third common stock. If you elect all stock and the available stock is oversubscribed, then you will receive a portion of the merger consideration in cash. Furthermore, if you elect to receive a combination of both cash and stock and the available cash is oversubscribed or undersubscribed, then you will receive a combination of merger consideration that differs from your election. 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 income tax purposes with respect to the cash received).

 

The value of First Charter common stock may vary in the future.

 

If the merger is not completed, the value of First Charter common stock could increase or decrease in the future. Such value could be either higher or lower than the merger consideration being offered by Fifth Third in the merger.

 

The merger agreement limits First Charter’s ability to pursue alternatives to the merger.

 

The merger agreement contains terms and conditions that make it more difficult for First Charter to be sold to a party other than Fifth Third. These provisions impose restrictions that prevent First Charter from seeking another acquisition proposal and that, subject to certain exceptions, limit First Charter’s ability to discuss, facilitate or commit to competing third-party proposals to acquire all or a significant part of First Charter. See “Terms of the Agreement — Acquisition Proposals by Third Parties.”

 

Fifth Third required First Charter to agree to these provisions as a condition to Fifth Third’s willingness to enter into the merger agreement. These provisions, however, might discourage a third party that might have an interest in acquiring all or a significant part of First Charter from considering or proposing that acquisition even if it were prepared to pay consideration with a higher per share market price than the current proposed merger consideration, and the termination fee provided in the merger agreement and described herein might

result in a potential competing acquirer proposing to pay a lower per share price to acquire First Charter than it might otherwise have proposed to pay.

 

The fairness opinion obtained by First Charter from its financial advisor will not reflect changes in circumstances subsequent to the date of the merger agreement.

 

First Charter has obtained a fairness opinion dated as of August 15, 2007 from its financial advisor, Keefe, Bruyette & Woods, Inc. First Charter has not obtained and will not obtain an updated opinion as of the date of this document from Keefe, Bruyette & Woods, Inc. Changes in the operations and prospects of Fifth Third or First Charter, general market and economic conditions and other factors that may be beyond the control of Fifth Third and First Charter, and on which the fairness opinion was based, may alter the value of Fifth Third or First Charter or the price of shares of Fifth Third common stock or First Charter common stock by the time the merger is completed. The opinion does not speak to the time the merger will be completed or to any other date other than the date of such opinion. As a result, 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 First Charter received from Keefe, Bruyette & Woods, Inc., please refer to “Proposal — Merger of First Charter into Fifth Third Financial Corporation — Opinion of First Charter’s Financial Advisor” beginning on page   of this document.

 

First Charter’s shareholders will not control Fifth Third’s future operations.

 

First Charter’s shareholders collectively own 100% of First Charter and, in the aggregate, have the absolute power to approve or reject any matters requiring the adoption or approval of shareholders under North Carolina law and First Charter’s Amended and Restated Articles of Incorporation. After the merger, First Charter’s shareholders in the aggregate will hold approximately     % of the outstanding shares of Fifth Third common stock. Accordingly, even if all of the former First Charter shareholders voted in concert on all matters presented to Fifth Third’s shareholders from time to time, the former First Charter shareholders will not likely have a significant impact on the election of directors or whether future Fifth Third proposals are approved or rejected.

 

The directors and executive officers of First Charter will have economic interests in the merger that are different from, or in addition to the merger consideration received by all other First Charter shareholders.

 

First Charter’s executive officers negotiated the terms of the merger agreement with their counterparts at Fifth Third, and First Charter’s Board of Directors adopted and approved the merger agreement and is recommending that the First Charter shareholders vote for the merger agreement. You should be aware that these executive officers and directors have economic interests in the merger in addition to the interests they share with you as a First Charter shareholder.

 

Certain officers and directors of First Charter will receive, among other things, severance agreements, employment agreements, change-in-control payments, accelerated stock option vesting and lapses of restrictions on restricted stock in connection with the merger. Furthermore, some of such officers shall receive a cash payment of their performance share awards, based on the assumptions that the performance period ends on the effective date of the merger and that First Charter has met 100% of its performance targets. In addition, directors of First Charter will continue to receive certain advisory or director fees for a period of one year after the effective date of the merger. See “Terms of the Agreement — Interests of First Charter’s Directors and Executive Officers in the Merger.” Accordingly, First Charter’s directors and certain executive officers may have interests in the merger that are different from, or in addition to, yours.

 

Fifth Third has not previously operated in the Charlotte metropolitan market area.

 

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. The banking business in this market area is extremely competitive, and the level of competition may increase further. Fifth Third has

not previously participated in this market and there may be unexpected challenges and difficulties that could adversely affect Fifth Third following the consummation of the merger.

 

Additional Risks

 

For additional risk factors relating to Fifth Third, reference is made to the Fifth Third Annual Report on Form 10-K/A for the year ended December 31, 2006 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007.

 

FORWARD-LOOKING STATEMENTS

 

This document, including information incorporated by reference into this document, contains or incorporates statements that Fifth Third believes are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to Fifth Third’s financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to those described in this document, or the documents incorporated by reference, including the risk factors set forth in our most recent Annual Report on Form 10-K/A. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements Fifth Third may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to Fifth Third.

 

There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions, either national or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (2) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (3) changes in the interest rate environment reduce interest margins; (4) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (5) our ability to maintain required capital levels and adequate sources of funding and liquidity; (6) changes and trends in capital markets; (7) competitive pressures among depository institutions increase significantly; (8) effects of critical accounting policies and judgments; (9) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies; (10) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged; (11) ability to maintain favorable ratings from rating agencies; (12) fluctuation of Fifth Third’s stock price; (13) ability to attract and retain key personnel; (14) ability to receive dividends from its subsidiaries; (15) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (16) effects of accounting or financial results of one or more acquired entities; (17) difficulties in combining the operations of acquired entities; (18) ability to secure confidential information through the use of computer systems and telecommunications networks; and (19) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity.

 

You should refer to our periodic and current reports filed with the Securities and Exchange Commission, or “SEC,” for further information on other factors that could cause actual results to be significantly different from those expressed or implied by these forward-looking statements. See “Where You Can Find More Information” on page  .

 

THE SPECIAL MEETING

 

This document and the accompanying proxy card are being furnished to you in connection with the solicitation by the Board of Directors of First Charter of proxies to be used at the special meeting to be held at  :  .m., local time,          , 2007, the First Charter Center, 10200 David Taylor Drive, Charlotte, North Carolina 28262-2373, and at any adjournments thereof. This document and the enclosed notice of First Charter’s special meeting and proxy card are first being sent to you on or about          , 2007.

 

Purpose of the Meeting

 

The purpose of the special meeting of First Charter’s shareholders is to vote upon the approval of the merger agreement relating to the merger of First Charter with and into Fifth Third Financial Corporation and other transactions contemplated thereby and to vote upon the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies. First Charter’s shareholders also may consider and vote upon such other matters as are properly brought before the special meeting. As of the date of this document, the First Charter Board of Directors knows of no business that will be presented for consideration at the special meeting, other than matters described in this document.

 

Voting and Revocability of Proxies

 

The First Charter Board of Directors has fixed the close of business on          , 2007 as the record date for shareholders entitled to notice of and to vote at the special meeting. Only holders of record of First Charter common stock on that record date are entitled to notice of and to vote at the special meeting. Each share of First Charter common stock you own entitles you to one vote. On the record date,           shares of First Charter common stock were outstanding and entitled to vote at the special meeting, held by approximately           shareholders of record.

 

  Voting Procedures

 

Registered shareholders:  Registered shareholders may vote their shares or submit a proxy to have their shares voted by one of the following methods:

 

 

Street-name shareholders:  If you hold your shares through a broker, bank or custodian, you are considered a “street-name” shareholder. Street-name shareholders may generally vote their shares or submit a proxy to have their shares voted by one of the following methods:

 

or electronically on the Internet, following the instructions on the proxy card or other information provided by the record holder.

 

 

Proxies solicited by the First Charter Board of Directors will be voted in accordance with the directions given on the proxy cards. If you sign and date your proxy card but do not indicate your vote on the proxy card, your proxy will be voted “FOR” approval of the merger agreement at the special meeting and “FOR” the adjournment or postponement of the meeting, if necessary or appropriate to solicit additional proxies. The proxies confer discretionary authority on the persons named on the proxy cards to vote First Charter common stock with respect to matters incident to the conduct of the special meeting. If any other business is presented at the special meeting, proxies will be voted in accordance with the discretion of the proxy holders. Proxies marked as abstentions will have the same effect as a vote against the proposal to approve the merger agreement at the special meeting. If you do not return your proxy card, or vote at the special meeting, it will have the same effect as if you voted against the merger agreement.

 

  Revoking Your Proxy

 

If you are a registered shareholder, you may revoke your proxy at any time before the shares are voted at the meeting by:

 

 

Special Meeting Admission

 

If you wish to attend the special meeting in person, you must present a form of personal identification. If you are a beneficial owner of common stock that is held by a bank, broker or other nominee, you will also need proof of ownership to be admitted to the meeting. A recent brokerage statement or a letter from your bank or broker are examples of proof of ownership. No cameras, recording equipment, electronic devices, large bags, briefcases or packages will be permitted in the meeting.

 

Vote Required

 

The First Charter Amended and Restated Articles of Incorporation require that in order to consolidate with, or merge with or into, any other corporation, First Charter’s shareholders must approve such merger by the affirmative vote of not less than 75% of the aggregate voting power of the outstanding stock entitled to vote. If any shareholder entitled to vote is a person who is the beneficial owner of more than 20% of the voting power of First Charter and if, prior to the acquisition of 20% of the voting power of First Charter by a shareholder, the Board of Directors of First Charter had not unanimously approved such consolidation or merger, then the merger or consolidation must be approved by the affirmative vote of not less than 75% of the aggregate voting power of the outstanding stock entitled to vote, which shall include the affirmative vote of at least 50% of the voting power of the outstanding stock of shareholders entitled to vote other than individual shareholders who are the beneficial owners of 20% or more of the voting power of First Charter. Since First Charter does not have any individual shareholders that are the beneficial owners of 20% or more of its voting

power, the affirmative vote of 75% of the aggregate voting power of the outstanding stock of First Charter entitled to vote is the only vote required to approve the merger agreement. The First Charter Board of Directors recommends that First Charter shareholders vote “FOR” approval of the merger agreement.

 

Because approval of the merger agreement requires the affirmative vote of 75% of the aggregate voting power of the outstanding common stock of First Charter entitled to vote, abstentions and failures to vote will have the same effect as votes against the proposal. Under National Association of Securities Dealers, Inc. conduct rules, your broker may not vote your shares on the First Charter proposal to approve the merger agreement without instructions from you. Without your voting instructions, a broker non-vote will occur. Broker non-votes have the same effect as votes against the proposal.

 

The proposal to adjourn or postpone the special meeting, if necessary or appropriate to solicit additional proxies, requires the affirmative vote of the record holders of a majority of the voting power present and entitled to vote at the special meeting. The First Charter Board of Directors recommends that First Charter shareholders vote “FOR” the approval of any proposal to adjourn or postpone the special meeting, if necessary or appropriate.

 

As of the record date, approximately           shares of First Charter common stock (representing     % of the votes entitled to be cast at the special meeting) were beneficially held by directors and executive officers of First Charter. Subsidiaries of First Charter beneficially owned approximately           shares (representing     % of the shares entitled to vote at the special meeting) of First Charter common stock in various fiduciary capacities as of the record date, of which those subsidiaries have sole or shared voting power.

 

Solicitation of Proxies

 

First Charter will bear all of the costs of soliciting proxies. However, Fifth Third and First Charter will bear equally the expenses of printing and mailing this document. In addition to soliciting proxies by mail, Morrow & Co., LLC, a proxy solicitation firm, will assist First Charter in soliciting proxies for the special meeting. First Charter will pay $      for these services. First Charter will, upon request, reimburse brokers, banks and other nominees for their expenses in sending proxy materials to their customers who are beneficial owners and obtaining their voting instructions. Additionally, directors, officers and employees of First Charter may solicit proxies personally and by telephone. None of these persons will receive additional or special compensation for soliciting proxies.

 

Do not send in any stock certificates with your proxy card. Prior to the effective time of the merger, the exchange agent will mail election forms and transmittal forms with instructions for the surrender of stock certificates for First Charter common stock to all record holders of First Charter common stock. If you make no election or revoke your election prior to the effective time, the exchange agent will mail transmittal forms with instructions for the surrender of stock certificates for First Charter common stock to former First Charter shareholders promptly following the effective time.

 

PROPOSAL — MERGER OF FIRST CHARTER INTO FIFTH THIRD FINANCIAL CORPORATION

 

The following description summarizes all material terms of the merger agreement. We urge you to read the merger agreement, a copy of which is attached as Annex A to this document and is incorporated by reference into this document.

 

Structure of the Merger

 

Upon completion of the merger, First Charter will merge with and into Fifth Third Financial Corporation and First Charter will cease to exist as a separate entity. Fifth Third may change the method of effecting the combination (including by providing for the merger of First Charter into a different wholly owned subsidiary of Fifth Third) if and to the extent Fifth Third deems such change desirable.

 

Corporate Governance

 

After the merger is completed, the directors and officers of Fifth Third Financial who were in office prior to the effective time of the merger will continue to serve as the directors and officers, respectively, of Fifth Third Financial for the term for which they were elected, subject to Fifth Third Financial’s code of regulations and in accordance with law.

 

Merger Consideration

 

Each share of First Charter common stock (excluding shares owned directly by First Charter or Fifth Third except for any First Charter shares held by them in a fiduciary capacity) that is issued and outstanding immediately prior to the effective time of the merger will be cancelled and converted, by virtue of the merger and without any further action, into the right to receive either $31.00 worth of Fifth Third common stock or $31.00 in cash based on the election of First Charter shareholders. You can also elect to receive a mix of Fifth Third common stock and cash worth $31.00 in return for each First Charter common share. However, if you elect all or part of your merger consideration to be in the form of Fifth Third common stock, the number of shares that you will receive in the merger will fluctuate between the date of this document and the closing of the merger. Furthermore, the amount of cash paid to First Charter shareholders is limited to 30%, but in no event more than 30%, of the total merger consideration paid and the value of the Fifth Third common stock paid to First Charter shareholders is limited to approximately 70% of the merger consideration paid. Therefore, it is possible that if you elect to be paid in cash, you may receive a portion or all of your payment in Fifth Third common stock or that if you elect to be paid in Fifth Third common stock, you may receive a portion or all of your payment in cash.

