UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

SCHEDULE 14A

(RULE 14a-101)

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:

 

 

FINANCIAL INSTITUTIONS, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DEAR SHAREHOLDERS:

 

The Annual Meeting of Shareholders of Financial Institutions, Inc. will be held at the Company’s offices at 220 Liberty Street, Warsaw, New York 14569 on Wednesday, May 6, 2009, at 10:00 a.m. for the following purposes:

 

1. Election of Directors.  To elect three Directors, each to serve a three-year term;

 

 

The Board of Directors has fixed the close of business of March 16, 2009 as the record date for the determination of shareholders entitled to notice of and to vote at the meeting.

 

It is important that your shares be represented and voted at the Annual Meeting whether or not you plan to attend. Accordingly, we request you vote at your earliest convenience. You may vote by mail, telephone or Internet. Further instructions are contained on the enclosed proxy ballot card.

 

Thank you for your cooperation and support.

 

On behalf of the Board of Directors,

 

 

 

April 1, 2009

 

FINANCIAL INSTITUTIONS, INC.

 

Table of Contents

 

 

This Proxy Statement is furnished in connection with solicitation of proxies on behalf of the Board of Directors of Financial Institutions, Inc. (“FII” or the “Company”) for the Annual Meeting of Shareholders of FII to be held at 10:00 am on May 6, 2009 at the Company’s principal executive office.

 

The principal executive office of FII is located at 220 Liberty Street, Warsaw, New York 14569. The main telephone number for FII is (585) 786-1100.

 

Under rules recently adopted by the Securities and Exchange Commission, proxy materials and the Company’s Annual Report to Shareholders are now being furnished on the Internet in addition to the paper copies of the materials being mailed to shareholders. This material is available at http://www.fiiwarsaw.com.

 

The close of business of March 16, 2009 has been fixed as the record date for determination of the shareholders entitled to notice of, and to vote at, the meeting. On that date there were outstanding and entitled to vote 10,805,319 shares of common stock, each of which is entitled to one vote on each matter at the meeting. The approximate date on which this Proxy Statement and the enclosed proxy card are being sent to shareholders is April 1, 2009.

 

Shareholders of record may vote by telephone, via the Internet or by mail. The toll-free telephone number and Internet web site are listed on the enclosed proxy. If you vote by telephone or via the Internet you do not need to return your proxy card. If you choose to vote by mail, please mark the ballot boxes, date and sign the proxy card, and then return it in the enclosed envelope (no postage is necessary if being mailed within the United States). If your shares are held in the name of a bank, broker or other holder of record, you will receive instructions from the holder of record that you must follow in order for your shares to be voted. Each proxy submitted will be voted at the meeting in accordance with the choices specified thereon and, if no choices are specified, will be voted for the election of Directors as set forth in this proxy statement and in accordance with the judgment of the persons named in the proxy with respect to any other matters which may come before the meeting, including without limitation matters raised in compliance with FII’s by-laws, which require, among other things, notice to FII at least 60 days prior to the meeting date. A shareholder giving a proxy has the right to revoke it at any time before it has been voted by (i) giving written notice to that effect to the FII Corporate Secretary, (ii) executing and delivering a proxy bearing a later date which is voted at the meeting, or (iii) attending and voting in person at the meeting.

 

 

Our Board of Directors is divided into three classes, one of which is elected at each Annual Meeting for a term of three years and until their successors have been elected and qualified. The Board of Directors has nominated three persons for election as Directors for the terms indicated in the following table. The Board of Directors believes that the nominees will be available and able to serve as Directors, but, if for any reason any of them should not be, the persons named in the proxy may exercise discretionary authority to vote for a substitute proposed by the Board of Directors. The holders of a majority of the outstanding shares of common stock are required to be present in person or to be represented by proxy at the meeting in order to constitute a quorum for transaction of business. Directors are elected by a plurality of the votes cast. Proxies indicating abstentions and broker non-votes are counted as present for quorum purposes but are not counted for or against the election of Directors. Our By-laws govern the methods for counting votes and vest this responsibility in the Inspectors of Election appointed to perform this function.

 

The Board of Directors currently consists of twelve members. John R. Tyler, Jr., whose term expires in 2009, has elected to retire as a director and is not standing for re-election. Three Directors are nominated for re-

election. Effective at the Annual Organizational Meeting following the Annual Shareholders Meeting the Board size will be fixed at eleven members. The nominees and information about them are listed in the following table:

 

 

Vote Required.

 

The Board of Directors unanimously recommends that the shareholders elect the nominees, Karl V. Anderson, Jr., Erland E. Kailbourne and Robert N. Latella, and, accordingly, recommends that you vote FOR ALL NOMINEES.

