Schedule 14A

(Rule 14A-101)

Information Required In Proxy Statement

SCHEDULE 14A INFORMATION

 

PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES

EXCHANGE ACT OF 1934
(AMENDMENT NO. )

 

Filed by the Registrant þ

 

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

FIRST CHARTER CORPORATION

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

PAYMENT OF FILING FEE (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 25, 2007

 

 

Dear Fellow Shareholder:

 

You are cordially invited to attend the Annual Meeting of Shareholders of First Charter Corporation, which will be held at the First Charter Center at 10200 David Taylor Drive, Charlotte, North Carolina on May 23, 2007. The meeting will begin at 10:00 a.m.

 

The business to be conducted at the Annual Meeting is described in the accompanying Notice of Annual Meeting of Shareholders and Proxy Statement, and I invite you to pay careful attention to both of these documents. In addition, also enclosed is a copy of our Annual Report on Form 10-K for the year ended December 31, 2006 and our Summary 2006 Annual Report to Shareholders.

 

It is important that your shares be represented and voted at the Annual Meeting. Whether or not you choose to attend, I urge you to sign, date, and promptly return the proxy card in the enclosed postage-paid envelope. You may also vote on the Internet or by telephone. Instructions for those voting methods are listed on your proxy card.

 

For your convenience, our shareholders may listen to the Annual Meeting on the Internet by visiting our website at www.FirstCharter.com and following the link provided under our “Investor Relations” section. Replays of the Annual Meeting will be made available for 14 days following the Annual Meeting.

 

Thank you for your interest in First Charter.  We look forward to your continued support throughout 2007.

 

Sincerely,

 

Robert E. James, Jr.

President and Chief Executive Officer

First Charter Corporation

10200 David Taylor Drive
Charlotte, North Carolina 28262-2373

 

 

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
to be held on May 23, 2007

 

TO THE SHAREHOLDERS:

 

The Annual Meeting of Shareholders of First Charter Corporation will be held at the First Charter Center, 10200 David Taylor Drive, Charlotte, North Carolina on Wednesday, May 23, 2007 at 10:00 a.m., for the following purposes:

 

 

We have fixed April 10, 2007 as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting. Only holders of our common stock of record at the close of business on that date will be entitled to notice of and to vote at the meeting and at any adjournment thereof.

 

You are cordially invited to attend the Annual Meeting. Whether or not you plan to attend, please sign, date and promptly return the accompanying proxy card (or vote by phone or on the Internet in accordance with the instructions on the proxy card), so that your shares may be represented and voted at the Annual Meeting.

 

By order of the Board of Directors,

 

Stephen J. Antal

Executive Vice President, General Counsel

and Corporate Secretary

 

April 25, 2007

 

First Charter Corporation

10200 David Taylor Drive
Charlotte, North Carolina 28262-2373

 

 

 

 

PROXY STATEMENT

 

 

 

 

2007 Annual Meeting of Shareholders
to be held on May 23, 2007

 

INFORMATION ABOUT ANNUAL MEETING AND VOTING

 

Background Information

 

The principal executive offices of First Charter Corporation are located at 10200 David Taylor Drive, Charlotte, North Carolina 28262-2373 and our telephone number is (704) 688-4300. We own all of the outstanding capital stock of First Charter Bank, a North Carolina state bank (“FCB”).

 

References throughout this Proxy Statement to the “Corporation” (as well as the words “we,” “us” and “our”) refer to First Charter Corporation. References to “you” or “your” refer to our shareholders. The term “Common Stock” means the Corporation’s outstanding common stock.

 

Purpose of Proxy Statement

 

The Board of Directors of First Charter Corporation is soliciting your proxy for voting at our Annual Meeting of Shareholders to be held on Wednesday, May 23, 2007 at 10:00 a.m., at the First Charter Center, 10200 David Taylor Drive, Charlotte, North Carolina (the “Annual Meeting”). This Proxy Statement will be mailed to shareholders on or about April 25, 2007.

 

Business to be Transacted

 

At the Annual Meeting, we will ask you to:

 

 

No other items are scheduled to be voted upon.

 

Who May Vote

 

Shareholders as of the close of business on April 10, 2007 (the “Record Date”) are entitled to vote at the Annual Meeting. Each share of Common Stock is entitled to one vote on each of the matters voted upon at the meeting, except that shares held by FCB, whether or not held in a fiduciary capacity, may not be voted by FCB in the election of directors, but will be counted for purposes of determining a quorum for the transaction of business at the Annual Meeting.

 

How to Vote

 

You may vote at the Annual Meeting:

 

 

Quorum to Transact Business

 

A quorum for the transaction of business at the Annual Meeting consists of the majority of the issued and outstanding shares of Common Stock entitled to vote on a particular matter, present in person or represented by proxy. As of the Record Date, 35,104,606 shares of Common Stock were issued and outstanding. If you attend in person and indicate your presence, or mail in a properly dated and signed proxy card or vote by phone or on the Internet in accordance with the instructions on your proxy card, your shares will be counted toward a quorum.

 

Voting of Shares Via Proxy

 

If you have submitted a properly dated and signed proxy via the mail (or if you vote by phone or on the Internet in accordance with the instructions on the proxy card) and a quorum is established, your shares will be voted as you indicate. However, if you mail in your proxy card and sign and date your card, but do not mark it, your shares will be voted in favor of the election of all of the nominated directors, and in favor of ratifying KPMG LLP as our independent registered public accountants for 2007. If you sign and date your proxy card and withhold voting for any or all of the nominated directors (as explained on the proxy card) or abstain regarding any of the other matters to be voted upon, your vote will be recorded as being withheld or as an abstention, as the case may be, but it will have no effect on the outcome of the vote. Proxies submitted by brokers that do not indicate a vote for some or all of the proposals because they do not have discretionary voting authority and have not received instructions as to how to vote on those proposals (so-called “broker non-votes”) will be counted for purposes of determining a quorum but will not affect the outcome of the vote.

 

Revocation of Proxy

 

If you later decide to revoke or change your proxy, you may do so by: (1) sending a written statement to that effect to the Secretary of the Corporation; (2) submitting a properly dated and signed proxy with a later date; or (3) voting in person at the Annual Meeting.

 

Vote Necessary for Action

 

Directors are elected by a plurality vote of shares present at the Annual Meeting. “Plurality” means that the nominees receiving the largest number of affirmative votes cast are elected as directors up to the maximum number of directors who are nominated to be elected at the meeting. At our meeting the maximum number of directors to be elected is six. In an uncontested election for directors, the plurality requirement is not a factor. The ratification of the appointment of KPMG LLP as our independent registered public accountants for 2007 requires an affirmative vote of the majority of the shares present and voting at the meeting.

 

Duplicate Proxy Statements and Cards

 

You may receive more than one proxy statement, proxy card or Annual Report. This duplication will occur if title to your shares is registered differently or your shares are in more than one type of account maintained by Registrar and Transfer Company, our transfer agent. To have all your shares voted, please sign, date and promptly return all proxy cards or make sure that you vote all of your shares by phone or on the Internet.

 

Other Business

 

We know of no other matters to be presented for shareholder action at the Annual Meeting. If other matters are properly presented at the meeting, your signed and dated proxy card, or your vote by telephone or on the Internet, gives authority to Stephen J. Antal and Charles A. Caswell to vote your shares in accordance with their best judgment.

 

Expenses of Solicitation

 

We will pay the cost of preparing, assembling and mailing this proxy-soliciting material. In addition to the use of the mail, proxies may be solicited personally or by telephone, by our officers and employees without additional compensation. We will pay all costs of solicitation, including certain expenses of brokers and nominees who mail proxy material to their customers or principals.

 

ELECTION OF DIRECTORS

 

Our Articles of Incorporation and Bylaws provide that the Board of Directors will consist of at least five but not more than twenty-five members. The exact number of directors is determined by either the vote of at least 75% of the members of the Board of Directors or by a vote of the shareholders. The directors are divided into three classes having staggered three-year terms. Each class of directors is as nearly equal in number as possible.