 

If you fail to make an election to receive either Fifth Third common stock or cash, you will receive consideration of Fifth Third common stock and/or cash on a pro rata basis as determined by the exchange agent. The pro rata selection process shall consist of such equitable pro ration processes as shall be mutually determined by First Charter and Fifth Third before the effective time of the merger. If you fail to make an election, you shall receive a combination of merger consideration that does not cause the total amount of cash paid to First Charter shareholders to exceed 30% of the total merger consideration and does not cause the total value of Fifth Third common stock paid to First Charter shareholders to be less than 70% of the total merger consideration paid.

 

If, after all First Charter shareholders have submitted their elections, the amount of Fifth Third common stock is oversubscribed, all First Charter shareholders who elected to receive cash will receive cash. In addition, all First Charter shareholders who chose no election or made no election will receive cash. Next, the exchange agent will select a sufficient number of shares to receive cash instead of Fifth Third common stock from any shares that elected to receive Fifth Third common stock. This selection will be determined such that the aggregate cash amount paid will equal as closely as possible, but in no event more than, 30% of the total merger consideration. All other shares that are not selected by the exchange agent will receive Fifth Third common stock.

 

If, after all First Charter shareholders have submitted their elections, the amount of cash is oversubscribed, all First Charter shareholders who elected to receive Fifth Third common stock will receive such stock. In addition, all First Charter shareholders who chose no preference or made no election will receive Fifth Third common stock. Next, the exchange agent will select on a pro rata basis a sufficient number of shares to receive Fifth Third common stock instead of cash among any shares that elected to receive cash. This selection will be determined such that the aggregate cash amount paid will equal as closely as possible, but in no event more than, 30% of the total merger consideration. All other shares that are not selected by the exchange agent will receive cash.

 

Each share of Fifth Third common stock issued and outstanding prior to the merger will remain issued and outstanding and will not be converted or exchanged in the merger.

 

The conversion ratio is equal to $31.00 divided by the average market price of Fifth Third common stock for the five trading days ending on the trading day immediately before the closing of the merger. Changes in

the price of Fifth Third common stock from the date of the merger agreement, from the date of this proxy statement/prospectus and from the date of the special meeting will affect the conversion ratio and thus, the number of Fifth Third common shares exchanged for First Charter shares as merger consideration.

 

No Fractional Shares

 

Only whole shares of Fifth Third common stock will be issued in connection with the merger. In lieu of fractional shares, each holder of First Charter common stock otherwise entitled to a fractional share of Fifth Third common stock will be paid, without interest, an amount of cash equal to the amount of this fraction multiplied by $31.00. No shareholder will be entitled to interest, dividends, voting rights or other rights in respect of any fractional share.

 

Effective Time of the Merger

 

Unless we agree otherwise, the effective time of the merger will occur on a day specified by the parties that is not more than five business days after all conditions contained in the merger agreement have been met or waived, including the expiration of all applicable regulatory waiting periods. It is anticipated that the effective time of the merger will occur in the first quarter of 2008, although no assurance can be given in this regard. First Charter and Fifth Third each will have the right, but not the obligation, to terminate the merger agreement if the merger does not occur on or before August 15, 2008, provided the terminating party is not in material breach or default of any representation, warranty or covenant contained in the merger agreement on the date of such termination.

 

Exchange of Certificates

 

After the effective time of the merger, you will cease to have any rights as a shareholder of First Charter, and your sole right will be the right to receive the merger consideration, into which your shares of First Charter common stock will have been converted by virtue of the merger. If you have properly made an election as to the type of merger consideration that you desire to receive and have delivered your stock certificates to the exchange agent, the exchange agent will send to you promptly following the effective time your share of the merger consideration adjusted as set forth above if necessary.

 

If you have not already sent in your stock certificates with your election form, as soon as reasonably practicable after the effective time of the merger, the exchange agent will send to you a notice and letter of transmittal for use in submitting to the exchange agent certificates formerly representing shares of First Charter common stock to be exchanged for either certificates representing shares of Fifth Third common stock (and, to the extent applicable, cash in lieu of fractional shares of Fifth Third common stock) and/or cash to which you are entitled to receive as a result of the merger and any applicable proration procedure. This notice and letter of transmittal shall specify that delivery shall be effected, and risk of loss and title to the stock certificates shall pass, only upon proper delivery of such certificates to the exchange agent. You will also receive instructions for handling share certificates that have been lost, stolen, destroyed or mislaid. You will not be entitled to receive any dividends or other distributions that may be payable to holders of record of Fifth Third common stock following the effective time of the merger until you have surrendered and exchanged your certificates (or, in the case of lost, stolen, destroyed or mislaid share certificates, such documentation as is required by Fifth Third) evidencing ownership of First Charter common stock. In the event all or a portion of your merger consideration is in Fifth Third common stock, any dividends payable on Fifth Third common stock after the effective time of the merger will be paid to the exchange agent and, upon receipt of the certificates (or, in the case of lost, stolen, destroyed or mislaid share certificates, such documentation as is required by Fifth Third) representing First Charter common stock, subject to any applicable escheat or similar laws relating to unclaimed funds, the exchange agent will forward to you (1) certificates representing your shares of Fifth Third common stock, (2) dividends declared thereon subsequent to the effective time of the merger, without interest, and (3) the cash value of any fractional shares, without interest. In the event all or a portion of your merger consideration is in cash upon receipt of the certificates (or, in the case of lost, stolen, destroyed or mislaid share certificates, such documentation as is required by Fifth Third) representing First Charter common stock, subject to any applicable escheat or similar laws relating to unclaimed funds, the

exchange agent will forward to you the applicable amount of cash without interest. You should not submit First Charter share certificates until you have received written instructions to do so.

 

At the effective time of the merger, the stock transfer books of First Charter will be closed and no transfer of First Charter common stock will thereafter be made on First Charter’s stock transfer books other than to settle transfers of First Charter common stock that occurred before the effective time. If a certificate formerly representing First Charter common stock is presented to Fifth Third, it will be forwarded to the exchange agent for cancellation and exchange for the merger consideration.

 

Background of the Merger

 

First Charter’s Board of Directors regularly considered various strategic options directed at increasing shareholder value and maximizing First Charter’s return on equity. At various times, this has included discussions relating to the possible acquisition of smaller institutions by First Charter, de novo entry into new markets not served by First Charter, strategic combinations with similarly sized financial institutions and the merger of First Charter with a larger financial institution.

 

Also, from time to time in the past, First Charter has been contacted informally by larger banks and their advisors to introduce themselves, to discuss industry matters of mutual interest and to gauge generally First Charter’s possible interest in exploring a potential business combination transaction. Those potentially interested banks included Fifth Third, whose Chief Financial Officer, Christopher G. Marshall, contacted Mr. James by telephone several times in the fourth quarter of 2006 and the first half of 2007. Mr. Marshall and Kevin T. Kabat, Fifth Third’s Chief Executive Officer, met with Mr. James on March 7, 2007 and June 7, 2007. Fifth Third also engaged McColl Partners and Goldman Sachs to serve as Fifth Third’s financial advisors in evaluating a possible acquisition of First Charter. However, notwithstanding Fifth Third’s overtures, prior to June 15, 2007, First Charter continued to view itself as a potential acquiror of other financial institutions.

 

As part of the First Charter Board’s ongoing strategic planning process described above, its Executive Committee conducted a planning retreat on June 15, 2007. As part of the agenda, the Executive Committee discussed First Charter’s performance and various alternatives designed to achieve growth. A representative of Keefe, Bruyette & Woods, Inc. (“KBW”) was also present for a portion of the meeting to provide an analysis of numerous bank acquisition targets First Charter was considering acquiring. KBW also presented an overview of the banking industry, with focus on subjects such as earnings growth, the current regulatory environment, increased competition from banks and nonbanks, industry risks and the issue of continuing industry consolidation. Thereafter, KBW provided a report regarding a wide range of strategic alternatives. Following thereafter, the Executive Committee concluded not to pursue the various acquisition opportunities it was analyzing. Instead, the Executive Committee requested that management update First Charter’s three-year strategic plan and that KBW prepare a more detailed analysis of strategic alternatives (including acquisition alternatives, de novo growth and the possible sale of First Charter). The Executive Committee requested a presentation of this information at the Executive Committee’s next meeting scheduled for June 26, 2007. Further, Robert E. James, Jr., President and Chief Executive Officer, informed the Executive Committee that he would consult with outside legal counsel to assist with the legal aspects of the consideration of strategic alternatives.

 

On June 26, 2007, at a meeting of the Executive Committee of First Charter’s Board of Directors, Mr. James presented management’s updated three-year strategic plan. KBW presented a report on strategic alternatives potentially available to First Charter. Helms Mulliss & Wicker, PLLC (“HMW”), outside counsel to First Charter, reviewed with the Executive Committee the legal and fiduciary considerations relating to the Board’s consideration of the various strategic alternatives.

 

On June 27, 2007, at a regular meeting of the First Charter Board of Directors, all of the information that was presented at the June 26th Executive Committee meeting was provided to the Board of Directors. Following extensive discussion, the Board authorized management to explore strategic alternatives (including the alternative of remaining independent), authorized the engagement of KBW as First Charter’s financial advisor and appointed an Evaluation Committee comprised of three non-employee directors to assist in the

consideration of First Charter’s strategic alternatives and to interact with First Charter’s management and legal and financial advisors in so doing.

 

Over ensuing days, KBW engaged in confidential conversations with eight financial institutions, on an anonymous basis, to gauge whether there was interest in a strategic partnership with an entity such as First Charter. After confidentiality agreements had been signed by five institutions, KBW provided them limited information regarding First Charter and formally solicited proposals for the potential acquisition of First Charter. Four of the financial institutions approached by KBW, including Fifth Third, submitted initial indications of interest on July 16, 2007.

 

On July 18, 2007, at a specially called meeting, the Board of Directors met with First Charter’s Executive Vice President, General Counsel and Corporate Secretary, Stephen J. Antal, HMW and KBW present, at which time KBW made presentations regarding the financial institutions that had submitted indications of interest and compared the indications of interest that were submitted, including a discussion of pricing and structure differences and the financial performance and business prospects of each potential partner. After considering all of the relevant factors, including the social and economic interests of First Charter’s employees, customers, suppliers, shareholders, other constituents and the communities in which First Charter operates or is located, the Board of Directors decided to pursue discussions and to conduct due diligence with two of the financial institutions that had expressed interest. Of the two financial institutions with which First Charter determined to pursue discussions, one provided an indication of interest with a fixed value of $30.00 per First Charter share and the other provided an indication of interest with an implied value of $32.00 per First Charter share. Other parties whose indications of interest were lower (including Fifth Third) were informed that they were not being invited to participate further in the process.

 

Between July 27 and August 14, the two potential strategic partners conducted due diligence on First Charter and First Charter conducted due diligence on the potential strategic partners. On August 7, 2007, KBW distributed instructions to the interested parties regarding a request for final bids. At this time, a draft merger agreement was distributed to the interested parties.

 

Numerous times during late July and early August, the Evaluation Committee of the Board of Directors, Messrs. James and Antal, HMW and KBW met to discuss the ongoing due diligence process and the bids that were received at various times during the process.

 

On August 10, 2007, the deadline for the submission of final bids, one interested party submitted a bid with a fixed value of $28.00 per First Charter share (with an aggregate maximum of 50% of the merger consideration to be in stock), which was less than its initial indication of interest of a fixed value of $30.00 per First Charter share. This party also submitted its comments on the proposed Agreement and Plan of Merger previously circulated by HMW. The other interested party that conducted due diligence elected not to submit a final bid at that time as a result of stock market conditions that had adversely impacted its company’s stock price and the stock market generally. Because the only final bid was comparable to the initial bids of two other bidders who had not been invited to conduct due diligence (and indeed less than Fifth Third’s initial bid), the Evaluation Committee of the Board of Directors authorized KBW to contact Fifth Third to determine if it had any further interest in pursuing a transaction with First Charter.

 

Later that day, upon being contacted by KBW, Fifth Third expressed continued interest in First Charter at the price offered in its initial indication of interest of $29.00 per First Charter share (with an aggregate maximum of 30% of the merger consideration to be in cash), subject to completion of due diligence. That same day, KBW also contacted the party that submitted the bid of $28.00 per share. After that conference, the interested party resubmitted its final indication of interest having increased the price it was willing to pay to $30.00 per share of First Charter common stock, such offer to expire at 6:00 p.m. on August 15, 2007. First Charter’s legal advisors thereafter continued to negotiate a definitive agreement with that party.

 

On August 12, 2007, the Board of Directors, along with Messrs. James and Antal and First Charter’s legal and financial advisors, met to consider the resubmitted indication of interest received on August 10 as well as Fifth Third’s further expression of interest in exploring a transaction with First Charter. During that meeting, KBW presented a report on market conditions, the potentially interested financial institutions and the

offer terms. First Charter’s legal advisors discussed the legal standards applicable to the decisions made by the Board of Directors and actions taken with respect to the proposed transaction. Following review and discussion, the Board of Directors voted to pursue negotiations with the interested party that had submitted its indication of interest on August 10, 2007 at $30.00 per First Charter share. KBW was instructed to inform Fifth Third that another entity was the successful bidder.

 

The following morning, August 13, 2007, Fifth Third contacted KBW to express continued interest in First Charter and to inform KBW that it was raising its indication of interest to a fixed value of $31.00 per share, contingent upon conducting further due diligence. At meetings later that day, the Evaluation Committee, and later the Board of Directors, authorized KBW to invite Fifth Third to conduct due diligence and to inform Fifth Third that the deadline for completion of due diligence and executing a definitive merger agreement would be 6:00 p.m. on August 15, 2007. The Board further charged its legal and financial advisors to continue negotiating a definitive agreement with the first interested party.