 

 

Based on recommendations made by the Executive, Nominating and Governance Committee, the Board of Directors has determined that all current directors are “independent” under NASDAQ rules, except Peter G. Humphrey, the President and Chief Executive Officer. Relationships described in the section titled “Certain Relationships and Related Party Transactions” were taken into consideration when determining this status.

In 2008, the Board of Directors held fourteen meetings. All Directors attended more than 75% of the Board meetings and the meetings of Committees on which they serve. There is no required attendance policy with respect to the Annual Meeting of Shareholders however all of the directors did attend the 2008 Annual Meeting.

 

The Board of Directors has established the following three standing committees: Audit; Management Development and Compensation; and Executive, Nominating and Governance. All the committees function under written charters that outline the respective authority, membership, meetings, duties and responsibilities. These committee charters may be viewed by accessing the Investor Relations tab on the FII website (http://www.fiiwarsaw.com). The Company has a written Code of Business Conduct and Ethics policy to assist its Directors, officers, and employees in adhering to their ethical and legal responsibilities. The current version of the Code of Business Conduct & Ethics policy may also be viewed by accessing the Investor Relations tab on the FII website under the Corporate Overview Governance Documents section (http://www.fiiwarsaw.com).

 

The Board of Directors of FII also serves as the Board of Directors of its wholly-owned subsidiary, Five Star Bank, and the compensation, audit and governance functions of the Five Star Bank Board are delegated to the appropriate committees of the FII Board.

 

The Audit Committee reviews the general scope of the audit conducted by our independent auditors and matters relating to our financial reporting, internal control systems and credit quality. In performing its function, the Audit Committee meets separately with representatives of the independent auditors, internal auditors and senior management. In 2008, the Audit Committee held nine meetings. The Audit Committee members are Barton P. Dambra, Chairman, John R. Tyler, Jr., James L. Robinson, and Karl V. Anderson, Jr. Mr. Dambra is the committee’s “audit committee financial expert”. All committee members are “independent” as defined in Securities and Exchange Commission and NASDAQ rules applicable to audit committees.

 

The Management Development and Compensation (“MD&C”) Committee of the Board is responsible for establishing the performance goals and objectives, evaluating the performance, and evaluating and approving all components of compensation for the Company’s CEO. The Committee is responsible for oversight of performance, compensation, benefit plans, and succession plans for senior and executive management. The MD&C Committee also reviews and makes recommendations to the full Board with regard to compensation of Directors. All committee members are “independent” under NASDAQ rules. The Management Development and Compensation Committee members are Susan R. Holliday, Chair, Samuel M. Gullo, John E. Benjamin, and Thomas P. Connolly. In 2008, the Management Development and Compensation Committee held seven meetings.

 

The Executive, Nominating and Governance Committee is charged with assisting the Board of Directors with strategic planning, in identifying qualified individuals to become Directors, determining membership on Board committees and addressing corporate governance issues. The Committee members are John R. Tyler, Jr., Chairman, James H. Wyckoff, Robert N. Latella, Samuel M. Gullo, Susan R. Holliday and John E. Benjamin. All committee members are considered “independent” under NASDAQ rules. In 2008, the Executive, Nominating and Governance Committee held five meetings. The Executive, Nominating and Governance Committee will consider nominations made by shareholders that are timely received pursuant to our By-laws. The consideration process will include, but not be limited to, determining (i) whether the nominee would be “independent”, and (ii) whether the nominee fits the Board’s then current needs for diversity, geographic distribution and professional expertise. Written nominations should be directed to our Director of Human Resources. The Executive, Nominating and Governance Committee will evaluate all nominees on the same basis, provided that current Directors may be evaluated solely on the basis of their record of performance as an FII Director.

 

In December 2008 the Board established an Office of the Chairman, consisting of the Chairman of the Board and a new position, the Vice Chairman. Currently Erland E. Kailbourne is the Chairman of the Board. A current Director is expected to be named to the Vice Chairman position in the first quarter of 2009 with an implementing effective date of the Annual Organizational Meeting in May 2009.

 

The Audit Committee of the Company assists the Board of Directors in its general oversight of the Company’s financial reporting process, internal controls and audit functions. The Audit Committee is comprised of “independent members”, as defined in Securities and Exchange Commission rules, including a “financial expert”, as defined by the NASDAQ rules, and operates under a written charter adopted by the Board of Directors. The Committee reviews and assesses the adequacy of its charter on an annual basis.

 

Management is responsible for the Company’s internal controls and financial reporting process. The Company’s independent registered public accounting firm, KPMG LLP (“KPMG”), is responsible for performing an independent audit of the Company’s consolidated financial statements and the effectiveness of the Company’s internal controls over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States) and to issue reports thereon. The Audit Committee’s responsibility is to monitor and oversee the financial reporting and audit processes.