 

The number of directors is currently fixed at seventeen. As previously announced, Mr. Thomas R. Revels has decided not to stand for re-election as a director and will retire from service on the Board of Directors upon the expiration of his current term at the Annual Meeting. By action of the Board of Directors, the number of directors will be fixed at sixteen upon the expiration of Mr. Thomas R. Revel’s term at the Annual Meeting. Proxies may not be voted for a number of persons greater than the number of nominees listed below.

 

Effective July 26, 2006 and October 25, 2006, respectively, Ms. Jewell D. Hoover and Mr. John S. Poelker, were appointed to the Board of Directors to fill vacancies left by the retirement of Harold D. Alexander at the 2006 Annual Meeting of Shareholders and the resignation of Jerry A. Felts, effective June 29, 2006. Effective November 1, 2006, Mr. Richard F. Combs was also appointed to the Board of Directors in fulfillment of an obligation established in the Corporation’s Agreement and Plan of Merger, dated June 1, 2006, to acquire GBC Bancorp, Inc. (“GBC”). Mr. Combs is a former GBC director. Mr. Combs’ appointment followed a determination by the Board of Directors to increase the size of the Board to seventeen.

 

As appointed directors Ms. Hoover, and Messrs. Poelker and Combs must each stand for election at the Annual Meeting.

 

The Board of Directors has nominated the six persons listed below to be elected as directors at the Annual Meeting. Each of the nominees is currently a member of the Board of Directors and is currently in the class of directors with terms expiring at the Annual Meeting. Each of the nominees has been nominated for a term to expire in 2010, except Mr. Richard F. Combs, who has been nominated for a term to expire in 2008 in order to better balance each of the three classes of directors.

 

It is intended that the persons named in the accompanying form of proxy will vote to elect these six nominees listed below unless authority to vote is withheld. The nominees will serve until the 2008 or 2010 Annual Meeting of Shareholders, as applicable, or until an earlier resignation or retirement or until a successor shall be elected and shall qualify to serve. We expect that each of the nominees will be available for election. However, if a vacancy in the slate of nominees is caused by death or other unexpected occurrence, it is intended that shares represented by the accompanying proxy will be voted for the election of a substitute nominee selected by the persons named in the proxy. We recommend a vote FOR all of the nominees for election as directors.

 

The names, ages and principal occupations (which have continued for the past five years unless otherwise indicated) and certain other information for each of the nominees and continuing directors are set forth below. Each director also serves as a First Charter Bank Director.

 

Nominees for Terms Expiring in 2010

 

JEWELL D. HOOVER, age 58, has been the President of Hoover & Associates, LLC, a bank consulting firm since 2003. Prior to that time, she was a Senior Bank Regulator with the Office of the Comptroller of the Currency, until her retirement in 2003. Ms. Hoover has been a director of the Corporation since 2006.

 

WALTER H. JONES, JR., age 65, is a partner in the law firm of Homesley, Jones, Gaines, Dudley, Childers, McLurkin, Donaldson & Johnson, PLLC. Mr. Jones is the Chairman of the Board of FCB and has been a director of the Corporation since 2000.

 

SAMUEL C. KING, JR., age 59, is the President of King’s Office Supply, Inc., an office products retailer. Mr. King is also the President of The UPS Store, Lincolnton, North Carolina, a retail packaging and shipping company. Mr. King has been a director of the Corporation since 2000.

 

JERRY E. McGEE, age 64, is President of Wingate University. Dr. McGee has been a director of the Corporation since 1995.

 

JOHN S. POELKER, age 64, has been the President of The Poelker Consultancy, Inc., a financial services consulting firm since 2005. Prior to that time, he was the Executive Vice President and Chief Executive Officer of Old National Bancorp (Evansville, Indiana) until his retirement in 2005. Mr. Poelker has been a director of the Corporation since 2006.

 

Nominee for Term Expiring in 2008

 

RICHARD F. COMBS, age 59, has been the President of Excella International Corp., an advanced oxidation technology company in the food preparation industry since 2005. Prior to that time, he was the President of Pureflow Ultraviolet, Inc., an industrial water treatment company, and subsidiary of Trojan Technologies, Inc. Mr. Combs has been a director of the Corporation since 2006.

 

Continuing Directors with Terms Expiring in 2009

 

MICHAEL R. COLTRANE, age 60, is the President, Chairman, and Chief Executive Officer of CT Communications, Inc., a telecommunications company. Mr. Coltrane is the Vice Chairman of the Board of the Corporation. He served as a director of the Corporation from 1983 until 1985 and currently has served as a director of the Corporation since 1988. Mr. Coltrane also serves as a director of CT Communications, Inc.

 

CHARLES A. JAMES, age 60 is the President of Mt. Pleasant Insurance Agency and the co-owner of Mt. Pleasant Bonded Warehouse, a general commodity storage company. Mr. James has been a director of the Corporation since 2000.

 

ROBERT E. JAMES, JR., age 56, has served as the President and Chief Executive Officer of the Corporation since 2005, and of FCB since 2004. He served as Executive Vice President of the Corporation from 1999 to 2005 and Executive Vice President of FCB from 1999 to 2004. Mr. James has been a director of the Corporation since 2005.

 

ELLEN L. MESSINGER, age 48, is the Vice President of Messinger Inc., a manufacturing company. Ms. Messinger has been a director of the Corporation since 2003.

 

HUGH H. MORRISON, age 59, is the President of E. L. Morrison Holding Company, Inc., a real estate holding company, owner of M.B. Commercial Real Estate, Inc., a real estate sales, leasing and property management company and owner of Engineered Lumber Supply LLC, a wholesale lumber company. Mr. Morrison has been a director of the Corporation since 1984.

 

Continuing Directors with Terms Expiring in 2008

 

WILLIAM R. BLACK, age 58, is a medical doctor specializing in oncology. Dr. Black is the Vice Chairman of the Board of FCB and has been a director of the Corporation since 1990.

 

JAMES E. BURT, III, age 69, is a retired banker and Chairman of the Board of the Corporation. Mr. Burt has been a director of the Corporation since 2000.

 

JOHN J. GODBOLD, JR., age 66, is the President of Godbold Financial Associates, Inc., a bank consulting company. Mr. Godbold has been a director of the Corporation since 1997.

 

L. D. WARLICK, JR., age 67, is the President of Warlick Funeral Home. Mr. Warlick has been a director of the Corporation since 2000.

 

WILLIAM W. WATERS, age 65, is the retired President of Waters Construction Company, a homebuilder. Mr. Waters has been a director of the Corporation since 2000.

 

Messrs. Charles A. James and Robert E. James, Jr. are not related. No director has a family relationship as close as first cousin with any other director, nominee for director or executive officer of the Corporation.

 

Director Compensation

 

 

 

 

Outstanding Equity Awards at Fiscal Year-End for 2006

 

 

 

 

Narrative to Director Compensation Table

 

During 2006, each director of the Corporation who was not employed by the Corporation or its subsidiaries (an “outside director”) was paid director fees of (1) $3,000 per quarter for his or her services as a director, (2) $1,500 for each meeting of the Board of Directors of the Corporation attended in person, ($1,000 for each telephonic attendance), and (3) $1,000 for each committee meeting attended in person ($750 for each telephonic attendance). In the event of an unscheduled meeting of the Board of Directors or committee meeting of short duration (i.e., less than one hour), a fee of $500 may be paid to each outside director attending such meeting, in the discretion of the Chairman of the Board or the committee chairperson. In addition, the chairperson of the Audit Committee received an annual cash retainer in the amount of $6,000 and the chairperson of each of the other committees of the Board of Directors, except the Executive Committee, received an annual cash retainer in the amount of $4,000. The compensation for outside directors is periodically reviewed for adjustment by the Compensation Committee. During 2006 the Committee retained Semler Brossy Consulting Group, LLC, a compensation consulting firm, to assist them with this review; no changes to the compensation described above were made for 2007.