 

On the morning of August 14, 2007, Fifth Third conducted on-site due diligence and met with First Charter management. In addition, Fifth Third was provided a draft of the merger agreement for review and comment. Simultaneously with this process, First Charter conducted due diligence regarding Fifth Third by reviewing publicly available information about Fifth Third and through conversations with certain Fifth Third officers.

 

Meanwhile, after the First Charter Board had authorized inviting Fifth Third to conduct due diligence, KBW contacted the first interested party to apprise it of the appearance of another higher bidder. That party responded by sending a letter accelerating the expiration of its offer to noon, August 15, 2007. First Charter notified Fifth Third that its deadline was also so accelerated.

 

Throughout the remainder of August 14 and that night, First Charter’s management team and legal and financial advisors worked separately to complete negotiation of a definitive merger agreement with both the first interested party and Fifth Third.

 

On the morning of August 15, 2007, First Charter’s Board of Directors and Messrs. James and Antal received presentations from KBW and HMW addressing the progress of negotiations with Fifth Third and the other interested party. Considering all the elements of the two sets of negotiations, including the superior price indicated by Fifth Third, the Board of Directors determined to discontinue discussions with the first interested party and proceed solely with Fifth Third to finalize negotiations. Fifth Third’s Board of Directors also met on August 15, 2007 and approved the $31.00 bid and the proposed merger agreement.

 

Later on August 15, 2007, at a reconvened meeting of the First Charter Board of Directors, KBW delivered an oral opinion, which was later confirmed in writing (such opinion is attached as Annex B hereto), that the bid price of $31.00 per First Charter share offered by Fifth Third was fair from a financial point of view to the First Charter shareholders. Representatives of HMW and Mr. Antal discussed certain legal matters with the First Charter Board of Directors, including the directors’ fiduciary obligations, the key terms of the merger agreement and regulatory and shareholder approvals required to complete the merger. After considering all of the relevant factors, including the KBW opinion, social and economic interests of First Charter’s employees, customers, suppliers, shareholders, other constituents and the communities in which First Charter operates or are located, the Board of Directors unanimously approved the transaction with Fifth Third and the definitive Agreement and Plan of Merger presented by First Charter’s legal advisors. Fifth Third and First Charter signed the Agreement and Plan of Merger later that evening.

 

On August 16, 2007, Fifth Third and First Charter announced the signing of the Agreement and Plan of Merger, dated as of August 15, 2007 before the stock market opened. On September 14, 2007, Fifth Third and First Charter entered into the Amended and Restated Agreement and Plan of Merger (attached hereto as Exhibit A) to change the structure of the merger such that First Charter will merge into Fifth Third Financial Corporation, a wholly owned subsidiary of Fifth Third.

 

First Charter’s Reasons for the Merger

 

In evaluating and determining to approve the merger agreement, the First Charter Board of Directors, with the assistance of its financial and legal advisors, considered a variety of factors and based their opinion as to the fairness of the transactions contemplated by the merger agreement primarily on the following factors:

 

 

 

Each of the above factors supports, directly or indirectly, the determination of the First Charter Board of Directors as to the fairness of the merger agreement and the related merger. This discussion of the information and factors considered by the First Charter Board of Directors in making its decision is not intended to be exhaustive, but does include all material factors considered by the First Charter Board of Directors. The First Charter Board of Directors did not quantify or attempt to assign relative weights to the specific factors considered in reaching its determination; however, the First Charter Board of Directors placed special emphasis on the consideration, including the form, fixed value and tax treatment of such consideration, payable in the proposed merger and the receipt of a favorable fairness opinion from its financial advisor. For additional information regarding the fairness opinion, see “— Opinion of First Charter’s Financial Advisor.”

 

The Board of Directors of First Charter recommends that the holders of First Charter common stock vote “FOR” approval of the amended and restated agreement and plan of merger and “FOR” the adjournment or postponement of the special meeting, if necessary or appropriate, to solicit additional proxies.

 

Fifth Third’s Reasons for the Merger

 

Fifth Third’s primary reason for entering into the merger is to further a long-range commitment of expanding its banking system to better meet and satisfy the needs of its customers by strengthening its presence in core markets while expanding into contiguous markets. Fifth Third’s historic acquisition strategy has generally been to fill in its markets along the interstate highways in Ohio, Kentucky, Illinois, Indiana, Michigan, Tennessee, West Virginia, Pennsylvania, Missouri and Florida. These acquisitions were designed to strengthen Fifth Third’s ability to compete in these markets by increasing its presence, consumer access and sales force. The First Charter acquisition would broaden Fifth Third’s market presence into a geographic region that is contiguous to Fifth Third’s traditional core market.

 

Opinion of First Charter’s Financial Advisor

 

On June 29, 2007, First Charter executed an engagement agreement with Keefe, Bruyette & Woods, Inc., referred to as KBW. KBW’s engagement encompassed assisting First Charter as its financial advisor in connection with a possible business combination with select other institutions. First Charter selected KBW because KBW is a nationally recognized investment-banking firm with substantial experience in transactions similar to the merger and is familiar with First Charter and its business. As part of its investment-banking business, KBW is continually engaged in the valuation of financial businesses and their securities in connection with mergers and acquisitions.

 

On August 15, 2007, the First Charter Board of Directors held a meeting to evaluate the proposed merger of First Charter with and into Fifth Third. At this meeting, KBW reviewed the financial aspects of the proposed merger. As of such date, KBW rendered a written opinion to First Charter shareholders as to the fairness, from a financial point of view, of the consideration to be paid in the merger. The First Charter Board of Directors approved the merger agreement at this meeting.

 

The full text of KBW’s written opinion is attached as Annex B to this document and is incorporated herein by reference. First Charter’s shareholders are urged to read the opinion in its entirety for a description of the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by KBW. The description of the opinion set forth herein is qualified in its entirety by reference to the full text of such opinion.

 

KBW’s opinion speaks only as of the date of the opinion. The opinion is directed to the First Charter Board of Directors and addresses only the fairness, from a financial point of view, of the consideration offered to the First Charter shareholders. It does not address the underlying business decision to proceed

with the merger and does not constitute a recommendation to any First Charter shareholder as to how the shareholder should vote at the First Charter special meeting on the merger or any related matter.

 

In rendering its opinion, KBW:

 

 

 

 

 

 

In conducting its review and arriving at its opinion, KBW relied upon and assumed the accuracy and completeness of all of the financial and other information provided to or otherwise made available to KBW or that was discussed with, or reviewed by KBW, or that was publicly available. KBW did not attempt, or assume any responsibility, to verify such information independently. KBW relied upon the management of First Charter as to the reasonableness and achievability of the financial and operating forecasts and projections (and assumptions and bases therefor) provided to KBW. KBW assumed, without independent verification, that the aggregate allowances for loan and lease losses for First Charter and Fifth Third are adequate to cover those losses. KBW did not make or obtain any evaluations or appraisals of any assets or liabilities of First Charter or Fifth Third, nor did they examine or review any individual credit files.

 

The projections and pro forma information furnished to KBW and used by it in certain of its analyses were prepared by First Charter’s senior management team. First Charter does not publicly disclose internal management projections of the type provided to KBW in connection with its review of the merger. As a result, such projections were not prepared with a view towards public disclosure. The projections were based on numerous variables and assumptions, which are inherently uncertain, including factors related to general economic and competitive conditions. Accordingly, actual results could vary significantly from those set forth in the projections. In its analysis, KBW used certain publicly available financial information and earnings estimates on Fifth Third and made no attempt to independently verify their accuracy.

 

For purposes of rendering its opinion, KBW assumed that, in all respects material to its analyses:

 

 

 

KBW further assumed that the merger will be accounted for as a purchase transaction under generally accepted accounting principles, and that the merger will qualify as a tax-free reorganization for United States federal income tax purposes. KBW’s opinion is not an expression of an opinion as to the prices at which shares of First Charter common stock or Fifth Third common stock will trade after the announcement of the proposed merger or the actual value of the Fifth Third common shares when issued pursuant to the merger, or the prices at which the Fifth Third common shares will trade following the completion of the merger.

 

In performing its analyses, KBW made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, which are beyond the control of KBW, First Charter and Fifth Third. Any estimates contained in the analyses performed by KBW are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by these analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which such businesses or securities might actually be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. In addition, the KBW opinion was among several factors taken into consideration by the First Charter Board of Directors in making its determination to approve the merger agreement and the merger. Consequently, the analyses described below should not be viewed as determinative of the decision of the First Charter Board of Directors with respect to the fairness of the consideration to be paid in the merger.

 

Summary of Analysis by KBW

 

The following is a summary of the material analyses presented by KBW to the First Charter Board of Directors in connection with its written fairness opinion. The summary is not a complete description of the analyses underlying the KBW opinion or the presentation made by KBW to the First Charter Board of Directors, but summarizes the material analyses performed and presented in connection with such opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or summary description. In arriving at its opinion, KBW did not attribute any particular weight to any analysis or factor that it considered, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. The financial analyses summarized below include information presented in tabular format. Accordingly, KBW believes that its analyses and the summary of its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on the information presented below in tabular format, without considering all analyses and factors or the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the process underlying its analyses and opinion. The tables alone do not constitute a complete description of the financial analyses.

 

Summary of Proposal.  The terms of the merger agreement call for each outstanding share of First Charter common stock to be converted into the right to receive a fixed value of $31.00 in cash or stock based upon a number of shares of Fifth Third common stock determined by the average market price of Fifth Third common stock over a five-trading-day period ending on the last trading day immediately before the closing date of the merger. First Charter shareholders will have the right to elect to receive either stock or cash with

the constraint that the overall transaction must be consummated with 70% of the First Charter shares being exchanged for Fifth Third common stock and 30% being exchanged for cash.

 

Selected Peer Group Analysis.  Using publicly available information, KBW compared the financial performance, financial condition and market performance of First Charter and Fifth Third to the following depository institutions that KBW considered comparable to First Charter and Fifth Third.

 

Companies included in First Charter’s peer group were:

 

 

Companies included in Fifth Third’s peer group were:

 

 

To perform this analysis, KBW used financial information as of or for the three-month or twelve-month period ended June 30, 2007. Market price information was as of August 14, 2007. Earnings estimates for 2007 and 2008 were taken from First Call, a nationally recognized earnings estimate consolidator. Certain financial data prepared by KBW, and as referenced in the tables presented below, may not correspond to the data presented in First Charter’s and Fifth Third’s historical financial statements, as a result of the different periods, assumptions and methods used by KBW to compute the financial data presented.

 

KBW’s analysis showed the following concerning First Charter’s and Fifth Third’s financial performance:

 

 

 

KBW’s analysis showed the following concerning First Charter’s and Fifth Third’s financial condition:

 

 

KBW’s analysis showed the following concerning First Charter’s and Fifth Third’s market performance:

 

 

Comparable Transaction Analysis.  KBW reviewed publicly available information related to selected comparably sized acquisitions of bank holding companies nationwide announced after January 1, 2004 with aggregate transaction values between $500 million and $1.5 billion. The transactions included in the group were:

 

 

Transaction multiples for the merger were derived from an offer price of $31.00 per share for First Charter. For each precedent transaction, KBW derived and compared, among other things, the implied ratio of price per common share paid for the acquired company to:

 

 

 

The results of the analysis are set forth in the following table:

 

 

 

 

No company or transaction used as a comparison in the above analysis is identical to First Charter, Fifth Third or the proposed merger. Accordingly, an analysis of these results is not mathematical. Rather, it involves complex considerations and judgments concerning differences in financial and operating characteristics of the companies.

 

Discounted Cash Flow Analysis.  KBW performed a discounted cash flow analysis to estimate a range for the implied equity value per share of First Charter common stock based on a continued independence scenario. In this analysis, KBW assumed discount rates ranging from 10.0% to 14.0% to derive (i) the present value of the estimated free cash flows that First Charter could generate over a five-year period and (ii) the present value of First Chater’s terminal value at the end of year five. Terminal values for First Charter were calculated based on a range of 10.0x to 14.0x estimated year six earnings per share. In performing this analysis, KBW used First Charter management’s earnings estimates for the first three years. Based on management’s estimates, KBW assumed 8.0% earnings per share growth thereafter. KBW also applied a range of long-term earnings per share growth rates between 6.0% and 10.0%. In determining cash flows available to shareholders, KBW used forecasted dividend payout ratios (percentages of earnings per share payable to shareholders) of 50.0%.

 

Based on these assumptions, KBW derived an implied equity value per share of First Charter common stock ranging from $15.89 to $23.09.

 

The discounted cash flow analysis is a widely used valuation methodology, but the results of such methodology are highly dependent on the assumptions that must be made, including asset and earnings growth rates, terminal values, dividend payout rates and discount rates. The analysis did not purport to be indicative of the actual values or expected values of First Charter common stock.

 

Forecasted Pro Forma Financial Analysis.  KBW analyzed the estimated financial impact of the merger on publicly available consensus estimates of Fifth Third’s 2008 earnings per share and 2008 cash earnings per share. Cash earnings per share is determined by adding per share amortization of intangible assets to earnings per share. For both First Charter and Fifth Third, KBW used the First Call consensus estimates of earnings per share for 2008. In addition, KBW assumed that the merger will result in cost savings to Fifth Third based on cost savings estimates provided by Fifth Third’s management. Based on its own analysis, KBW determined

that the merger would be slightly dilutive to Fifth Third’s estimated GAAP earnings per share in 2008 and breakeven to Fifth Third’s cash earnings per share in 2008.

 

Furthermore, KBW’s analysis indicated that Fifth Third’s Leverage Ratio, Tier 1 Risk-Based Capital Ratio and Total Risk Based Capital Ratio would all remain “well capitalized” by regulatory standards. For all of the above analysis, the actual results achieved by Fifth Third following the merger may vary from the projected results, and the variations may be material.

 

Other Analyses.  KBW reviewed the relative financial and market performance of First Charter and Fifth Third to a variety of relevant industry peer groups and indices. KBW also reviewed publicly available earnings estimates, balance sheet composition, historical stock performance and other financial data for Fifth Third.