 

In connection with these responsibilities, the Company’s Audit Committee met with management and the independent accountants to review and discuss the Company’s December 31, 2008 consolidated financial statements. The Audit Committee also discussed with the independent accountants matters requiring communications. The Audit Committee received written disclosures from the independent accountants required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and considered the compatibility of non-audit services with KPMG’s independence.

 

 

Fees paid or payable to KPMG for professional services rendered in connection with the audit of the Company’s consolidated financial statements included in the Company’s Form 10-K, audit of the effectiveness of the Company’s internal controls over financial reporting, and the limited reviews of the interim consolidated financial statements included in the Company’s Forms 10-Q were $510,600 for fiscal year ended December 31, 2008 and $433,000 for fiscal year ended December 31, 2007.

 

 

Audit related fees consist of services rendered in connection with the audits of the Company’s broker-dealer subsidiary’s financial statements and regulatory compliance procedures. These fees were $30,000 for fiscal year ended December 31, 2008 and $24,200 for fiscal year ended December 31, 2007.

 

Tax Fees

 

Aggregate fees for tax compliance and advisory services for the fiscal year ended December 31, 2008 were $40,000 and $38,880 for the fiscal year ended December 31, 2007.

 

All Other Fees

 

No additional fees other than those reported as audit fees, audit related fees and tax fees were paid or payable to KPMG for the fiscal years ended December 31, 2008 and December 31, 2007.

 

Procedures have been adopted that require Audit Committee pre-approval of all permissible services to be performed by the independent accountant, including the fees and other compensation to be paid, except that certain routine additional professional services not to exceed $10,000 per quarter may be performed at the request of the Company without pre-approval. The additional professional services include tax assistance,

research and compliance, assistance in research of accounting literature, and assistance in due diligence activities. A listing of the additional services provided to the Company each quarter, if any, is provided to the Company’s Audit Committee at the first scheduled meeting after the end of the quarter.

 

Based upon the Audit Committee’s discussions with management and the independent accountants, and its review of the information described above, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008, to be filed with the Securities and Exchange Commission.

 

THE AUDIT COMMITTEE

Barton P. Dambra, Chairman

John R. Tyler, Jr.

Karl V. Anderson, Jr.

James L. Robinson

 

KPMG LLP has served as the independent auditors of the Company since 1995. Representatives of KPMG LLP are expected to be present at the Annual Meeting. They will be given an opportunity to make a statement if they desire to do so and will be available to respond to appropriate questions.

 

The Management Development and Compensation Committee (“the Committee”) of the Board is responsible for establishing the performance goals and objectives, evaluating the performance, and evaluating and approving all components of compensation for the Company’s CEO. The Committee is responsible for oversight of performance, compensation, benefit plans, and succession plans for senior and executive management. The Committee also reviews and makes recommendations to the full Board with regard to compensation of Directors. All Committee members are “independent” under NASDAQ rules.

 

The Committee’s Charter calls for it to meet at least three times annually, or more frequently as circumstances warrant. The Committee met seven times during 2008.

 

The Company’s philosophy for executive officer compensation is to align pay with performance, while at the same time providing competitive compensation that allows the Company to retain, attract and motivate executives to achieve the short and long-term objectives of the Company. The Committee believes that executive compensation should be directly linked to continuous improvements in corporate performance.

 

The Committee reviews and approves all compensation decisions for the executive officers named in the Summary Compensation Table which follows, and approves equity awards to all officers of the Company including the Chief Executive Officer (CEO). Decisions regarding the non-equity compensation of other senior executive officers are made by the CEO. The Chairman of the Board and the CEO annually review the performance of each senior executive officer, other than the CEO, whose performance is reviewed by the Committee. The conclusions reached and recommendations based on these reviews, with respect to salary adjustments and annual cash incentive amounts, are presented to the Committee. The Committee has final discretion over all compensation of the Company’s senior executive officers, which includes the named executive officers.

 

The Committee reviews compensation practices of other banking organizations of like size and structure in order to assess our competitiveness. The Company subscribes to Equilar, Inc.’s on-line database of executive and director compensation, which is drawn directly from SEC filings. In 2007, the Committee used this database to benchmark the Company’s executive compensation.

 

The following peer group of publicly traded banks, with assets of $1 billion — $3.5 billion, was approved by the Committee as appropriate for the compensation analysis: Community Banks, Inc./PA, S&T Bancorp, Inc., Sun Bancorp, Inc./NJ, Harleysville National Corp., KNBT Bancorp, Inc., Independent Bank Corp., Yardville National Bancorp, Lakeland Bancorp, Inc., Tompkins Trustco, Inc., Univest Corp. of PA, Peoples Bancorp, Inc., Omega Financial Corp./PA, State Bancorp, Inc., Arrow Financial Corp. Suffolk Bancorp, Alliance Financial Corp., Canandaigua National Corp., First National Community Bancorp, Inc., Citizens & Northern Corp., Camco Financial Corp., ACNB Corp.