 

Deferred Compensation for Non-Employee Directors.  Effective May 1, 2001, the Corporation amended and restated the First Charter Corporation 1994 Deferred Compensation Plan for Non-Employee Directors (the “Deferred Compensation Plan”). Under the Deferred Compensation Plan, eligible directors may elect to defer all or part of their director’s fees for a calendar year, in exchange for Common Stock. The amount deferred, if any, must be in multiples of 25 percent of their total director’s fees. Each participant is fully vested in his or her account balance under the Deferred Compensation Plan. The Deferred Compensation Plan generally provides for fixed payments or a lump sum payment, or a combination of both, in shares of Common Stock after the participant ceases to serve as a director for any reason.

 

The Common Stock purchased by the Corporation for the Deferred Compensation Plan is maintained in the First Charter Corporation Directors’ Deferred Compensation Trust, a Rabbi Trust (the “Trust”), on behalf of the participants. The assets of the Trust are subject to the claims of general creditors of the Corporation. Dividends payable on the shares of Common Stock held by the Trust will be reinvested in additional shares of Common Stock and held in the Trust for the benefit of the participants. Deferrals of director fees pursuant to this plan amounted to $333,250 for 2006.

 

Effective May 1, 2001, the Corporation approved and adopted a non-qualified compensation deferral arrangement called the First Charter Corporation Directors’ Option Deferral Plan (the “Director OPT Plan”). Under the Director OPT Plan, eligible directors may elect to defer 100% of their director’s fees and invest these deferrals into mutual fund investments. Participants are offered the opportunity to direct an administrative committee to invest in separate investment funds with distinct investment objectives and risk tolerances. Deferrals of director fees pursuant to this plan amounted to $62,250 for 2006.

 

We also maintain the First Charter Stock Option Plan for Non-Employee Directors (the “Director Option Plan”) and the 2000 Omnibus Stock Option and Award Plan (the “Omnibus Stock Option Plan”). The Compensation Committee from time to time may grant non-qualified options to purchase Common Stock and/or Restricted Stock Awards (“RSA”) to eligible directors of the Corporation or a subsidiary in accordance with these plans. The terms and provisions of any options granted, including the termination, vesting and accelerated exercise of the options, upon death, disability, retirement or otherwise, as well as the terms and provisions of any RSA granted under these plans, is subject to the discretion of the Compensation Committee. The exercise price of any option granted must be equal to the fair market value of the Common Stock on the date of grant. In March 2006 the Compensation Committee approved an RSA grant to each of the outside directors of the Corporation in the amount of 1,000 shares of Common Stock, pursuant to the Omnibus Stock Option Plan. These RSAs vest in cumulative installments of one third per year over the next three years.

 

Burt Agreements.  On June 29, 2000, the Corporation and James E. Burt, III, a director of the Corporation, entered into a Separation and Consulting Agreement terminating Mr. Burt’s employment with the Corporation and his prior employment agreements with the Corporation and its successors (the “Consulting Agreement”). Pursuant to the Consulting Agreement, Mr. Burt will serve as a consultant to the Corporation on a part-time basis until July 31, 2007, unless the consultancy is terminated earlier. Mr. Burt advises the Corporation on its business, customers, products and services, and he remains under the terms of an ongoing non-competition agreement with the Corporation both during the term of the Consulting Agreement and for a two-year period following the termination or end of the Consulting Agreement. During 2006, Mr. Burt received $103,985 for his consulting services.

 

At the time of the merger between the Corporation and Carolina First Bancshares, Inc., in April 2000 the Corporation assumed a pre-existing supplemental executive retirement plan that benefits Mr. Burt. Under this agreement, the Corporation provides Mr. Burt with monthly payments in the amount of $4,166.67 ($50,000 a year). Mr. Burt is entitled to continue receiving these monthly payments until August 2012.

 

Attendance of Directors

 

During 2006, the Board of Directors held 11 meetings. Each director attended at least 75% of the aggregate number of meetings of the Board of Directors and all committees of the Board of Directors on which they served during their applicable period of service in 2006.

 

Committees of the Board of Directors

 

The following is a brief description of the duties of each of our committees and a list of the current members of each such committee.

 

Executive Committee.  Subject to limitations under North Carolina law, the Executive Committee may exercise all of the authority of the Board of Directors in the management of the Corporation. The Executive Committee reviews management reports and makes recommendations to the directors at the regularly scheduled Board of Directors meetings. The Executive Committee met three times during 2006. James E. Burt, III, (Chairman), Michael R. Coltrane (Vice Chairman), William R. Black, John J. Godbold, Jr., Robert E. James, Jr., Walter H. Jones, Jr., Jerry E. McGee, and Hugh H. Morrison are the current members of the Executive Committee.

 

ALCO and Finance Committee (the “ALCO Committee”).  The ALCO Committee became a committee of the Corporation’s Board of Directors effective January 1, 2006, and is responsible for oversight of asset and liability management, capital and dividend planning, liquidity, budgeting and forecasting and contingency planning. The ALCO Committee met six times in 2006. Michael R. Coltrane (Chairman), William R. Black, James E. Burt, III, Jewell D. Hoover and Robert E. James, Jr. are the current members of the ALCO Committee.

 

Audit Committee.  The Audit Committee, among other things, is responsible for the appointment, compensation, retention and oversight of the Corporation’s independent auditors, and reviews the Corporation’s financial statements, audit reports, internal controls and internal audit procedures. The Audit Committee met thirteen times during 2006. William R. Black (Chairman), Jewell D. Hoover, Charles A. James, Samuel C. King, Jr., Ellen L. Messinger and John S. Poelker are the current members of the Audit Committee. As determined by the Board of Directors, each of the members of the Audit Committee is an independent director in accordance with the independence requirements of the Securities and Exchange Commission (the “SEC”), and the NASDAQ Stock Market Marketplace Rules (the “NASDAQ Rules”).

 

Compensation Committee.  The Compensation Committee annually reviews and recommends to the Board of Directors salary grade ranges and merit increase guidelines for our employees and the employees of our subsidiaries. In addition, the committee recommends to the Board of Directors the annual budget request for all salaries and specifically recommends to the Board of Directors all executive officers’ salaries. Furthermore, it reviews recommendations from management regarding major benefit plans and recommends to the Board of Directors annually the formula for matching contributions and discretionary contributions made by the Corporation to the First Charter Retirement Savings Plan (401(k)). The committee also reviews recommendations for the formula for funding and payments made under the Corporation’s Annual Incentive Plan (the “Annual Incentive Plan”). The Compensation Committee grants options and other stock-based awards under and administers the First Charter Comprehensive Stock Option Plan, Omnibus Stock Option Plan, the 1999 Employee Stock Purchase Plan (“1999 ESPP”), the First Charter Corporation Restricted Stock Award Program and the Director Option Plan. The committee also annually evaluates and recommends director compensation and benefits to the full Board of Directors. The Compensation Committee’s governing Charter does not contain any specific provisions regarding the committee’s ability to delegate its authority to other persons.

 

With respect to the Chief Executive Officer, the Compensation Committee periodically reviews and approves corporate goals and objectives relevant to CEO compensation, evaluates the CEO’s performance in light of those goals and objectives, and determines and approves the CEO’s compensation. For members of Executive Management, other than the CEO, the Committee receives recommendations from the CEO and, in its discretion, approves the compensation for these individuals. The Compensation Committee routinely engages an outside compensation consultant to make recommendations relating to overall compensation philosophy, the financial peer group to be used for external comparison purposes for Executive Management (including the NEOs) and director compensation, comparable base salary levels for Executive Management, short-term and long-term incentive compensation plans, appropriate

performance parameters for such plans, and related compensation matters. For 2006, the Compensation Committee engaged Semler Brossy Consulting Group, LLC to serve in this capacity.