 

The First Charter Board of Directors retained KBW as an independent contractor to act as financial advisor to First Charter regarding the merger. As part of its investment banking business, KBW is continually engaged in the valuation of banking businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive biddings, secondary distributions of listed and unlisted securities, private placements and valuations for estate, corporate and other purposes. As specialists in the securities of banking companies, KBW has experience in, and knowledge of, the valuation of banking enterprises. In the ordinary course of its business as a broker-dealer, KBW may, from time to time, purchase securities from, and sell securities to, First Charter and Fifth Third. As a market maker in securities KBW may from time to time have a long or short position in, and buy or sell, debt or equity securities of First Charter and Fifth Third for KBW’s own account and for the accounts of its customers.

 

First Charter and KBW have entered into an agreement relating to the services to be provided by KBW in connection with the merger. First Charter has agreed to pay KBW, at the time of closing, a cash fee equal to 0.80% of the market value of the aggregate consideration offered in exchange for the outstanding shares of common stock and options of First Charter. The estimated fee to be paid to KBW is approximately $8.9 million. Pursuant to the KBW engagement agreement, First Charter also agreed to reimburse KBW for reasonable out-of-pocket expenses and disbursements incurred in connection with its retention and to indemnify against certain liabilities, including liabilities under the federal securities laws.

 

Material Federal Income Tax Consequences

 

The following is a summary of the material anticipated federal income tax consequences of the merger to First Charter shareholders who hold their stock as a capital asset. The summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations thereunder, and published administrative rulings and court decisions in effect as of the date of this registration statement, all of which are subject to change at any time, possibly with retroactive effect.

 

This summary is not a complete description of all of the consequences of the merger and, in particular, may not address federal income tax considerations applicable to shareholders subject to special treatment under federal income tax law. For example, it may not apply to persons who are not U.S. persons for federal income tax purposes, financial institutions, dealers in securities, shareholders who receive their stock in consequence of the exercise of an employee stock option or right or other compensation, and persons who hold First Charter common stock as part of a hedge, straddle or conversion transaction. In addition, no information is provided herein with respect to the tax consequences of the merger under applicable state, local or foreign laws.

 

You are urged to consult with your tax advisors regarding the tax consequences of the merger in your particular circumstances, as well as any tax consequences that may arise under the laws of any state, local or foreign taxing jurisdiction.

 

As a condition to the merger, Fifth Third will receive an opinion of Alston & Bird LLP, tax counsel to Fifth Third, and First Charter will receive an opinion of Helms Mulliss & Wicker, PLLC, tax counsel to First Charter, addressing the federal income tax consequences of the merger. The opinions will be based on factors, assumptions and representations set forth in the opinions, including representations contained in letters and certificates from Fifth Third and First Charter to be delivered for purposes of the opinions. An opinion of

counsel represents only counsel’s best legal judgment on the matters addressed in the opinion, and has no binding effect or official status of any kind, and no assurance can be given that contrary positions may not be taken by the Internal Revenue Service or a court considering the issues. Neither Fifth Third nor First Charter has requested or will request a ruling from the Internal Revenue Service with regard to any of the federal income tax consequences of the merger. Accordingly, there can be no assurance that the Internal Revenue Service will not challenge the conclusions reflected in such opinions or that a court will not sustain such challenge.

 

In the event that either First Charter or Fifth Third fails to receive such an opinion because the material federal income tax consequences to First Charter shareholders are different from those described above, but First Charter or Fifth Third determines to waive their respective requirements for the receipt of the tax opinion, First Charter will resolicit the vote of the First Charter shareholders prior to proceeding with consummation of the merger.

 

Provided that the merger constitutes a reorganization within the meaning of Section 368(a) of the Internal Revenue Code, for federal income tax purposes:

 

 

Based upon the current ruling position of the Internal Revenue Service, cash you receive in lieu of a fractional share interest in Fifth Third common stock will be treated as received in redemption of such fractional share interest, and you should generally recognize capital gain or loss for federal income tax purposes measured by the difference between the amount of cash received and the portion of the tax basis of the Fifth Third common stock allocable to such fractional share interest. Such gain or loss should be a long-term capital gain or loss if the holding period for such share of First Charter common stock is greater than one year at the effective time. In the case of individual First Charter shareholders, such capital gain will be taxed for federal income tax purposes at a maximum rate of 15% if your holding period is more than one year.

 

If you elect to receive solely cash for First Charter common stock in the merger, such cash will be treated as a redemption of First Charter common stock and you should generally recognize capital gain or loss equal to the difference between your tax basis in First Charter common stock and such cash. You should be aware, however, that such gain may be subject to the provisions and limitations of Section 302 of the Internal Revenue Code.

 

If you exchange First Charter common stock for a combination of Fifth Third common stock and cash, you will recognize gain (but not loss). Your gain will be equal to the lesser of (i) the cash (excluding any cash received in lieu of a fractional share of Fifth Third common stock) and the fair market value of the Fifth Third common stock received (including the fair market value of any fractional share of Fifth Third common stock which is deemed to be distributed in the merger and then redeemed by Fifth Third), less your tax basis in First Charter common stock, or (ii) the amount of cash received.

Payments in respect of First Charter common stock may be subject to information reporting to the Internal Revenue Service and to a 28% backup withholding tax. Backup withholding will not apply, however, to a payment to a holder of First Charter common stock or other payee if such shareholder or payee completes and signs the substitute Form W-9 that will be included as part of the transmittal letter, or otherwise proves to the combined company and the exchange agent that such shareholder or payee is exempt from backup withholding.

 

Accounting Treatment

 

Fifth Third will account for the merger as a purchase under United States generally accepted accounting principles. Under the purchase method of accounting, all the assets acquired and liabilities assumed of the acquired company are recorded at their respective fair values, as of the effective date of the transaction. The amount, if any, by which the purchase price paid by Fifth Third exceeds the fair value of the net tangible and identifiable intangible assets acquired by Fifth Third in the transaction is recorded as goodwill. After the merger, First Charter’s assets and liabilities and results of operations will be consolidated with Fifth Third’s assets and liabilities and results of operations.

 

Resale of Fifth Third Common Stock by Affiliates

 

The shares of Fifth Third common stock to be issued to shareholders of First Charter in connection with the merger have been registered under the Securities Act of 1933 and will be freely transferable under the Securities Act, except for shares issued to any shareholder who may be deemed to be an “affiliate” of First Charter or Fifth Third at the time of the special meeting. Generally, an affiliate includes a director, an executive officer or a 10% or more shareholder of First Charter or Fifth Third at the time of the special meeting.

 

Rule 145 under the Securities Act currently restricts the public sale of Fifth Third common stock received in the merger by affiliates, although the SEC has proposed changes to Rule 145 that may eliminate such restrictions. The following discussion of Rule 145 assumes no change in Rule 145. During the first year following the effective time of the merger, affiliates of First Charter who do not become affiliates of Fifth Third may publicly resell the Fifth Third common stock received by them in connection with the merger upon compliance with the following conditions of Rule 144:

 

 

Shares of Fifth Third common stock sold by: (1) an affiliate’s spouse or relative living in the affiliate’s household, (2) any trust or estate in which the affiliate or person listed in clause (1) collectively owns 10% or more of the beneficial interest or of which any of these persons serves as trustee or executor, (3) any corporation in which the affiliate or any person specified in clause (1) beneficially owns at least 10% of an equity interest, (4) any person to whom the affiliate donated shares or (5) any person who acquired the shares from the affiliate as a result of the affiliate defaulting on an obligation secured by a pledge of the shares, will be aggregated with the number of shares sold by the affiliate for purposes of determining whether the volume limitations of Rule 144 are exceeded.

 

After the first year following the completion of the merger, affiliates of First Charter who are not affiliates of Fifth Third may resell their shares publicly without regard to the volume limitation or manner of sale requirement so long as Fifth Third has satisfied its reporting requirements under the Securities Exchange Act of 1934, as amended during the prior 12-month period. If Fifth Third has not satisfied its reporting requirements, affiliates may not publicly resell their shares of Fifth Third common stock received in the

merger until two years have elapsed since completion of the merger. At that time, the shares may be sold without any restriction.

 

Even if the shares are sold, pledged or donated in compliance with Rule 145, the shares will remain subject to Rule 145 in the hands of the recipient until the restrictive period applicable to the affiliate transferor has expired.

 

The merger agreement provides that First Charter will use its best efforts to cause each person who is deemed by First Charter to be an affiliate (for purposes of Rule 145) of First Charter to execute and deliver to Fifth Third a written agreement intended to ensure compliance with the Securities Act.

 

Sales and other dispositions of Fifth Third common stock by any affiliate of First Charter who becomes an affiliate of Fifth Third in connection with the merger must be made in compliance with the requirements of Rule 144 set forth above until such person has not been an affiliate of Fifth Third for at least three months and a period of at least two years has elapsed since the date the shares were acquired in connection with the merger.

 

No Dissenters’ or Appraisal Rights

 

Shareholders of a corporation that is proposing to merge or consolidate with another entity are sometimes entitled under relevant state laws to appraisal or dissenters’ rights in connection with the proposed transaction depending on the circumstances. These rights generally confer on shareholders who oppose a merger or the consideration to be received in a merger the right to receive, in lieu of the consideration being offered in the merger, the fair value for their shares as determined in a judicial appraisal proceeding.

 

You are not entitled to appraisal or dissenters’ rights under North Carolina law in connection with the merger because the First Charter common stock was listed on the NASDAQ Global Select Market System on the record date for its special meeting of shareholders and the merger consideration consists solely of cash and stock.

 

PROPOSAL — ADJOURNMENT OR POSTPONEMENT OF THE SPECIAL MEETING

 

We are asking First Charter shareholders to vote on a proposal to adjourn or postpone the special meeting, if necessary or appropriate, in order to allow for the solicitation of additional proxies if there are insufficient votes at the time of the special meeting to approve the merger agreement.

 

The Board of Directors of First Charter recommends that our shareholders vote “FOR” the approval of any proposal to adjourn or postpone the special meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes in favor of approval of the merger agreement at the time of the special meeting.

 

TERMS OF THE AGREEMENT

 

Representations and Warranties

 

The merger agreement, attached hereto as Annex A, contains representations and warranties that Fifth Third and First Charter made to each other relating to, among other things, the following:

 

 

 

Fifth Third has made representations and warranties to First Charter with respect to the availability of sufficient funds to deliver the aggregate cash consideration in connection with the merger. First Charter also has made representations and warranties to Fifth Third with respect to employee benefits matters, material contracts, its loan portfolio, owned and leased real estate, environmental matters, derivative transactions, investment securities and commodities, securitizations, intellectual property and the inapplicability of state antitakeover laws.

 

These representations and warranties were made as of specific dates, may be subject to important qualifications and limitations agreed to by Fifth Third and First Charter in connection with negotiating the terms of the merger agreement, and may have been included in the merger agreement for the purpose of allocating risk between Fifth Third and First Charter rather than establishing matters as fact. The merger agreement is included with this filing only to provide investors with information regarding the terms of the merger agreement, and not to provide investors with any other factual information regarding the parties or their respective businesses. The assertions embodied in the representations and warranties are qualified by information in a confidential disclosure schedule that First Charter provided to Fifth Third in connection with the signing of the merger agreement. While Fifth Third does not believe that the confidential disclosure schedule contains information that securities laws require it to publicly disclose, other than information that has already been so disclosed, the disclosure schedule does contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached merger agreement. Accordingly, you should keep in mind that the representations and warranties are modified in important part by the underlying disclosure schedule. The merger agreement should not be read alone, but should instead be read in conjunction with the other information regarding the companies and the merger that will be contained in, or incorporated by reference into, this proxy statement/prospectus, as well as in Forms 10-K/A, Forms 10-Q, Forms 8-K and other filings that Fifth Third makes with the Securities and Exchange Commission.

 

Most of the representations and warranties of the parties will be deemed to be true and correct unless the facts, circumstances or events, individually or when taken together with all other facts, circumstances or events inconsistent with the representations or warranties has had or would reasonably likely to have a material adverse effect on the business, results of operations or financial condition of the party making the representations and warranties or on the ability of the party to complete the transactions contemplated by the merger agreement. In determining whether a material adverse effect has occurred or is reasonably likely, the parties will disregard any effects resulting from (A) changes in generally accepted accounting principles or regulatory accounting requirements applicable to banks or savings associations and their holding companies generally, (B) changes in laws, rules or regulations of general applicability or interpretations thereof by any governmental entity, (C) changes in global or national political conditions (including any outbreak of war or acts of terrorism) or in general economic conditions affecting banks, savings associations or their holding companies generally, (D) consummation or public disclosure of the merger agreement or the transactions contemplated thereby or (E) actions or omissions of Fifth Third or First Charter taken with the prior written consent of the other in contemplation of the transactions contemplated by the merger agreement.

 

Conduct Pending Merger

 

First Charter has agreed that, prior to the effective time of the merger, and except with the prior written consent of Fifth Third, First Charter and its subsidiaries will be operated in the ordinary course of business in

all material respects and First Charter will use reasonable best efforts to maintain and preserve intact its business organization and advantageous business relationships and retain the services of its key officers and key employees. First Charter has also agreed to, prior to the effective time of the merger, and except with the prior written consent of Fifth Third, take no action that is intended to or would be reasonably expected to adversely affect or materially delay the ability of the parties to obtain any necessary approvals of any regulatory agency or governmental entity required for the transactions contemplated by the merger agreement.

 

In addition, without Fifth Third’s prior written consent, neither First Charter nor its subsidiaries will, among other things:

 

 

 

 

 

 

 

 

 

Fifth Third has agreed that, without the prior written consent of First Charter, neither Fifth Third nor its subsidiaries will, among other things:

 

 

Consistent with GAAP and so long as and to the extent not inconsistent with applicable laws, First Charter has agreed that on or before the effective time of the merger based on a review of First Charter’s loan losses, current classified assets and commercial, multi-family and residential mortgage loans and investment portfolio, First Charter will work with Fifth Third in good faith and with the goal of establishing collection procedures, internal valuation reviews, credit policies and practices and general valuation allowances which are consistent with the guidelines used within the Fifth Third system. Fifth Third shall provide such assistance and direction to First Charter as is necessary in conforming to such policies, practices, procedures and asset dispositions which are mutually agreeable between the date of the merger agreement and the effective time of the merger.