 

The Compensation Committee met ten times during 2006. Jerry E. McGee (Chairman), Michael R. Coltrane, Walter H. Jones, Jr., John S. Poelker, Thomas R. Revels and L.D. Warlick, Jr., are the current members of the Compensation Committee. In order to comply with certain restrictions under Rule 16b-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Compensation Committee is composed solely of directors who qualify as “non-employee directors,” as that term is defined in Rule 16b-3. As determined by the Board of Directors, each of the members of the Compensation Committee is an independent director in accordance with the independence requirements of the NASDAQ Rules.

 

Governance and Nominating Committee.  The Governance and Nominating Committee evaluates and recommends nominees for the Board of Directors. In addition, the Governance and Nominating Committee assesses the effectiveness of the Board of Directors and its committees and assists in the development and implementation of the Corporation’s Corporate Governance Guidelines. The Governance and Nominating Committee met eight times during 2006. Walter H. Jones, Jr. (Chairman), Samuel C. King, Jr., Jerry E. McGee, Ellen L. Messinger, and L.D. Warlick, Jr. are the current members of the Governance and Nominating Committee. As determined by the Board of Directors, each of the members of the Governance and Nominating Committee is an independent director in accordance with the independence requirements of the NASDAQ Rules.

 

Nominations for Director

 

The Governance and Nominating Committee identifies and recommends individuals qualified to become members of the Board of Directors and recommends to the Board of Directors director nominees to be presented for shareholder approval at the Annual Meeting of Shareholders and director candidates to fill vacancies on the Board of Directors as they arise. The Governance and Nominating Committee will consider candidates recommended by shareholders for election to the Board of Directors. Our Bylaws set forth the procedures for you to follow in order to nominate persons for election to the Board of Directors. Generally, you may properly bring a nomination before the annual meeting of shareholders in a given year if you provide written notice to the Corporate Secretary at least 90 days, but not more than 120 days, prior to the anniversary date of the prior year’s annual meeting of shareholders. This notice must include certain biographical information relating to the person nominated. You must also inform us of the number of shares of Common Stock you beneficially own. The Governance and Nominating Committee will consider the nomination for the Board of Directors’ slate of nominees for that year. The Bylaws provide a different time frame for submitting nominations if the annual meeting is held more than 30 days before or 60 days after the anniversary date of the prior year’s annual meeting. Finally, the Bylaws set forth under what circumstances you may submit a nomination for director before a special meeting of shareholders and the time frame within which the nomination must be submitted. Unless nominations are presented in accordance with these Bylaw provisions, they will be disregarded and invalid. You may obtain a copy of the Bylaws, upon written request, to First Charter Corporation, Post Office Box 37937, Charlotte, North Carolina, 28237-7937, Attention: Corporate Secretary, and upon payment of $25.00 to cover the costs of reproduction and mailing.

 

The Governance and Nominating Committee reviews the background and qualifications of each director nominee to determine his or her experience, competence and character and assesses such director nominee’s potential contribution to the Board of Directors. It is the policy of the Governance and Nominating Committee to select individuals as director nominees who have recognized personal and professional integrity, who have demonstrated exceptional ability and judgment and who will be most effective, in conjunction with the other nominees to the Board, in collectively serving the long-term interests of the Corporation and its shareholders. Director nominees will be selected by the Governance and Nominating Committee on the basis of their outstanding achievement in their personal careers, broad experience, wisdom, ability to make independent analytical inquiries, understanding of the business environment, specialized knowledge (such as an understanding of accounting, financial, marketing or regulatory matters), willingness to devote adequate time to the duties of the Board of Directors, and

commitment to the Corporation’s communities and shared values. Shareholder nominees will be analyzed by the Governance and Nominating Committee in the same manner as nominees that are nominated by the Governance and Nominating Committee.

 

All nominees for election to the Board of Directors have been recommended by the Governance and Nominating Committee. Except for Ms. Hoover and Messrs. Poelker and Combs, all such nominees are current directors standing for re-election. Ms. Hoover and Messrs. Poelker and Combs, who were appointed to the Board of Directors in 2006, are required to stand for election by the shareholders of the Corporation at the Annual Meeting. Ms. Hoover and Mr. Poelker were identified and recommended by the Chief Executive Officer and Chief Financial Officer of the Corporation, respectively. As previously stated, Mr. Combs was appointed to the Board of Directors in fulfillment of an obligation established in the Corporation’s Agreement and Plan of Merger with GBC.

 

OWNERSHIP OF COMMON STOCK

 

The following table shows, as of February 28, 2007, the number of shares of Common Stock and the percent of outstanding Common Stock beneficially owned by (i) each director and nominee for director of the Corporation, (ii) each executive officer of the Corporation named in the Summary Compensation Table contained elsewhere herein and (iii) all directors and executive officers as a group. Based upon a search of filings made with the Securities and Exchange Commission, no shareholder of the Corporation owns 5 percent or more of our Common Stock.

 

 

 

 

CORPORATE GOVERNANCE MATTERS

 

Director Independence

 

Upon the consideration of the criteria and requirements regarding director independence set forth in the NASDAQ Rules, the Board of Directors has determined that each of the following directors that will serve after the date of the Annual Meeting are “independent directors”: Dr. Black, Mr. Coltrane, Mr. Combs, Ms. Hoover, Mr. Charles A. James, Mr. Jones, Mr. King, Dr. McGee, Ms. Messinger, Mr. Morrison, Mr. Poelker, Mr. Warlick, and Mr. Waters. During its deliberations, the Board of Directors also considered the following de minimis relationships with directors deemed independent under the NASDAQ Rules: (i) Samuel C. King, Jr. is the President of King’s Office Supply, Inc., from which the Corporation purchased office products and furniture during 2006 and (ii) Walter H. Jones, Jr., is a Partner in the law firm of Homesley, Jones, Gaines, Dudley, Childers, McLurkin, Donaldson & Johnson, PLLC, which during 2006 the Corporation engaged from time to time for representation in various matters involving collections and foreclosures. Messrs. Alexander and Felts, who each ceased to be directors during 2006, and Mr. Revels, whose term expires at the Annual Meeting, were independent during their service on the Board of Directors.

 

Code of Business Conduct and Ethics and Corporate Governance Guidelines

 

The Corporation’s Board of Directors previously adopted the “First Charter Corporation Code of Business Conduct and Ethics” (the “Code”), applicable to the directors and employees (including the Chief Executive Officer and the Chief Financial Officer) of the Corporation and its subsidiaries. During 2006, the Board of Directors reaffirmed the adoption of the Code. In addition, in furtherance of our long-standing goal of providing effective corporate governance of our business and affairs for the benefit of shareholders, the Board of Directors previously adopted the “First Charter Corporation Corporate Governance Guidelines” (the “Corporate Governance Guidelines”). A copy of each of the Code and the Corporate Governance Guidelines is available on our website at www.FirstCharter.com under the “Corporate Governance” section.

 

Committee Charters

 

Each of the Audit Committee, the Compensation Committee and the Governance and Nominating Committee operate under written charters that have been approved by the Board of Directors. These charters are available on our website at www.FirstCharter.com under the “Corporate Governance” section.

 

Audit Committee Financial Expert

 

The Board of Directors has determined that one member of the Audit Committee, John S. Poelker, is an audit committee financial expert. Mr. Poelker is “independent” as that term is defined in the NASDAQ Rules.