 

Upon the request and at the sole option of Fifth Third, and if it would not cause a breach of an existing contract of First Charter, First Charter shall execute and deliver to Fifth Third an agreement to convert all electronic funds transfer (“FTPS”) related services to Fifth Third, including conversion to the Jeanie^® network or other network in which Fifth Third or its affiliates participate. The FTPS Agreement shall provide that Fifth Third will be the exclusive provider of such services to First Charter and its banking subsidiaries. The cost of the conversion to the Jeanie^® system will be paid by Fifth Third.

 

Acquisition Proposals by Third Parties

 

The merger agreement provides, subject to limited exceptions described below, that First Charter and its subsidiaries will not authorize its officers, directors, employees or any investment banker, financial advisor, attorney, accountant or other representative retained by it or any of its subsidiaries to directly or indirectly (i) solicit, initiate, encourage, facilitate (including by way of furnishing information) or take any other action designed to facilitate any inquiries or proposals regarding any alternative transaction (as described below) (any of the foregoing inquiries or proposals being referred to herein as an “alternative proposal”); (ii) participate in discussions or negotiations regarding any alternative transaction; (iii) enter into any agreement regarding any alternative transaction or (iv) render its rights agreement inapplicable to an alternative proposal or the transactions contemplated thereby.

 

For purposes of the merger agreement, the term “alternative transaction” means any transaction pursuant to which any person (or group of persons) (other than Fifth Third or its affiliates), directly or indirectly, acquires or would acquire more than 25% of the outstanding shares of First Charter common stock or outstanding voting power or of any new series or new class of preferred stock that would be entitled to a class or series vote with respect to the merger, whether from First Charter or pursuant to a tender offer or exchange offer or otherwise; a merger, shares exchange, consolidation or other business combination involving First

Charter (other than the merger); any transaction pursuant to which any person (or group of persons) (other than Fifth Third or its affiliates) acquires or would acquire control of assets (including for this purpose the outstanding equity securities of subsidiaries of First Charter and securities of the entity surviving any merger or business combination including any of First Charter’s subsidiaries) of First Charter, or any of its subsidiaries representing more than 25% of the fair market value of all the assets, net revenues or net income of First Charter and its subsidiaries, taken as a whole, immediately before such transaction; or any other consolidation, business combination, recapitalization or similar transaction involving First Charter or any of its subsidiaries, other than the transactions contemplated by the merger agreement, as a result of which the holders of shares of First Charter immediately before such transactions do not, in the aggregate, own at least 75% of the outstanding shares of common stock and the outstanding voting power of the surviving or resulting entity in such transaction immediately after the consummation thereof in substantially the same proportion as such holders held the shares of First Charter common stock immediately before the consummation thereof.

 

The merger agreement permits First Charter to comply with Rule 14d-9(e) and Rule 14e-2(a) under the Securities Exchange Act of 1934 with regard to an acquisition proposal that First Charter may receive. In addition, if First Charter receives an unsolicited bona fide written acquisition proposal prior to the First Charter shareholders meeting, and subject to first entering into a confidentiality agreement with any person offering an alternative proposal, First Charter may furnish nonpublic information regarding First Charter and may consider and participate in discussions and negotiations with the person making that acquisition proposal only if the Board of Directors reasonably determines in good faith, after receipt of advice from outside legal counsel, that the failure to engage in discussions with the third party concerning such acquisition proposal would likely cause the Board of Directors to breach its fiduciary duties to First Charter and its shareholders.

 

First Charter, within 24 hours, must promptly notify Fifth Third after receipt of any alternative proposal, or any material modification of or material amendment to any alternative proposal, or any request for nonpublic information relating to First Charter or any of its subsidiaries or for access to the properties, books or records of First Charter or any subsidiary by any person that informs the First Charter Board of Directors or any subsidiary that it is considering making, or has made, an alternative proposal. Moreover, First Charter will promptly advise Fifth Third orally and in writing, and shall indicate the identity of the person making the alternative proposal or intending to make or considering making an alternative proposal or requesting nonpublic information or access to the books and records of First Charter or any subsidiary, and the material terms of any such alternative proposal or modification or amendment to an alternative proposal. First Charter shall keep Fifth Third fully informed, on a current basis, of any material changes in the status and any material changes or modifications in the terms of any such alternative proposal, indication or request.

 

First Charter and its subsidiaries shall immediately cease and cause to be terminated any existing discussions or negotiations with any persons (other than Fifth Third) conducted with respect to any alternative transaction, and shall use reasonable best efforts to cause all persons other than Fifth Third who have been furnished confidential information regarding First Charter in connection with the solicitation of or discussions regarding any alternative proposal within the 12 months before August 15, 2007, promptly to return or destroy such information. First Charter agrees not to, and to cause its subsidiaries not to, release any third party from the confidentiality and standstill provisions of any agreement to which First Charter or its subsidiaries is or may become a party, and shall immediately take all steps necessary to terminate any approval that may have been given under any such provisions authorizing any person to make any alternative proposal.

 

First Charter shall ensure that the officers, directors and all employees, agents and representatives (including any investment bankers, financial advisors, attorneys, accountants or other retained representatives) of First Charter or its subsidiaries are aware of the restrictions described under the above section as reasonably necessary to avoid violations thereof.

 

Conditions to Closing

 

The merger agreement must be approved by the affirmative vote of 75% of the aggregate voting power of the outstanding stock of First Charter entitled to vote. The merger also must be approved in writing by the Federal Reserve Board and the North Carolina Commissioner of Banks. Fifth Third and First Charter filed

these applications for such approvals on September 18, 2007. No assurance can be given that the required governmental approvals will be forthcoming.

 

Fifth Third’s and First Charter’s obligations to complete the merger are subject to additional conditions set forth in the merger agreement. These include:

 

 

Fifth Third’s obligation to complete the merger is further subject to conditions set forth in the merger agreement, including:

 

 

First Charter’s obligation to complete the merger is further subject to conditions set forth in the merger agreement, including:

 

 

Termination

 

The merger agreement may be terminated and the merger abandoned at any time prior to the effective time of the merger by written notice delivered by Fifth Third to First Charter or by First Charter to Fifth Third in the following instances:

 

 

 

Amendment

 

The merger agreement may, to the extent legally allowed, be amended by the written agreement of each of the parties, by action taken or authorized by each company’s respective Board of Directors at any time before or after approval of the matters presented in connection with the merger by First Charter’s shareholders. Approval of any amendment by First Charter’s shareholders is not required unless this action would adversely change the amount or form of consideration to be provided to First Charter’s shareholders pursuant to the merger agreement; alter or change any term of the articles of incorporation of the surviving corporation if such alteration or change would adversely affect the holders of any securities of First Charter; or alter or change any of the terms and conditions of the merger agreement if such alteration or change would adversely affect the holders of any securities of First Charter.

 

Termination Fee

 

First Charter must pay Fifth Third a termination fee of $32,500,000.00 in immediately available federal funds if the merger agreement is terminated in any of the following circumstances:

 

 

Fifth Third shall not be entitled to the termination fee if:

 

 

Interests of First Charter’s Directors and Executive Officers in the Merger

 

Shares of First Charter common stock held by or for the benefit of directors and executive officers of First Charter will be cancelled and converted into the right to receive the merger consideration on the same basis as shares held by you and the other shareholders of First Charter. In addition, directors and executive officers of First Charter have the following interests in the merger that are different from, or in addition to, those of you and the other shareholders of First Charter.

 

First Charter Employment Agreements.  Fifth Third will enter into new employment agreements with Robert E. James, First Charter’s President and Chief Executive Officer, Stephen M. Rownd, First Charter’s Executive Vice President and Chief Banking Officer and Jeffrey Scott Ensor, First Charter’s Executive Vice President and Chief Risk Officer. The First Charter employment agreements of Messrs. James and Rownd, including applicable change-in-control provisions within such agreements, will terminate in accordance with the terms of their new Fifth Third employment agreements. The new Fifth Third employment agreement with Mr. Ensor will expressly terminate the change-in control agreement between Mr. Ensor and First Charter.

 

Fifth Third will employ Mr. James as the President and CEO of the Fifth Third affiliate headquartered in Charlotte, North Carolina for a period of three years. Mr. James will receive a base salary of $425,006.40 per year. In addition, Mr. James will be eligible to receive a bonus with a target payment of 60% with a maximum potential of 120% of his base salary and long term incentive grants up to $600,000.00 on the same terms and conditions as similarly situated employees. Mr. James will also be entitled to receive additional benefits described below, as well as executive perquisites. As compensation for terminating the First Charter change-in-control provisions, Mr. James will receive a lump-sum cash payment in the amount of $353,960.00. As consideration for entering into his covenant not to compete, Mr. James will receive $1,750,000.00.

 

Fifth Third will employ Mr. Rownd as Executive Vice President of the Fifth Third affiliate headquartered in Charlotte, North Carolina for a period of three years. Mr. Rownd will receive a base salary of $282,713.60 per year. In addition, Mr. Rownd will be entitled to receive a bonus with a target payment of 45% of his base salary and long term grants on the same terms and conditions as similarly situated employees. Mr. Rownd will also be eligible to receive additional benefits described below, as well as executive perquisites. As compensation for terminating the First Charter change-in-control provisions, Mr. Rownd will receive a lump-sum cash payment in the amount of $713,626.00. As consideration for entering into his covenant not to compete, Mr. Rownd will receive $530,000.00.

 

Fifth Third will employ Mr. Ensor as Executive Vice President of the Fifth Third affiliate headquartered in Charlotte, North Carolina for a period of three years. Mr. Ensor will receive a base salary of $237,919.20 per year. In addition, he will be eligible to receive a bonus with a target payment of 45% of his base salary and long term incentive grants on the same terms and conditions as similarly situated employees. Mr. Ensor will also be eligible to receive additional benefits described below, as well as executive perquisites. As compensation for terminating the First Charter change-in-control agreement, Mr. Ensor will receive a lump-sum cash payment in the amount of approximately $240,000.

The new Fifth Third employment agreements with Messrs. James, Rownd and Ensor will provide that each is eligible to participate on a nondiscriminatory basis in any 401(k), vacation, disability, life or medical insurance or other benefit plan adopted by Fifth Third or any affiliate to the extent such plan is made available to similarly situated employees of Fifth Third in accordance with the terms of such plans. The new Fifth Third employment agreements provide that each will also be eligible to participate in any benefit plan or program made available to senior management employees and/or directors of Fifth Third in accordance with the terms and conditions of those plans. In the event of death, the new Fifth Third employment agreements will provide that the personal representative of each shall be paid all earned but unpaid base salary and accrued bonus and an additional amount representing one year’s base salary. In the event of termination of the employment agreements of Messrs. James, Rownd and Ensor due to disability, each will be entitled to receive all earned but unpaid base salary and accrued bonus and an additional amount representing one year’s base salary, less any amount that each receives from Fifth Third’s long-term disability plan. In addition, in the event of death or disability, all supplemental benefits, awards, grants and options under any Fifth Third or First Charter supplemental agreement, stock option or grant will be fully vested. If Fifth Third terminates the employment of Messrs. James, Rownd or Ensor for cause (as defined in the agreement), or if Messrs. James, Rownd or Ensor resign without good reason (as defined in the agreement), each will be entitled only to receive all earned but unpaid base salary, unreimbursed expenses and/or accrued, vested stock options and vested 401(k) or pension benefits through the effective date of the termination for cause or resignation without good reason. If Fifth Third terminates the employment of Messrs. James, Rownd or Ensor without cause or Messrs. James, Rownd or Ensor terminate their employment for good reason, each will be entitled to (i) all accrued, unpaid base salary and unreimbursed expenses through the date of such termination; (ii) any prior year annual incentive bonus earned but not yet paid; (iii) continued payment of their base salary for the remainder of the employment term; (iv) an annual bonus amount for the remainder of the employment term (calculated as the target bonus in effect at the time of the termination); (v) continuation of health and welfare benefit coverage (including coverage for their dependents to the extent such coverage is provided by Fifth Third for its employees generally) under such plans and programs to which they were entitled to participate immediately prior to the date of the end of their employment for the remainder of the employment term; and (vi) acceleration of vesting of all supplemental benefits.

 

If any amounts to be paid to Messrs. James and Rownd would be subject to the excise tax imposed by Section 4999 of the Code, then Messrs. James and Rownd shall also be entitled to receive a gross-up payment. The aggregate value of the gross-up payments is expected to be approximately $675,000 for Mr. James and $812,000 for Mr. Rownd.

 

First Charter Agreements Regarding Change-in-Control Benefits.  Fifth Third will also honor First Charter change-in-control agreements with each of Cecil O. Smith, First Charter’s Executive Vice President and Chief Information Officer, Stephen J. Antal, First Charter’s Executive Vice President, General Counsel and Corporate Secretary, Josephine P. Sawyer, Senior Vice President and Director of Human Resources and Sheila Stoke, First Charter’s Senior Vice President, Controller and interim principal financial officer, regarding the change-in-control benefits payable to such executives as a result of the merger. The agreements provide a definitive statement of the payments and benefits to be provided to the employees. The agreements provide that the consummation of the merger and termination of employment under specified circumstances within one year thereafter triggers the obligation to provide those payments and benefits. Such benefits include the payment of COBRA premium costs for the continuation of group medical plan coverage for the executives and their eligible dependents for a period specified in the agreements. The aggregate value of the benefits to be received by such executives in the event of the consummation of the merger and subsequent termination of employment is $1,203,300.00.

 

Excess Parachute Payments.  The new Fifth Third employment agreement for Mr. Ensor will provide that no portion of the payment(s) made under Mr. Ensor’s employment agreement shall be deemed to be an “Excess Parachute Payment” pursuant to Section 280G of the Internal Revenue Code. Mr. Ensor and Fifth Third agree that the present value of any payment under the employment agreement and any other payment to or for the benefit of Mr. Ensor in the nature of compensation, receipt of which is contingent on a change-in-control as defined in the employment agreement, and to which Section 280G of the Code applies,

shall not exceed an amount equal to one dollar less than the maximum amount Mr. Ensor may receive without becoming subject to the tax imposed by Section 4999 of the Code. In the event that Sections 280G and 4999 of the Code or any successor provisions are repealed without succession, this provision of Mr. Ensor’s employment agreement shall no longer apply.