 

Conflicts of Interest Transactions

 

Pursuant to the Corporation’s Amended and Restated Conflicts of Interest Transactions Policy for Directors and Executive Officers, an executive officer or director, or immediate family members of such persons, who has an actual or possible conflict of interest in a transaction has a duty to disclose to the Audit Committee that interest and describe all material facts concerning the matter before entering into the proposed transaction. The Audit Committee shall review the proposed transaction and determine whether a “conflict of interest transaction” exists and whether such transaction should be approved by the Audit Committee, subject to the approval of the disinterested directors of the Corporation. If the conflict of interest transaction involves a director, simultaneous with such review, the Audit Committee shall disclose the proposed transaction to the Governance and Nominating Committee to facilitate its ongoing monitoring of the independence of the members of the Board of Directors. The Governance and Nominating Committee shall inform the Board of Directors as to its initial assessment of the potential impact of the conflict of interest transaction upon the subject director’s independence. Thereafter, the disinterested members of the Board of Directors shall determine by voting whether the transaction should be approved and validated. On an annual basis, the Corporation’s management discloses to the Audit Committee and the Board of Directors for their review a summary of all previously approved conflict of interest transactions and the amounts paid by the Corporation pursuant to such transactions during each of the two most recently completed fiscal years. If at any time there is proposed to be a material change in the amount or type of the continuing transactions previously approved pursuant to this policy, such change must be approved in advance in the same manner as a new conflict of interest transaction.

 

A “conflicts of interest transaction” is defined as a transaction involving the Corporation in which an executive officer or director has a direct or indirect interest. Under the policy, executive officers and directors will be deemed to have a direct interest if they have or a member of their family has a material financial interest in the transaction. The Corporation believes that Related Person Transactions (as defined below) that are required to be disclosed in the Corporation’s annual proxy statement will constitute “conflicts of interest transactions” and will therefore be subject to the foregoing approval procedures.

 

The term “Related Person Transaction” generally means a transaction, arrangement or relationship (or any series of the same) in which the Corporation (including any of its subsidiaries) was, is or will be a participant

and the amount involved exceeds $120,000, and in which any Related Person had, has or will have a direct or indirect interest. A “Related Person” generally means a director, director nominee or executive officer of the Corporation; a person who is known to be the beneficial owner of more than 5% of any class of the Corporation’s common stock; and any immediate family member of any of the foregoing persons, which means any child, stepchild, parent, stepparent, spouse, sibling, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the director, executive officer, nominee or more than 5% beneficial owner, and any person (other than a tenant or employee) sharing the household of such director, executive officer, nominee or more than 5% beneficial owner.

 

Shareholder Communications

 

You may communicate directly with any member or committee of the Board of Directors or the Chair of any committee by writing to the Board of Directors, or a specific Committee Chair or director at the following address: First Charter Corporation Board of Directors, c/o Corporate Secretary, Post Office Box 37937, Charlotte, North Carolina 28237-7937. Each such communication should specify the applicable addressee. The Board of Directors has instructed the Corporate Secretary to forward these communications to the addressee, and if no specific addressee is listed, to the Chairman of the Board of Directors.

 

Attendance at 2006 Annual Meeting

 

At the 2006 Annual Meeting of Shareholders, 14 members of our Board of Directors were in attendance. We believe that the Annual Meeting is an opportunity for shareholders to communicate directly with our directors. Pursuant to our Corporate Governance Guidelines, directors are encouraged to attend the Annual Meeting of Shareholders.

 

REPORT OF THE AUDIT COMMITTEE

 

The Audit Committee of the Board of Directors is currently composed of six directors and operates under a written charter. The Audit Committee annually reviews and reassesses the adequacy of the Audit Committee Charter. During 2006, the Charter was amended and such amended Charter was adopted by the Board of Directors and is attached hereto as Appendix A.

 

Management is responsible for the Corporation’s internal controls and the financial reporting process. The independent auditors are responsible for performing an audit of the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and issuing a report thereon. The Audit Committee, among other things, is responsible for monitoring and overseeing these processes and is directly responsible for the appointment, compensation, and oversight of the Corporation’s independent auditors.

 

In this context, the Audit Committee has met and held discussions with management and the independent auditors. Management represented to the Audit Committee that the Corporation’s consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America, and the Audit Committee has reviewed and discussed the audited consolidated financial statements with management and the independent auditors. The Audit Committee has discussed with the independent auditors the matters required to be discussed by Statement on Auditing Standards No. 61, as amended (Codification of Statements on Auditing Standards).

 

The Corporation’s independent auditors also provided to the Audit Committee the written disclosures and the letter required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees), and the Audit Committee has discussed with the independent auditors that firm’s independence.

 

Based upon the Audit Committee’s discussions with management and the independent auditors and the Audit Committee’s review of the representations of management and the report of the independent auditors to the Audit Committee, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in the Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2006, filed with the Securities and Exchange Commission.

 

Submitted by the Audit Committee of the Board of Directors:

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

EXECUTIVE COMPENSATION PHILOSOPHY

 

The Corporation’s executive compensation program has been designed as an active management tool that directs and rewards specific results. The primary objective of the executive compensation program is to reinforce the strategic goals and objectives that management and the Board of Directors have developed by directly aligning specific, targeted levels of performance with specific levels of compensation. The impact of performance on pay is intended to be clear, direct and easy to understand.

 

The executive compensation program is founded upon the idea that a strong, performance-oriented compensation program, aligned with the practices of our peers, is a key ingredient in becoming a leading performer relative to organizations of similar size, and is, therefore, in the best interests of shareholders. We also believe that a performance-based compensation program is vital to attracting and retaining highly talented and motivated executives to lead the Corporation.

 

As described elsewhere in this proxy statement, the Compensation Committee of the Board of Directors is responsible for the administration of and overall structure of the Corporation’s executive compensation program. The Compensation Committee is composed entirely of independent, nonmanagement directors.

 

OVERVIEW OF COMPENSATION PROGRAM

 

Beginning in the Fall of 2005, the Corporation’s executive compensation program was completely reviewed and updated to better align the program with our pay for performance philosophy. From a business perspective, one of management’s primary goals was to enhance total return to shareholders. To reinforce this overarching business goal, the Compensation Committee and management sought to tie executive compensation to quantifiable earnings metrics, such as the Corporation’s Operating Earnings Per Share (EPS) and Cash Return on Equity (ROE).

 

Based on a review of our competitors’ business practices and our understanding of the relationship between pay and performance within our Peer Group (defined below), the Compensation Committee made two significant changes to the structure of the executive compensation program that went into effect in 2006:

 

 

Although the Corporation considers the new LTIP and its performance-driven incentives to be a focal point of the redesigned executive compensation program, it is only one element of a comprehensive executive compensation program designed to align pay with performance and to aid in the attraction and retention of

highly qualified executives. Each element of the program is briefly described below along with a summary of its objectives:

 

 

OPERATION OF COMPENSATION COMMITTEE

 

The Compensation Committee is responsible for the overall structure of the Corporation’s executive compensation program. The Committee considers, recommends and oversees the Corporation’s major benefit plans, including incentive compensation plans, and equity-based plans in which Directors, the Corporations’ top level of “executive management” (which consists of the Chief Executive Officer and seven other executive officers), and other employees of the Corporation and its subsidiaries may participate. The executive officers named in the Summary Compensation Table, which consists of the Chief Executive Officer, the Chief Financial Officer, and three other members of executive management, are referred to as “NEOs” or “named executive officers.” The Compensation Committee also approves option grants and restricted stock or other awards, and imposes such limitations, restrictions and

conditions upon those awards as the Committee deems necessary or advisable. The Compensation Committee is composed entirely of independent, nonmanagement directors. Except for the broad-based compensation and benefit programs available to all employees, the Compensation Committee approves all compensation-related decisions for executive management. For more information on the operations of the Compensation Committee, please refer to “Committees of the Board of Directors.”

 

OUTSIDE CONSULTANT

 

In connection with the redesign of the compensation program, the Compensation Committee engaged the Semler Brossy Consulting Group, LLC (Semler Brossy) to serve as the Compensation Committee’s independent executive compensation advisor. Semler Brossy works directly for the Compensation Committee, reporting to the Chairman of the Committee. On issues related to compensation design or comparison of the Corporation’s program to the Peer Group, Semler Brossy typically prepares and presents a written report to the Committee. Generally, Semler Brossy will meet with appropriate members of executive management to assess compensation program design issues and desired business directives, but Semler Brossy will prepare its report and findings independently. Semler Brossy is also charged with providing objective data, consistent with the stated compensation philosophy, on Peer Group compensation programs and provides general advice and counsel to the Committee on ongoing compensation issues that arise. Semler Brossy provides no other services for the Corporation.