 

The First Charter agreements regarding change-in-control benefits between First Charter and Mr. Smith, Ms. Stoke, Mr. Antal and Ms. Sawyer provide that no portion of the payment(s) made to these individuals shall be deemed to be an “Excess Parachute Payment” pursuant to Section 280G of the Internal Revenue Code. The present value of any payment under the agreements regarding change in control and any other payment to or for the benefit of Mr. Smith, Ms. Stoke, Mr. Antal and Ms. Sawyer in the nature of compensation, receipt of which is contingent on a change in control, and to which Section 280G of the Code applies, shall not exceed an amount equal to one dollar less than the maximum amount these individuals may receive without becoming subject to the tax imposed by Section 4999 of the Code.

 

Director Advisory Fees.  Upon consultation with each member of the First Charter Board of Directors, Fifth Third has agreed to offer each such director either (1) a seat on a Fifth Third local advisory board for the region formerly served by First Charter for a one year period after the effective date of the merger or (2) a one-year advisory and consulting contract. In either case, for a period of one-year after the effective date of the merger, Fifth Third shall pay quarterly compensation to such directors consistent with the existing fee structure offered by First Charter to such directors. We expect the payments under the existing fee structure to be approximately $65,000 per director for the one year following the merger. If service as a director or consultant would continue after such year, Fifth Third and each such person will need to mutually agree on any compensation for such continued service.

 

Performance Share Awards.  First Charter has granted performance share awards to certain executive officers under its 2000 Omnibus Stock Option and Award Plan. As of the effective time of the merger (1) all performance objectives with respect to such performance shares shall be deemed to be satisfied to the extent necessary to earn 100% of the performance shares, (2) the performance period shall be deemed to be complete, (3) such performance shares shall be converted to actual performance share awards (as defined in the Performance Share Award Agreements under the 2000 Omnibus Stock Option and Award Plan) and (4) the actual performance share awards shall be paid out in cash as soon as practicable in accordance with the 2000 Omnibus Stock Option and Award Plan.

 

The effect of the conversion of the performance share awards to performance shares to be paid out in cash for each of the executive officers and the executive officers as a group will be as follows:

 

 

Restricted Stock.  First Charter has awarded Restricted Stock to certain directors, executive officers and key employees under its 2000 Omnibus Stock Option and Award Plan and its Restricted Stock Award Program. As of the effective time of the merger (1) all restrictions with respect to such Restricted Stock shall be deemed to have lapsed, (2) the restriction period shall be deemed to have ended and (3) such Restricted Stock shall entitle the participant to make an election with respect to the merger consideration to be received in the merger.

The effect of the acceleration of the restricted stock held by the executive officers of First Charter, by all executive officers as a group and by all directors and executive officers as a group will be as follows:

 

 

Stock Options.  First Charter has granted stock options to certain directors, executive officers and key employees under its Comprehensive Stock Option Plan and its 2000 Omnibus Stock Option and Award Plan. Prior to the consummation of the merger, the options awarded under the Comprehensive Stock Option Plan and its 2000 Omnibus Stock Option and Award Plan by First Charter’s Board of Directors shall fully and immediately vest as of the effective time of the merger without any action on the part of the holders of the options or awards. After completion of the merger, all outstanding options will be converted into options to purchase Fifth Third common stock. The number of shares subject to these options will be adjusted to allow the holder, upon exercise, to receive shares of Fifth Third common stock calculated by multiplying the conversion ratio by the number of shares of First Charter common stock subject to the options, and the exercise price of the First Charter stock options will be adjusted by dividing the exercise price per share by the conversion ratio.

 

The effect of the acceleration of the exercisability on the First Charter options held by the executive officers of First Charter, by all executive officers as a group and by all directors and executive officers as a group will be as follows:

 

 

Fifth Third will file a registration statement with the SEC to register the shares of Fifth Third common stock issuable pursuant to these options, which is anticipated to take place at or about the effective time of the merger. Holders of these options may not exercise the options until this registration statement has become effective.

 

Indemnification and Liability Insurance.  Fifth Third will assume the permissible obligations of First Charter or any of its subsidiaries arising under applicable North Carolina and federal law and under First Charter’s or any subsidiary’s articles of incorporation, charter or bylaws, to indemnify each officer or director of First Charter or any of its subsidiaries against liabilities in connection with any claim arising out of the fact that such person is or was a director or officer of First Charter or any of its subsidiaries, if such claim pertains to any matter occurring prior to the effective time of the merger, regardless of whether such claim is asserted prior to, at or after the effective time of the merger. Fifth Third also shall cause the individuals serving as officers and directors of First Charter or any of its subsidiaries immediately before the effective time to be

covered for six-year period from the effective time of the merger by the directors’ and officers’ liability insurance policy maintained by First Charter providing coverage for acts or omissions of the type currently covered by First Charter’s existing directors’ and officers’ liability insurance for acts or omissions occurring on or prior to the effective time of the merger, but only to the extent that this insurance may be permissible under banking laws and may be purchased or kept in full force on commercially reasonable terms. Fifth Third and First Charter have agreed that these costs shall be commercially reasonable so long as they do not exceed 300% of the annual premiums currently paid for such coverage by First Charter. If Fifth Third is unable to maintain such policy (or such substitute policy) as a result of the commercially unreasonable premiums, Fifth Third shall obtain as much comparable insurance as is available for the premium amount.

 

Effect on First Charter’s Employees

 

Employment.  Fifth Third will consider employing as many of the employees of First Charter and its subsidiaries who desire employment within the Fifth Third holding company system as possible, to the extent of available positions and consistent with Fifth Third’s standard staffing levels and personnel policies.

 

Fifth Third Employee Benefit Plans.  For a six-month period following the effective time of the merger, Fifth Third will provide each of the employees of First Charter (as of the effective time of the merger) who continue employment with Fifth Third with employee benefits, rates of base salary or hourly wage and annual bonus opportunities that are substantially similar, in the aggregate, to the aggregate rates of base pay or hourly wage and employee benefits and annual bonus opportunities provided to such employees under the First Charter compensation and benefit plans as in effect immediately before the effective time of the merger. Fifth Third will offer or provide to each of the employees of First Charter and its subsidiaries who become employees of Fifth Third, as a group, participation in employee benefit plans and arrangements available for similarly situated employees of Fifth Third. Former First Charter employees will be given credit for service with First Charter and its subsidiaries for purposes of eligibility, vesting and accrual of benefits. No former First Charter employee will be entitled to participate in the Fifth Third Bancorp Master Retirement Plan (which has been frozen to new participants).

 

Severance.  The merger agreement provides for the payment of severance amounts to employees of First Charter who do not have an employment, change-in-control or severance agreement under certain conditions upon termination of employment. During the period beginning at the effective time of the merger and ending six months following the effective time, such employees shall be entitled to receive severance payments and benefits in an amount and form as generally described in Fifth Third’s severance policy in effect immediately before the date of the merger agreement (including customary releases); however, the maximum severance pay amounts described in such severance policy shall not apply and shall, instead, be limited to a maximum 52-week severance pay amount, regardless of employee classification. Employees shall also be entitled to receive payment of COBRA premium costs for the continuation of group medical insurance benefit coverage for such employees and their eligible dependents for a period equal to the total number of weeks of base salary/wages available to such employees as severance pay.

 

FIFTH THIRD BANCORP

 

Description of Business

 

Fifth Third, with its principal office located in Cincinnati, Ohio, is an Ohio corporation organized in 1975 as a bank holding company registered under the Bank Holding Company Act of 1956 and subject to regulation by the Federal Reserve Board. Fifth Third has elected to become a financial holding company under that Act. Fifth Third’s three wholly owned subsidiary depositary institutions have over 1,100 banking centers in Ohio, Kentucky, Indiana, Illinois, Michigan, Florida, Tennessee, West Virginia, Pennsylvania and Missouri. Those institutions are: Fifth Third Bank, Fifth Third Bank (Michigan) and Fifth Third Bank, National Association.

 

Fifth Third’s subsidiaries provide a wide range of financial products and services to the retail, commercial, financial, governmental, educational and medical sectors, including a wide variety of checking, savings and money market accounts, and credit products such as credit cards, installment loans, mortgage loans and leases. Each of the banking subsidiaries has deposit insurance provided by the Federal Deposit Insurance Corporation through the Deposit Insurance Fund.

 

As of September 30, 2007, Fifth Third, its affiliated banks and other subsidiaries had consolidated total assets of approximately $104.3 billion, consolidated total deposits of approximately $69.4 billion and consolidated total shareholders’ equity of approximately $9.3 billion.

 

Fifth Third operates five business segments: Commercial Banking, Branch Banking, Consumer Lending, Investment Advisors and Fifth Third Processing Solutions. During the first quarter of 2006, Fifth Third began separating its retail line of business into the Branch Banking and Consumer Lending business segments. Fifth Third believes that banking is first and foremost a relationship business where the strength of the competition and challenges for growth can vary in every market. Its affiliate operating model provides a competitive advantage by keeping the decisions close to the customer and by emphasizing individual relationships. Through its affiliate operating model, individual managers from the banking center to the executive level are given the opportunity to tailor financial solutions for their customers.

 

Fifth Third is a corporate entity legally separate and distinct from its subsidiaries. The principal source of Fifth Third’s income is dividends from its subsidiaries. There are certain regulatory restrictions as to the extent to which the subsidiaries can pay dividends or otherwise supply funds to Fifth Third. See “Description of Capital Stock and Comparative Rights of Shareholders — Dividends.”

 

Additional Information

 

For more detailed information about Fifth Third, reference is made to the Fifth Third Amendment on Form 10-K/A to its Annual Report on Form 10-K for the year ended December 31, 2006, Quarterly Reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 2007 and Current Reports on Form 8-K filed with the SEC on January 16, January 22, March 30, May 10, July 27, July 30, August 7, August 8, August 16, August 17, September 27, October 29 and October 31, 2007, each of which are incorporated into this document by reference, except for information furnished in those filings, including but not limited to, Items 2.02 and 7.01 of Form 8-K, which information is not deemed filed and is not incorporated by reference herein. See “Where You Can Find More Information.” More information about Fifth Third is also contained in its 2006 Annual Report to Shareholders which is available through Fifth Third’s website at https://www.53.com/wps/portal/av?New_WCM_Context=http://www.53.com/wps/wcm/connect
/FifthThirdSite/About+53/Investor+Relations/Annual+Reports+and+Proxy+Statements/.

 

FIRST CHARTER CORPORATION

 

Description of Business

 

First Charter is a bank holding company established as a North Carolina corporation in 1983 and is registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”). Its principal asset is the stock of its banking subsidiary, First Charter Bank (“First Charter Bank”). The principal executive offices of First Charter and First Charter Bank are located at 10200 David Taylor Drive, Charlotte, North Carolina 28262-2373. The telephone number is (704) 688-4300.

 

First Charter Bank, a North Carolina state bank, is the successor entity to The Concord National Bank, which was established in 1888. On November 1, 2006, First Charter completed its acquisition of GBC Bancorp, Inc., parent of Gwinnett Banking Company (“Gwinnett Bank”), its banking subsidiary, headquartered in Lawrenceville, Georgia (the “GBC Merger”). As a result of the GBC Merger, Gwinnett Bank became a subsidiary of First Charter. Effective March 1, 2007, Gwinnett Bank was merged with and into First Charter Bank. Gwinnett Bank operated two financial centers located in Lawrenceville, Georgia and Alpharetta, Georgia.

 

First Charter operates 60 financial centers and four insurance offices, as well as 137 ATMs (automated teller machines) in North Carolina and Georgia and operates loan origination offices in Asheville, North Carolina and Reston, Virginia.

 

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-first largest city in the United States and has a diverse economic base. Primary business sectors in the Charlotte Metro region include banking and finance, insurance, manufacturing, health care, transportation, retail, telecommunications, government services and education. In October 2005 and February 2006, First Charter expanded into the Raleigh, North Carolina market with the opening of one and three de novo financial centers, respectively. A fifth financial center opened in Raleigh in late January 2007. Raleigh has an economic base similar to that found in Charlotte. Since the North Carolina economy has historically relied on the manufacturing and transportation sectors, it has been significantly impacted by global competition and rising energy prices. As a result, the North Carolina economy is transitioning to a more service-oriented economy. Recently, the education, healthcare, financial and business services industries have shown the most growth.

 

As a result of the GBC Merger, First Charter entered the Atlanta, Georgia market on November 1, 2006. Gwinnett Bank was organized in 1996 and opened its main office in Lawrenceville, Gwinnett County, Georgia, in 1997. An additional financial center, in Alpharetta, Fulton County, Georgia, opened in 2001. Gwinnett and Fulton Counties have a diverse economic base. Primary business sectors include education, government, health and social services, retail trade, manufacturing, financial and other professional services.

 

Through its financial centers, First Charter Bank provides a wide range of banking products, including interest-bearing and non interest-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. It also provides commercial, consumer, real estate, residential mortgage and home-equity loans.

 

In addition, First Charter Bank also operates two subsidiaries: First Charter Insurance Services, Inc. (“First Charter Insurance”) and First Charter Leasing and Investments, Inc. (“First Charter Leasing”). First Charter Insurance is a North Carolina corporation formed to meet the insurance needs of businesses and individuals. First Charter Leasing is a North Carolina corporation that administers leases and manages investment securities. It also acts as the holding company for First Charter of Virginia Realty Investments, Inc., a Virginia corporation (“First Charter Virginia”). First Charter Virginia is engaged in the mortgage origination business and also acts as the holding company for First Charter Realty Investments, Inc., a Delaware real estate investment trust (“First Charter Realty”). First Charter Realty is the holding company for FCB Real Estate, Inc., a North Carolina real estate investment trust, and First Charter Real Estate Holdings, LLC, a North Carolina limited liability company, which owns and maintains the real estate property and assets

of First Charter. FCB Real Estate, Inc. primarily invests in commercial and 1-4 family residential real estate loans. First Charter Bank also has a majority ownership in Lincoln Center at Mallard Creek, LLC (“LCMC”), a North Carolina limited liability company. LCMC sold Lincoln Center, a three-story office building and its principal asset, during 2006. First Charter Insurance and one of First Charter Bank’s financial centers continue to lease a portion of Lincoln Center.