 

The role and selection of the outside consultant is reviewed against a set of standards on an annual basis. This review includes feedback from management. Based on this review, Semler Brossy was retained for 2007 as the independent executive compensation advisor to the Compensation Committee.

 

COMPETITIVE BENCHMARKING AND POSITIONING

 

We believe that the compensation practices of our peers provide important context to the Corporation’s executive compensation program. The primary source of peer data for our executive compensation program is a customized Peer Group developed to specifically reflect banks with whom the Corporation competes for talent, banks of similar size and scope to the Corporation and banks that operate with a similar, metropolitan focused branch footprint. Additionally, as a secondary reference point, the Compensation Committee considers data from financial services compensation surveys.

 

As part of the compensation review that began in the Fall of 2005, the Compensation Committee developed a set of criteria that would consistently identify banks most similar to the Corporation in size and scope of operations (the “Peer Group”). Under these criteria, we consider our Peer Group to consist of financial institutions that:

 

 

The Compensation Committee intends to apply these criteria annually, based on completed fiscal year results to update the list of banks that comprise the Peer Group. Based on an historical analysis, we believe that the majority of the competitors in the Peer Group will remain in the Peer Group year over year, with

banks leaving and entering the Peer Group primarily because of acquisition or divestiture activity. For fiscal 2006, the Peer Group was comprised of the following 28 banks:

 

 

In general, the Corporation positions each element of compensation at median of the Peer Group to provide pay opportunities comparable to the marketplace. When the compensation design decisions for 2006 were being made, the Corporation’s performance was assessed as below the median of our Peer Group, measured by one year and three year total shareholder return, earnings per share growth, return on equity and return on assets. The Compensation Committee determined that it was in the best interests of the shareholders to target 2006 compensation near the median level of the Peer Group to ensure the Corporation’s ability to attract and retain the key leadership talent that would ultimately be responsible for improving the Corporation’s performance. For fiscal 2006, as evaluated against the measures established for our Long Term Incentive Plan of Operating EPS and Cash ROE, the Corporation’s performance was at or above the median level of the Peer Group. An independent third party has been engaged to perform reviews of the Corporation’s performance against the Peer Group. This information will be shared with the Compensation Committee on a semi-annual basis.

 

The structure of the Corporation’s executive compensation program coupled with the positioning of each compensation element results in a mix of compensation that is heavily weighted toward variable, at-risk compensation. Approximately 59% of Mr. James’ 2006 compensation opportunity and an average of approximately 57% of the other NEOs’ 2006 compensation opportunity are performance-based, and therefore at risk based on the Corporation’s performance. This ensures that the interests of the NEOs are aligned with those of the Corporation’s shareholders.

 

The Corporation maintains and monitors adherence to desired positioning of its executive compensation program through a combination of periodic reviews, as well as at the time of a new plan introduction or modification and when individual compensation decisions are made. While the Corporation does not make compensation decisions solely based on Peer Group positioning, compensation decisions are evaluated against their impact on the desired positioning.

 

 

ELEMENTS OF COMPENSATION

 

Base Salary

 

For all members of executive management, base salaries are reviewed annually as well as at the time of a promotion or other change in responsibilities. Increases are based on an evaluation of the previous year’s performance of the executive, the relative strategic importance of the position, market conditions and median pay levels within the Peer Group.

 

For 2006, Mr. James received an 8.7% salary increase to $350,000. The new salary improves the positioning of his salary to above the 25th percentile, but below the median pay level. This increase was provided to Mr. James after consideration of the following factors:

 

 

In approving an 8.7% salary increase, the Compensation Committee noted that the Corporation’s earnings and return performance were below desired levels — however, the 25th percentile pay positioning combined with the strategic progress led by Mr. James, supported a larger than typical increase.

 

For 2006, base salaries of the NEOs (excluding the CEO) were reviewed and, on average, increases of 16.3% were provided. These increases are designed to provide base salaries consistent with the median pay levels. These increases include two salary increases related to promotions. During 2006, Mr. Rownd and Mr. Ensor were promoted to new executive roles. Effective on the date of the promotion, Mr. Rownd received an increase of 10.4% and Mr. Ensor received an increase of 24.2%.

 

2006 Base Salary Adjustment

 

 

 

Annual Incentive Plan (AIP)

 

The Corporation’s Annual Incentive Plan (AIP) is a performance-based annual incentive plan that is based on achievement of targeted levels of Operating EPS. It is the belief of management and the Board that successful performance against Operating EPS is consistent with a well-run financial services institution. (Accordingly, the LTIP also uses Operating EPS as a key performance metric and both plans define the term in the same way.) The Corporation believes that Operating EPS better reflects the performance of the Corporation than EPS presented in the Corporation’s financial statements, which is calculated according to generally accepted accounting principles (GAAP EPS), since certain less frequently occurring items are excluded from the Operating EPS calculation. Adjustments are made to GAAP EPS to derive Operating EPS for the following types of items:

 

 

 

Operating EPS is based on fully diluted shares outstanding. For the NEOs in 2006, the AIP payments were based completely on the achievement of Operating EPS targets. For 2007, AIP payments will be based 70% on the achievement of Operating EPS targets and 30% on the achievement of individual goals established in advance by the Compensation Committee, as agreed to by Mr. James on behalf of each member of executive management. The intent of this change is to balance the team-based incentive to achieve targeted corporate performance with an individual accountability performance measure.

 

The Operating EPS targets set for the AIP are the same Operating EPS targets set forth in the annual business plan submitted by executive management to the Board of Directors for their approval. In determining the reasonableness of these annual goals, the Board takes into consideration the following factors:

 

 

In 2006, the Corporation’s Operating EPS goal was targeted at $1.59 per share. Our actual Operating EPS for the year was $1.53, which includes a net impact of the adjustments from GAAP EPS ($1.49 per share) to Operating EPS of $0.04 per share.

 

Commensurate with competitive practices within the Peer Group, 2006 target annual incentives were 50% of base salary for Mr. James and 40% of base salary for other NEOs. Officers may earn between 0% — 100% of their targeted award based on their performance against goals. Based on the payout grid in place for 2006, the Operating EPS of $1.53 resulted in a payout of 40% of the targeted award. Awards to the NEOs under the AIP for performance in 2006 are reflected in column (g) of the 2006 Summary Compensation Table, included under “Compensation of Executive Officers” section below.

 

The Compensation Committee is responsible for reviewing this result and can, in its discretion, adjust an individual dollar award. For 2006, the Compensation Committee determined that there would be no AIP payments for Messrs. James and Caswell. The Committee felt this action was appropriate in light of the Corporation’s late 10-K filing, the previously disclosed internal control weaknesses and accounting and integration issues in connection with the GBC Bancorp, Inc. merger. In the case of Mr. Ensor, since he was a member of executive management for only three months, his payout reflects three months as a member of executive management and nine months under the incentive arrangements in place in his former position.

 

 

After reviewing median compensation levels for similar positions within the Peer Group, the Compensation Committee determined that adjustments should be made to target annual incentive levels for several of the

NEOs in 2007. Based on the review, Mr. James’ target annual incentive was increased from 50% to 65% of base salary and Mr. Caswell’s and Mr. Rownd’s target annual incentive was increased from 40% to 50%. Mr. James’ target, when combined with his base salary, results in his aggregate annual target compensation remaining at a level that is below the median level for chief executive officers of members of the Peer Group; however, over the coming years, the Compensation Committee will continue to evaluate Mr. James’ compensation and expects to continue to move his total compensation package closer to the median of chief executive officer compensation for the Peer Group.