 

At June 30, 2007, First Charter and its subsidiaries had 1,109 full-time equivalent employees. First Charter had no employees who were not also employees of First Charter Bank. First Charter considers its relations with its employees to be good.

 

Due to the diverse economic base of the markets in which it operates, First Charter believes that it is not dependent on any one or a few customers or types of commerce whose loss would have a material adverse effect on First Charter.

 

First Charter operates one reportable segment, First Charter Bank. See Note 15 of the consolidated financial statements for the quarter ended June 30, 2007 included with this proxy statement/prospectus.

 

Competition

 

First Charter’s primary market area is located within North Carolina and recently has expanded into Atlanta, Georgia. Banking activities in these areas are highly competitive, and First Charter has active competition in all areas in which it presently engages in business. Within these areas are numerous branches of national, regional and local institutions. In its market area, First Charter faces competition from other banks, including four of the largest banks in the country, savings and loan associations, savings banks, credit unions, finance companies, brokerage firms, insurance companies and major retail stores that offer competing financial services. Many of these competitors have greater resources, broader geographic coverage and higher lending limits than First Charter Bank. First Charter Bank’s primary method of competition is to provide its clients with a broad array of financial products and solutions, delivered with exceptional service and convenience at a fair price.

 

Government Supervision and Regulation

 

General.  As a registered bank holding company, First Charter is subject to the supervision of, and regular inspection by, the Board of Governors of the Federal Reserve System (the “Federal Reserve”). First Charter Bank is a North Carolina chartered-banking corporation and a Federal Reserve member bank, with deposits insured by the Federal Deposit Insurance Corporation (the “FDIC”). First Charter Bank is subject to extensive regulation and examination by the Federal Reserve, the Office of the Commissioner of Banks of the State of North Carolina (the “NC Commissioner”) under the direction and supervision of the North Carolina Banking Commission (the “NC Banking Commission”) and the FDIC, which insures its deposits to the maximum extent permitted by law.

 

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

 

In addition to state and federal banking laws, regulations and regulatory agencies, First Charter and First Charter Bank are subject to various other laws, regulation and supervision and examination by other regulatory agencies, all of which directly or indirectly affect First Charter’s operations, management and ability to make

distributions. The following discussion summarizes certain aspects of those laws and regulations that affect First Charter.

 

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

 

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

 

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

 

First Charter is also subject to the North Carolina Bank Holding Company Act of 1984. This state legislation requires First Charter, by virtue of its ownership of First Charter Bank, to register as a bank holding company with the NC Commissioner. In addition, as a result of its acquisition of Gwinnett Bank, First Charter is required to register as a bank holding company with the Georgia Department of Banking and Finance.

 

Interstate Banking and Branching Legislation.  Pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the “Interstate Banking and Branching Act”), a bank holding company may acquire banks in states other than its home state, without regard to the permissibility of those acquisitions under state law, but subject to any state requirement that the bank has been organized and operating for a minimum period of time, not to exceed five years, and other conditions, including deposit concentration limits.

 

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

 

Consumer Protection.  In connection with its lending and leasing activities, First Charter Bank and its subsidiaries are subject to a number of federal and state laws designed to protect borrowers and promote

lending to various sectors of the economy and population. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, as well as state law counterparts.

 

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

 

The Community Reinvestment Act of 1977 requires First Charter Bank’s primary federal regulatory agency, in this case the Federal Reserve, to assess its ability to meet the credit needs of low- and moderate-income persons. Financial institutions are assigned one of four ratings: “Outstanding,” “Satisfactory,” “Needs to Improve,” or “Substantial Noncompliance.” As of First Charter Bank’s latest examination, it had a “Satisfactory” rating.

 

The USA PATRIOT Act.  After the September 11, 2001 terrorist attacks in New York and Washington, D.C., the United States government attempted to tighten control on activities perceived to be connected to money laundering and terrorist funding. A series of orders were issued which attempt to identify terrorists and terrorist organizations and require the blocking of property and assets of, as well as prohibiting all transactions or dealings with, such terrorists, terrorist organizations and those that assist or sponsor them. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”) substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the United States, imposed new compliance and due diligence obligations, created new crimes and penalties, compelled the production of documents located both inside and outside the United States, including those of foreign institutions that have a correspondent relationship in the United States, and clarified the safe harbor from civil liability to customers. Originally passed into law in October 2001, the USA PATRIOT Act was renewed in March 2006. In addition, the United States Treasury Department issued regulations in cooperation with the federal banking agencies, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Department of Justice that require customer identification and verification, expand the money-laundering program requirement to the major financial services sectors including insurance and unregistered investment companies such as hedge funds, and facilitate and permit the sharing of information between law enforcement and financial institutions and among financial institutions. The United States Treasury Department also has created the Treasury USA PATRIOT Act Task Force to work with other financial regulators, the regulated community, law enforcement and consumers to continually improve regulation.

 

Sarbanes-Oxley Act of 2002.  On July 30, 2002, the Sarbanes-Oxley Act was enacted which addressed corporate governance and securities reporting requirements for companies with securities registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Among its requirements are changes in auditing and accounting and the inclusion of certifications of certain securities filings by principal executive officers and principal financial officers. It also expanded reporting of information in current reports filed with the Securities and Exchange Commission and requires more detailed reporting information in securities disclosure documents in a more timely manner. The NASDAQ Global Select Market has also modified its corporate governance rules with an intent to allow shareholders to more easily and efficiently monitor the performance and activities of companies and their executive officers and directors.

 

Capital and Operational Requirements

 

First Charter and First Charter Bank must comply with the minimum capital adequacy standards set by the Federal Reserve and the FDIC which are substantially similar. The risk-based guidelines define a three-tier

capital framework, under which First Charter and First Charter Bank are required to maintain a minimum ratio of Tier 1 Capital (as defined) to total risk-weighted assets of 4.00 percent and a minimum ratio of Total Capital (as defined) to risk-weighted assets of 8.00 percent. Tier 1 Capital includes common shareholders’ equity, qualifying trust preferred securities, qualifying minority interests, and qualifying perpetual preferred stock, less goodwill and other adjustments. Tier 2 Capital includes, among other items, perpetual or long-term preferred stock, certain intermediate-term preferred stock, hybrid capital instruments, perpetual debt and mandatorily convertible debt securities, qualifying subordinated debt, and the allowance for credit losses up to 1.25 percent of risk-weighted assets. Tier 3 Capital includes subordinated debt that is unsecured, fully paid up, has an original maturity of at least two years, is not redeemable before maturity without prior approval of the Federal Reserve and includes a lock-in clause precluding payment of either interest or principal if the payment would cause the issuing bank’s risk-based capital ratio to fall or remain below the required minimum. The sum of Tier 1 and Tier 2 Capital less investments in unconsolidated subsidiaries is equal to qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and Total Capital by risk-weighted assets. Risk-weighted assets refer to the on- and off-balance sheet exposures of First Charter and First Charter Bank, as adjusted for one of four categories of applicable risk-weights established in Federal Reserve regulations, based primarily on relative credit risk. At June 30, 2007, First Charter and First Charter Bank were in compliance with the risk-based capital requirements. First Charter’s Tier 1 and Total Capital Ratios at June 30, 2007, were 10.57 percent and 11.67 percent, respectively. First Charter did not have any subordinated debt that qualified as Tier 3 Capital at June 30, 2007. The leverage ratio is calculated by dividing Tier 1 Capital by adjusted total assets. First Charter’s leverage ratio at June 30, 2007, was 8.97 percent. First Charter meets its leverage ratio requirement.

 

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

 

Prompt Corrective Action under FDICIA.  The Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), among other things, identifies five capital categories for insured depository institutions (well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized) and requires the respective federal regulatory agencies to implement systems for “prompt corrective action” for insured depository institutions that do not meet minimum capital requirements within such categories. FDICIA imposes progressively more restrictive constraints on operations, management and capital distributions, depending on the category in which an institution is classified. Failure to meet the capital guidelines could also subject a banking institution to capital raising requirements. In addition, pursuant to FDICIA, the various regulatory agencies have prescribed certain non-capital standards for safety and soundness relating generally to operations and management, asset quality and executive compensation, and such agencies may take action against a financial institution that does not meet the applicable standards.

 

The various regulatory agencies have adopted substantially similar regulations that define the five capital categories identified by FDICIA, using the Total Risk-Based Capital, Tier 1 Risk-Based Capital and Leverage Capital Ratios as the relevant capital measures. Such regulations establish various degrees of corrective action to be taken when an institution is considered undercapitalized. Under the regulations, a “well capitalized” institution must have (i) a Tier 1 Capital ratio of at least 6.00 percent, (ii) a Total Capital ratio of at least 10.00 percent, (iii) a Leverage ratio of at least 5.00 percent and (iv) not be subject to a capital directive order. An “adequately capitalized” institution must have a Tier 1 Capital ratio of at least 4.00 percent, a Total Capital ratio of at least 8.00 percent and a leverage ratio of at least 4.00 percent, or 3.00 percent in some cases. Under these guidelines, First Charter and First Charter Bank were considered well capitalized as of June 30, 2007. See Note 13 of the consolidated financial statements for the quarter ended June 30, 2007 included with this proxy statement/prospectus.

 

Banking agencies have also adopted regulations which mandate that regulators take into consideration (i) concentrations of credit risk, (ii) interest rate risk and (iii) risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation is made as a part of the institution’s regular safety and soundness examination. In addition, the banking agencies have amended their regulatory capital guidelines to incorporate a measure for market risk. In

accordance with amended guidelines, a corporation or bank with significant trading activity (as defined in the amendment) must incorporate a measure for market risk in its regulatory capital calculations. The revised guidelines do not materially impact First Charter’s or First Charter Bank’s regulatory capital ratios or First Charter Bank’s well-capitalized status.

 

Distributions.  First Charter is a legal entity separate and distinct from its subsidiaries. The primary source of funds for distributions paid by First Charter to its shareholders is dividends received from First Charter Bank, and First Charter Bank is subject to laws and regulations that limit the amount of dividends it can pay. The Federal Reserve regulates the amount of dividends First Charter Bank can pay to First Charter based on net profits for the current year combined with the undivided profits for the last two years, less dividends already paid. See Note 13 of the consolidated financial statements for the quarter ended June 30, 2007 included with this proxy statement/prospectus. North Carolina laws provide that, subject to certain capital requirements, a Board of Directors of a North Carolina bank may declare a dividend of as much of the bank’s undivided profits as it deems expedient.

 

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

 

Deposit Insurance.  The deposits of First Charter Bank are insured by the Deposit Insurance Fund (the “DIF”) of the FDIC, up to applicable limits. As insurer, the FDIC is authorized to conduct examinations of, and to require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious threat to the FDIC. The FDIC also has the authority to initiate enforcement actions against banking institutions, after giving the institution’s primary regulator an opportunity to take such action.

 

In addition, First Charter Bank is subject to the deposit premium assessments of the DIF. The FDIC imposes a risk-based deposit premium assessment system, which was amended pursuant to the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”). Under this system, as amended, the assessment rates for an insured depository institution vary according to the level of risk incurred in its activities. To arrive at an assessment rate for a banking institution, the FDIC places it in one of four risk categories determined by reference to its capital levels and supervisory ratings. In addition, in the case of those institutions in the lowest risk category, the FDIC further determines the institution’s assessment rate based on certain specified financial ratios or, if applicable, its long-term debt ratings. Beginning January 1, 2007, assessments can range from 5 to 43 basis points per $100 of assessable deposits, depending on the insured institution’s risk category as described above. This assessment rate schedule can change from time to time, at the discretion of the FDIC, subject to certain limits. Under the current system, premiums are assessed quarterly.

 

The Reform Act also provides for a one-time premium assessment credit for eligible insured depository institutions, including those institutions in existence and paying deposit insurance premiums on December 31, 1996, or certain successors to any such institution. The assessment credit is determined based on the eligible institution’s deposits at December 31, 1996, and is applied automatically to reduce the institution’s quarterly premium assessments to the maximum extent allowed, until the credit is exhausted. In addition, insured deposits have been required to pay a pro rata portion of the interest due on the obligations issued by the Financing Corporation (“FICO”) to fund the closing and disposal of failed thrift institutions by the Resolution Trust Corporation.

 

Source of Strength.  According to Federal Reserve policy, bank holding companies are expected to act as a source of financial strength to subsidiary banks and to commit resources to support each such subsidiary. This support may be required at times when a bank holding company may not be able to provide such support. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, in the event of a loss

suffered or anticipated by the FDIC, either as a result of default of a banking or thrift subsidiary of First Charter or related to FDIC assistance provided to a subsidiary in danger of default, the other banking subsidiaries of First Charter may be assessed for the FDIC’s loss, subject to certain exceptions.

 

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

 

Regulatory Recommendations.  First Charter and First Charter Bank are subject to federal and state banking regulatory reviews from time to time. As a result of these reviews, First Charter and First Charter Bank receive various observations and recommendations from their respective regulators. Observations represent suggestions for enhancements to policy or practice and may reference sound industry practices. Recommendations are provided to enhance oversight of, or to improve or strengthen, First Charter’s or First Charter Bank’s processes. First Charter does not believe that these observations and recommendations are material to First Charter. In addition, neither First Charter nor First Charter Bank is currently subject to any formal or informal corrective action with respect to any of their regulators.

 

Properties

 

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

 

First Charter operates 60 financial centers, four insurance offices and 137 ATMs located in North Carolina and Georgia. First Charter also leases facilities in Reston, Virginia and Asheville, North Carolina for loan origination.

 

Legal Proceedings

 

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

 

Market Price of and Dividends on Common Equity and Related Shareholder Matters

 

Market Information, Holders, and Dividends

 

The “Summary” section to this proxy statement/prospectus contains information regarding the high and low sales prices and cash dividends declared with respect to First Charter’s common stock. For information regarding First Charter’s ability to pay dividends, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Management and Note 22 of the Consolidated Financial Statements of First Charter for the year ended December 31, 2006 included with this proxy statement/prospectus.

 

As of           , there were            record holders of First Charter common stock. During 2007, 2006, and 2005, First Charter paid dividends on its common stock on a quarterly basis.

 

Supplementary Financial Information

 

See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Tables 8 and 22.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Factors that May Affect Future Results

 

The following discussion contains certain forward-looking statements about First Charter’s financial condition and results of operations, which are subject to certain risks and uncertainties that could cause actual

results to differ materially from those reflected in the forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements contained in this proxy statement/prospectus, which reflect management’s judgment only as of the date hereof. First Charter undertakes no obligation to publicly revise these forward-looking statements to reflect events and circumstances that arise after the date hereof.

 

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

 

Overview

 

First Charter, headquartered in Charlotte, North Carolina, is a regional financial services company with assets of $4.8 billion and is the holding company for First Charter Bank (“First Charter Bank”). First Charter operates 60 financial centers, four insurance offices, and 137 ATMs in North Carolina and Georgia, and also operates loan origination offices in Asheville, North Carolina and Reston, Virginia. First Charter provides businesses and individuals with a broad range of financial services, including banking, financial planning, wealth management, investments, insurance, and mortgages.

 

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

 

Another source of earnings for First Charter is noninterest income. Noninterest income is derived largely from service charges on deposit accounts and other fee or commission-based services and products including mortgage, wealth management, brokerage, and insurance. Other sources of noninterest income include securities gains or losses, transactions involving bank-owned property, and income from Bank Owned Life Insurance (“BOLI”) policies.

 

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

 

The Community-Banking Model

 

First Charter Bank operates a community-banking model. The community-banking model is focused on delivering a broad array of financial products and solutions to our clients with exceptional service and convenience at a fair price. It emphasizes local market decision-making and management whenever possible.

Management believes this model works well against larger competitors that may have less flexibility and are challenged to provide exceptional customer service, as well as local competition that may not have the array of products and services nor the number of convenient locations that First Charter Bank offers. First Charter Bank competes against four of the largest banks in the country, as well as other local banks, savings and loan associations, credit unions, and finance companies.

 

Existing Markets and Expansion

 

During 2005, First Charter implemented a growth strategy intended to both expand the First Charter footprint into high growth markets and to optimize existing locations through attracting new customers and retaining existing customers. As part of the strategic growth strategy, First Charter has expanded operations into the Raleigh, North Carolina, Metro area. The Raleigh Metro area is expected to have at or above average household income and growth rates relative to the North Carolina and national averages. First Charter opened a loan production office in Raleigh in early 2005, which was later consolidated into First Charter’s first financial center in Raleigh in October 2005. First Charter also added three new financial centers in the Raleigh market in February 2006 by opening new financial centers in Raleigh, Cary, and Garner, North Carolina. A fifth financial center opened in Raleigh in late January 2007. These financial centers offer businesses and individuals a broad range of financial services, including banking, financial planning, wealth management, investments, insurance, and mortgages. First Charter also operates 22 ATMs in the Raleigh market.

 

During 2006, First Charter also opened two new replacement financial centers in Lincolnton and Denver, North Carolina, providing an even greater level of service and convenience for customers in those markets.

 

On November 1, 2006, First Charter entered the greater Atlanta, Georgia metropolitan market with the acquisition of GBC Bancorp, Inc. (“GBC”) and its banking subsidiary, Gwinnett Bank, with financial centers located in Lawrenceville and Alpharetta, Georgia. By expanding into the greater Atlanta metropolitan market through this acquisition, First Charter has been able to spread its credit risk over multiple market areas and states, as well as gain access to another large market area as a source for core deposits. The counties in which Gwinnett Bank operates boast some of the strongest demographic growth trends in the nation, and the median household income in these counties is significantly higher than the median income for Georgia and the Southeast. Effective March 1, 2007, Gwinnett Bank was merged with and into First Charter Bank.

 

Recent Challenges

 

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

 

During the months following the fiscal year end, First Charter was engaged in a detailed assessment of its internal controls and focused considerable time and resources on the adoption and implementation of various accounting pronouncements and the analysis of their impact on its financial results. In addition, the Audit Committee of the Board of Directors commenced and concluded an inquiry regarding certain accounting policies and estimates, principally related to First Charter’s acquisition of GBC, compensation matters, and related controls and procedures. As previously disclosed, none of the findings of the Audit Committee inquiry were financially material, and did not result in First Charter restating any of its historical financial statements. However, these events caused a significant delay in the completion of First Charter’s 2006 financial statements, their audit by First Charter’s outside auditors and, in turn, the filing of the Form 10-K for the year ended December 31, 2006.

 

During the second quarter of 2007, the North Carolina Attorney General obtained a court order to appoint a receiver to take control of a real estate venture in the Village of Penland and related development projects located in Western North Carolina (“Penland”). The Attorney General’s complaint alleges that various

defendants, including real estate development companies, individuals, and an appraiser engaged in deceptive practices to induce consumers to obtain loans to purchase lots in Penland in the Spruce Pine, North Carolina area. These lots were allegedly priced based upon inflated appraisals. Several financial institutions, including First Charter, made loans in connection with these residential developments.

 

As of June 30, 2007, First Charter had 70 loans with an aggregate outstanding balance of $14.1 million to individual lot purchasers related to Penland. As previously disclosed, based on management’s assessment of probable incurred losses associated with the Penland loan portfolio, First Charter recorded an additional $7.8 million provision for loan losses during the second quarter of 2007. As of June 30, 2007, no loans in the Penland loan portfolio had reached a 90-day past-due status. However, based on management’s assessment of the individual borrowers, $5.4 million of these loans were placed on nonaccrual status as of June 30, 2007 and all of the previously recognized interest income related to these nonaccrual loans was reversed.

 

On July 31, 2007, the General Assembly of North Carolina passed House Bill 1473 which includes a provision that disallows the deduction of dividends paid by captive real estate investment trusts (“REITs”) for the purposes of determining North Carolina taxable income. First Charter, through its subsidiaries, participates in two entities classified as captive REITs from which First Charter has historically received dividends which resulted in certain tax benefits taken within First Charter’s tax returns and consolidated financial statements. This legislation is effective for taxable years beginning on or after January 1, 2007.

 

As of June 30, 2007, First Charter was evaluating the impact that this legislation will have on First Charter’s current and prior tax filings, as well as the related financial statement impact to First Charter’s effective tax rate and uncertain tax positions. Assuming the legislation eliminates the deductibility of the REIT dividends for North Carolina state income tax purposes, First Charter expects an increase in its effective tax rate for 2007 and subsequent fiscal years.

Management’s Discussion and Analysis For The Year Ended December 31, 2006 Compared To The Year Ended December 31, 2005

 

Financial Summary

 

Net income was $47.4 million, or $1.49 per diluted share, for 2006, a $22.1 million increase from net income of $25.3 million, or $0.82 per diluted share, for 2005. Return on average assets and return on average equity was 1.08 percent and 13.5 percent for 2006, respectively, compared to 0.56 percent and 7.9 percent for 2005, respectively. During 2006 and 2005, several material transactions occurred, which impacted noninterest income and expense. In 2006, these transactions included the sale of First Charter’s employee benefits administration business, the sale of two financial centers, distributions received from First Charter’s equity method investments, the further repositioning of First Charter’s securities portfolio, the restructuring of First Charter’s BOLI investment, the acceleration of vesting on all stock options granted from 2003 to 2005, the separation expense for certain employees, and the merger costs associated with the acquisition of GBC. During 2005, these transactions included the initial repositioning of First Charter’s securities portfolio, early termination of derivatives and their associated hedged debt instruments, early extinguishment of debt, the expense associated with the retirement of a key executive, and the modification of a legacy employee benefit plan.

 

Earnings Analysis For The Fourth Quarter 2006 Compared To The Fourth Quarter 2005

 

For the fourth quarter of 2006, net income was $12.0 million, or $0.36 per diluted share, compared to a net loss of $8.3 million, or $0.27 per diluted share, for the 2005 fourth quarter. The fourth quarter of 2006 was adversely affected by several items, including $0.7 million in expense incurred from the accelerated vesting of equity options, $0.3 million in merger-related expense, $0.2 million in employee separation expense. The $1.0 million gain recognized on the sale of SEBS was principally offset by the income tax expense on the gain. During the fourth quarter of 2005, First Charter repositioned and de-leveraged its balance sheet by selling securities and extinguishing debt in an on-going effort to improve First Charter’s earnings quality and stability. As a result of executing these initiatives, First Charter realized an approximate $31.3 million pre-tax ($20.0 million after-tax) charge in the fourth quarter of 2005.

 

On December 1, 2006, First Charter completed the sale of SEBS to an independent third party for $3.1 million in cash. The transaction resulted in a pre-tax gain of $962,000. Because the goodwill and certain of the intangible assets were nondeductible for tax purposes, the applicable income tax expense associated with the gain was $951,000. In connection with this sale, First Charter and the purchaser entered into a three-year agreement under which First Charter will continue to use the purchaser as the strategic record-keeping partner for its wealth management clients and the administration of certain of First Charter’s employee benefits plans. Financial results for SEBS, the sole component of First Charter’s Employee Benefits Administration Business, including the gain, are reported as Discontinued Operations for all periods presented.

 

The net interest margin (taxable-equivalent net interest income divided by average earning assets) increased 13 basis points to 3.40 percent in the fourth quarter of 2006 from 3.27 percent in the fourth quarter of 2005. The margin improvement benefited, in part, from the addition of GBC’s higher-margin balance sheet and the continued benefits from previously disclosed balance sheet repositionings in the fourth quarter of 2005 and the third quarter of 2006. Net interest income increased to $36.0 million, representing a $4.1 million, or 12.8 percent, increase over the fourth quarter of 2005.

 

Compared to the fourth quarter of 2005, earning-asset yields increased 103 basis points to 6.96 percent. This increase was driven by two factors. First, loan yields increased 99 basis points to 7.56 percent and securities yields increased 68 basis points to 4.84 percent. Second, the mix of higher-yielding (loan) assets improved as a result of the GBC acquisition, the balance sheet repositionings, and a smaller percentage of lower-yielding mortgage loans. The percentage of investment security average balances (which, on average, have lower yields than loans) to total earning-asset average balances was reduced from 25.9 percent to 21.6 percent over the prior year.

 

On the liability side of the balance sheet, the cost of interest-bearing liabilities increased 104 basis points during the fourth quarter of 2006, compared to the fourth quarter of 2005. This was comprised of a 106 basis

point increase in interest-bearing deposit costs to 3.73 percent, while other borrowing costs increased 112 basis points to 4.90 percent. During this period, the Federal Reserve raised the rate that banks can lend funds to each other (the Fed Funds rate) by 100 basis points. Also, as a result of the balance sheet repositionings, the percentage of higher-cost other borrowings average balances was reduced from 31.3 percent to 28.1 percent of total interest-bearing liabilities average balances over the prior year.

 

The provision for loan losses was $1.5 million for the fourth quarter of 2006, compared to $1.8 million for the fourth quarter of 2005, reflecting improved credit quality trends, including lower net charge-offs. Net charge-offs were $650,000 for the fourth quarter of 2006, or 0.08% of average portfolio loans, compared to $2.9 million for the fourth quarter of 2005, or 0.39% of average portfolio loans.

 

Historical noninterest income amounts have been restated to reflect the effect of reporting the previously announced sale of SEBS as a discontinued operation. Noninterest income from continuing operations totaled $17.4 million, compared to a loss of $0.7 million for the fourth quarter of 2005. Driving the noninterest loss for the 2005 fourth quarter were securities losses of $16.7 million from the balance sheet repositioning, versus no gains or losses recognized in the 2006 fourth quarter. Excluding these securities losses, noninterest income increased $1.4 million, or 8.7 percent, to $17.4 million. Of this increase, $0.3 million was attributable to the GBC acquisition, which closed on November 1, 2006. Deposit service charges, ATM, debit card, and merchant fees, and mortgage, brokerage, insurance, and wealth management revenue were all contributors to growth in First Charter’s noninterest income. Partially offsetting the growth in these key areas were $0.5 million less in gains from property sales in the 2006 fourth quarter, compared to the 2005 fourth quarter.

 

Historical noninterest expense amounts have been restated to reflect the effect of reporting the sale of SEBS as a discontinued operation. On a year-over-year basis, total noninterest expense from continuing operations for the 2006 fourth quarter decreased $9.4 million to $33.9 million, compared to $43.2 million for the fourth quarter of 2005. The 2005 fourth quarter included approximately $14.7 million of expense related to the previously discussed balance sheet repositioning. Raleigh-related expense totaled $1.3 million during the 2006 fourth quarter, compared to $0.7 million in the fourth quarter of 2005. Salaries and employee benefits expense increased $3.9 million, compared to the fourth quarter of 2005, principally attributable to general overall compensation increases, including $1.1 million in GBC personnel-related expenses, $0.6 million from Raleigh personnel expense and investment, and an additional $1.1 million from equity-based compensation, including option acceleration expense, and $0.2 million in severance expense. Occupancy and equipment expense for the 2006 fourth quarter increased $1.1 million and included incremental expense from a new loan platform being placed in service during the quarter and $0.2 million of incremental Raleigh-related costs during the quarter, whereas occupancy and equipment expense for the 2005 fourth quarter included a $1.4 million reduction of expense due to a correction related to First Charter’s fixed asset records. Marketing expense declined $0.5 million, compared to the year-ago quarter. Foreclosed properties expense increased by $0.2 million, and amortization of intangible assets also increased by $0.2 million due to core deposit intangible amortization from the GBC acquisition.

 

The effective tax rate for the fourth quarter of 2006 was 36.3 percent, compared with 40.0 percent in the fourth quarter of 2005. The 2005 fourth quarter was significantly affected by charges incurred for the previously mentioned balance sheet repositioning, while the 2006 fourth quarter was adversely affected by the tax gain recognized from the sale of SEBS and additional revenue related to the GBC acquisition. The effective tax rate for both quarters includes the effects of both continuing and discontinued operations.

 

Table One

Selected Financial Data