 

Long-Term Incentive Plan (LTIP)

 

Prior to 2006, the Corporation relied on time-based stock options as its primary long-term incentive vehicle. In connection with the compensation program review conducted in 2005, a new LTIP tied to Operating EPS growth, Cash ROE and Net Charge-offs was approved by the Compensation Committee and the Board of Directors early in 2006.

 

For 2006, the Compensation Committee approved the following target levels of long-term awards based on its review of competitive practices: 100% of base salary for Mr. James and 70% of base salary for all other NEOs. Consistent with the renewed emphasis on performance, the new LTIP calls for 70% of this targeted LTIP value to be delivered through performance shares and 30% to be delivered through time-based stock options. We believe this mix is consistent with our pay for performance philosophy. The number of stock options granted was determined by dividing the value of the stock option component of the award by our FAS 123(R) Black-Scholes value as of the date of grant. The number of performance shares granted was determined by dividing the value of the performance share component of the award by the grant-date fair value of $21.91, then adjusting the award to compensate for the value of the dividends that participants will not receive on the award during the performance period. The grant-date fair value of $21.91 represented the closing market price on the date of the grant, less the discounted present value of such dividends.

 

With the introduction of the new LTIP, a gap in the long-term incentive program was created since the performance shares component does not vest for three years. To offset this gap, the target value of the performance share component was increased by 40% in 2006 and 33% in 2007.

 

Equity Award Timing Policy

 

All LTIP equity awards relating to fiscal 2006 performance were granted on March 9, 2006, which was the day of the meeting at which these awards were approved. In addition, these awards were granted during an “Open Trading Window,” defined under the Corporation’s Insider Trading Policy as a time when trading in the Corporation’s common stock is permitted following the announcement of the Corporation’s earnings.

 

Effective for 2007, the Corporation adopted a policy to grant equity awards to Directors, members of executive management, and other officers and employees annually only at such time as when an Open Trading Window is scheduled to occur. This procedure is designed to further the Corporation’s policy that it will not have any program, plan or practice to time or select the grant dates of any equity award in coordination with the Corporation’s release of material non-public information. In the event of a “new hire” or ad hoc grant, the employee will be notified that his or her grant will be recommended to the Compensation Committee at their next meeting and effective the date of the Compensation Committee approval.

 

Stock Options

 

Consistent with competitive practice, stock options are granted with an exercise price at not less than the fair market value on date of grant and vest ratably over five years. Options expire ten years after grant. It is the Compensation Committee’s belief that the members of executive management are in the best position to have a direct positive impact on the Corporation’s stock price and, accordingly, stock options continue to be an element in the incentive compensation package. For the reasons discussed below under the subheading “Other Equity Actions,” stock options have been eliminated for all other employees receiving equity awards and have been replaced by restricted stock awards. The Corporation has a policy that it will not reprice stock options.

 

Performance Shares

 

The performance shares will vest based on achievement of three goals as evaluated over a three-year performance period. It is the Compensation Committee’s intention that, when achieved, these goals taken as a whole are consistent with third quartile performance within the Peer Group. First, Net Charge-offs must remain below 1% during the performance period before any vesting can occur. Second, assuming the Net Charge-off goal has been met, 70% of the shares can vest based on Operating EPS growth assessed against the Peer Group and 30% of the shares can vest based on Cash ROE assessed against pre-established goals. Finally, the total value of the shares received by the participant from the LTIP will be a function of the future value of the stock. The following performance schedules are in place for the 2006 to 2008 and 2007 to 2009 performance period:

 

 

 

Results between threshold and target and target and maximum will be interpolated. In addition, participants will not receive dividends or dividend equivalents on performance shares.

 

Other Equity Compensation Actions

 

In December, 2006 the Compensation Committee approved the acceleration of vesting of 429,968 stock options of which 36,960 were held by non-employee members of the Board of Directors, 55,675 were held by the Corporation’s NEOs and 17,988 by two other members of executive management. The decision to accelerate the vesting of these stock options was due primarily to two reasons. The first reason was the effect of FAS 123(R) which impacts the expense required to be recognized by the Company. The second reason relates to a change in compensation philosophy, whereby stock options will serve as a more limited component of compensation. Beginning in 2006, the Corporation began to use restricted stock as the primary form of compensation for employees other than members of executive management. For 2006, equity compensation for members of executive management consisted of a combination of performance share awards and stock option grants; however, the vesting schedule for the 2006 stock option grants was not accelerated.

 

Supplemental Executive Retirement Plan (SERP)

 

From time to time, the Corporation has provided SERPs to select executives through contractual agreements that guarantee additional retirement benefits beyond those made available through the Corporation’s qualified retirement plan and deferred compensation arrangements. The Corporation’s existing SERPs have been structured as a pre-set, fixed annuity value.

 

Currently, the Corporation provides SERP benefits to two of the NEOs: Mr. James and Mr. Rownd. Mr. James was provided a SERP when he was being recruited to First Charter to replace a benefit that his previous employer provided. Mr. Rownd’s SERP was provided primarily as a retention device and to achieve equity parity with SERPs provided to other members of executive management at that time. Under

the SERPs, upon reaching age 65 and subject to the satisfaction of the vesting requirements, Mr. James is entitled to receive a sum of $785,000 and Mr. Rownd is entitled to receive a sum of $1,205,000. Mr. James and Mr. Rownd were 70% and 50% vested as of December 31, 2006, respectively, and will continue to vest at a rate of 10% each year.

 

Additional details regarding the terms and provisions of the SERPs are described in the Proxy Statement in the section called “Change in Control and Employment Agreements.”

 

Deferred Compensation

 

Executive Management, as well as select members of senior management, are eligible to participate in the Corporation’s Option Plan Trust (“OPT Plan”) which is a non-qualified deferred compensation plan. Under this tax-deferred capital accumulation plan, executives may elect to defer up to 100% of their base salary and cash annual incentive and invest these deferrals in mutual funds. Subject to approval by the Compensation Committee, the plan may provide a restoration contribution for company matching contributions otherwise limited under the broad-based qualified 401(k) plan as a result of Internal Revenue Code restrictions on compensation that can be recognized under qualified plans. Amounts contributed by the Corporation to the account of each of the NEOs under the OPT Plan during 2006 are reflected in the table entitled “Nonqualified Deferred Compensation for 2006” included under “Compensation of Executive Officers” section below.

 

Perquisites and Other Benefits

 

The Corporation provides certain perquisites to executive management where they generally either (i) meet the business needs of the organization, or (ii) provide a level of benefits commensurate with the group insurance plans offered all employees to recognize limitations on wages.

 

The Corporation provides income protection in the event of disability or death under group insurance plans for all employees. These group plans have limitations on income replacement and, as a result, highly compensated employees are not provided proportional income protection. Accordingly, supplemental life and disability coverage are provided by the Corporation to certain members of executive management. For 2006, Messrs. James and Manley received supplemental term life coverage and Messrs. James, Rownd and Manley received disability coverage.

 

Additionally, the Corporation provides Mr. James a whole life insurance policy as a continuation of his plan under prior employment. For 2006, this benefit was grossed up for tax purposes.

 

Company-owned vehicles are provided to certain executive officers to meet the needs of the organization by facilitating business travel and customer relations. The cost of certain golf and social club memberships is covered for executive officers, provided that the club membership provides for a business-use opportunity such as use of the facilities for functions and meetings, and client networking and entertainment. For 2006, these benefits were grossed up for tax purposes. The Compensation Committee has reviewed the Corporation’s policies regarding perquisites and related gross-up payments for executive management and has decided to eliminate gross-up payments related to such perquisites in the future. The Committee further expects to adopt new guidelines related to perquisites going forward.

 

On very limited occasions, spousal travel in connection with a business-related event is also a covered expense. This is limited to events sponsored for the purpose of building customer or employee relationships where the travel is for an extended period of time or extends into the personal time of the executive, or it is expected or customary for the executive to be accompanied by a spouse.

 

Other perquisites such as awarded travel, temporary housing, and moving and relocation costs are provided from time to time, commensurate with the same benefits afforded other employees. The Corporation’s policy has been to gross up for tax purposes certain relocation expenses.

 

Members of executive management generally participate in the Retirement Savings Plan or 401(k) pursuant to which an eligible employee may elect to defer between 1% and 50% of compensation,

and the Corporation contributes quarterly a match of 75 cents for each dollar contributed up to 6% of eligible pay. Additionally, the Corporation may contribute annually (i) a discretionary matching amount based on an EPS target for such year and (ii) a discretionary contribution allocated to eligible employees, including executive officers, based on their eligible compensation. Any and all discretionary contributions are determined by the Board of Directors on an annual basis.

 

Employment Agreements

 

The Corporation currently maintains employment agreements with Messrs. James, Rownd and Caswell, primarily as a means of retention during periods of uncertainty and operational challenge. As part of the employment contracts the executives also agree to be bound by non-compete and non-disclosure provisions. These agreements include provisions for, among other things:

 

 

Additionally, the Corporation has entered into Change in Control arrangements with the following NEOs to provide protection to those executives in the event of their termination related to a change of control. The arrangements provide for a payout of base salary and average bonus for 35 months for Messrs. James, Caswell and Rownd and 24 months for Messrs. Smith and Ensor if, within a year of the change in control, their employment is terminated other than For Cause. The employment agreements eliminate the tax-related ceiling on post-employment compensation under Section 280G of the Internal Revenue Code of 1986, as amended, by providing for a corresponding payment by the Corporation of any taxes imposed by that section.

 

Additional details regarding the terms and provisions of the employment contracts are described in this Proxy Statement in the section called “Employment Agreements, Change in Control and Potential Payments Upon a Change In Control.”

 

SHARE OWNERSHIP GUIDELINES

 

The Board of Directors and the Compensation Committee believe that Directors and executives should have a reasonable and tangible equity position in the Corporation which will further the alignment of interests between these parties and the shareholders. Therefore, during 2006, the Compensation Committee and Board, acting upon the recommendation of the Corporate Governance and Nominating Committee, approved the following share ownership guidelines for both Directors and members of executive management:

 

 

These guidelines are considered by the Board to be modest; however, given the relatively short tenure of the current members of executive management and the relatively light historical reliance on equity-based compensation by the Corporation, the Compensation Committee and the Board believe them to be appropriate and in the best interests of the shareholders. Individuals have three years to achieve these target levels of ownership. Failure to meet these requirements within this timeframe will be taken into consideration when granting future equity awards. Common stock held directly or indirectly (e.g., 401(k) Plan, Deferred Compensation Plan or family members sharing the same household) and restricted stock

subject to time-based vesting count towards the ownership for purposes of these guidelines. Unvested performance shares and unexercised stock options do not count for these purposes. The Compensation Committee expects that it will revisit the share ownership guideline levels from time to time.

 

DEDUCTIBILITY OF COMPENSATION EXPENSES

 

Section 162(m) of the Internal Revenue Code of 1986 generally limits the tax deductibility by the Corporation for compensation paid to the CEO and the other most highly compensated executive officers to $1 million per officer per year, unless it qualifies as “performance-based” compensation. To qualify as “performance-based,” compensation payments must satisfy certain conditions, including limitations on the discretion of the Compensation Committee in determining the amounts of such compensation. It is the Corporation’s current policy that, to the extent possible, compensation paid to its NEOs be deductible under Section 162(m) of the Internal Revenue Code. The Compensation Committee believes that the compensation program and actions taken during 2006 are consistent with this policy.

 

EXECUTIVE COMPENSATION

 

 

 

 

 

 

Narrative to Summary Compensation Table

 

For a discussion and analysis of the Corporation’s compensation program, including a discussion of each element of compensation provided to the NEOs, please refer to the “Compensation Discussion and Analysis” section above.

 

As discussed in the “Compensation Discussion and Analysis” section above, the Corporation has entered into Employment and Change in Control Agreements with certain members of executive management. A discussion of these agreements follows. For additional discussion of the benefits that will be provided to each of the NEOs in the event of their termination or a change in control of the Corporation, please refer to “Potential Payments Upon Termination or Change in Control.”

 

Robert E. James, Jr. Pursuant to an amended and restated employment agreement between the Corporation and Robert E. James, Jr. effective December 19, 2001, Mr. James is employed by the Corporation as President and Chief Executive Officer for a rolling thirty-six month term which, unless terminated earlier, automatically extends on the last day of each successive month thereafter, with the last such possible thirty-six month term expiring on October 31, 2015. Under the terms of the agreement, Mr. James will receive an annual base salary of at least $196,000 per year, plus benefits, and may be entitled to receive annual bonus compensation from one or more arrangements including but not limited to the Annual Incentive Plan. In addition, Mr. James has certain other rights in connection with a “change in control” as discussed below.

Charles A. Caswell.  Pursuant to an employment agreement between the Corporation and Charles A. Caswell dated April 13, 2005, and retroactively effective to March 17, 2005, Mr. Caswell is employed by the Corporation as Executive Vice President, Chief Financial Officer and Treasurer for a rolling thirty-six month term which, unless terminated earlier, automatically extends on the last day of each successive month thereafter, with the last such possible thirty-six month term to expire on June 27, 2027. Under the terms of the agreement, Mr. Caswell, will initially receive a base salary of $225,000 per year, plus benefits, and may be entitled to receive annual bonus compensation from one or more arrangements including but not limited to the Annual Incentive Plan. In addition, Mr. Caswell has certain other rights in connection with a “change in control” as discussed below.

 

Stephen M. Rownd.  Pursuant to an amended and restated employment agreement between the Corporation and Stephen M. Rownd effective December 19, 2001, Mr. Rownd is employed by the Corporation as Executive Vice President for a rolling thirty-six month term which, unless terminated earlier, automatically extends on the last day of each successive month thereafter, with the last such possible thirty-six month term expiring on May 31, 2024. Under the terms of the agreement, Mr. Rownd will receive an annual base salary of at least $183,600 per year, plus benefits, and may be entitled to receive annual bonus compensation from one or more arrangements including but not limited to the Annual Incentive Plan. In addition, Mr. Rownd has certain other rights in connection with a “change in control” as discussed below.

 

The employment agreements for Mr. James, Mr. Caswell and Mr. Rownd also provide that under certain circumstances upon leaving the employment of the Corporation, the NEO may not, within the “restricted territory” and for a period of two years after termination of employment, engage directly or indirectly in the banking, financial services or any other business in which the Corporation and its subsidiaries are engaged. The term “restricted territory” means: (1) the geographic area encompassing a twenty-five (25) mile radius of Charlotte, North Carolina; and/or (2) any Metropolitan Statistical Area (as defined by the United States Department of Commerce) from which First Charter generated at least ten percent (10%) of its gross annual revenue during the last two calendar years before the end of the executive’s employment with First Charter. Additionally, the employment agreements prohibit during the life of the agreement and for three years afterwards, the solicitation or inducement of any of the Corporation’s employees to terminate their employment with the Corporation and join any business activity with which the executive is or expects to be directly or indirectly associated or employed.

 

Change in Control Provisions.  The employment agreements between the Corporation and Messrs. James, Caswell and Rownd contain provisions relating to a change in control of the Corporation. In addition, Messrs. J. Scott Ensor and Cecil O. Smith, Jr. are parties to change in control agreements with the Corporation, dated November 6, 2006 and April 13, 2005, respectively. The specific events that constitute a change in control of the Corporation are discussed below, under “Potential Payments Upon Termination or Change in Control.”

Grants of Plan-Based Awards for 2006

 

 

Outstanding Equity Awards at Fiscal Year-End for 2006