With the addition of a performance-based equity incentive plan in January 2008, total compensation for Company executives was determined to be competitive with this peer group of publicly traded banks. No benchmarking was conducted in 2008.

 

The principal components of our executive compensation program are:

 

1. Base salary;

 

2. Annual incentive awards; and

 

3. Performance-based equity incentives.

 

It is the Committee’s philosophy to compensate the Company’s executive officers competitively. Base salaries are determined annually based on the scope and performance of the executives’ responsibilities and the experience, skills and knowledge required for the position, taking into account compensation paid by competitive financial services organizations for similar positions. Generally, the Committee believes that executive base salaries should be targeted near the median of the range of salaries for executives in similar positions and with similar responsibilities. The Committee also recognizes that, in some circumstances, it may be necessary to provide compensation at above-market levels. These circumstances include the need to retain or attract key individuals, or to recognize roles that were larger in scope or accountability than comparable market positions.

 

In an effort to control overall salary costs, Mr. Humphrey did not receive a salary increase for 2008 or 2009. Messrs Miller and Rudgers did not receive a salary increase for 2009, as compared to 1.5% and 1.9% for 2008, respectively. Messrs. Witkowski and Birmingham received merit increases of 2% and 2.7%, respectively, for 2009.

 

Executive incentive compensation is based on a pay-for-performance philosophy, which emphasizes performance targets that correlate with Company financial performance, so a portion of our executives’ annual and long-term compensation is at risk. The percentage of compensation at risk increases as the executive level rises. This provides additional upside potential and downside risk for more senior executives, recognizing that these executives have greater influence on the performance of the Company.

 

The Annual Management Incentive Plan is a cash incentive designed to reward employees who do not participate in any direct sales incentive plan. The Annual Incentive Plan is intended to compensate employees for the Company’s achievement of financial goals at corporate and business unit levels and for achieving measurable individual annual performance objectives. The 2008 annual incentive plan awards started at 90% of goal and were capped at an achievement level of 120% of goal. For 2008, the Committee chose earnings per share (“EPS”) as the corporate performance measurement and set the target at $1.24 per common share. Incentive awards were also subject to an adjustment factor based on individual-specific performance goals.

 

For 2008, the target incentives for executives ranged from 30% to 50% of base salary, depending on the executive officer’s position. The amount of an executive’s actual annual incentive award, in relation to the executive’s target opportunity, was based on the Company’s performance versus the EPS target and the executive’s individual performance. The individual performance component of the annual incentive was based on measures of performance relevant to the particular individual’s job responsibilities. The target incentive was subject to application of an individual adjustment factor. In determining achievement of the target incentive, the Company’s 2008 reported EPS was $(2.56). Accordingly, no annual incentive award was paid to Messrs. Humphrey, Rudgers, and Miller. Messrs. Witkowski and Birmingham also received no award under the Annual

Management Incentive Plan. However, in order to recognize the overall performance of their respective functional areas of responsibility in 2008, each was paid a special bonus.

 

The 2009 Annual Incentive Plan will again use EPS as the corporate performance measure for incentive payments to the named executive officers. At least 90% of the Company’s EPS goal must be achieved in order for that portion of the incentive attributable to the EPS goal to be earned.

 

Long-term incentives are important components of our compensation program. Two types of long-term equity-based incentive awards may be granted to executive officers. The objectives of the program are to retain executives, align executives’ financial interests with the interests of the shareholders, and reward the achievement of the Company’s long-term goals.

 

Non-Qualified Stock Options.  Options are granted at an exercise price equal to the price as of close of business on the date of the grant. Option grants vest 25% on the first anniversary of the date of grant and an additional 25% of shares vest on each of the second, third, and fourth anniversaries of the date of grant, provided the employee is still employed by the Company. Options expire not more than ten years from the date of grant.

 

Restricted Stock.  Restricted stock is used to incent the named executive officers and certain other key executives. The value of each share is determined as of the close of business on the date of the grant. The executive is entitled to receive dividends with respect to unvested shares.

 

Timing of Grants.  Stock options and restricted stock grants are approved at regularly scheduled predetermined meetings of the MD&C Committee. The number of restricted stock grants awarded to named executive officers in 2008 was based on their positions and relative responsibilities and did not take into consideration the executive’s shareholdings or previous awards. No stock options were awarded to named executive officers in 2008.

 

In January 2008, the MD&C Committee approved a revised restricted stock agreement, which provides for an award of restricted shares that vest based on achievement of three Company performance targets and satisfaction of service requirements. If the participant ceases to be employed by the Company before the shares vest under the service vesting schedule, the shares are immediately forfeited, except as provided in the Management Stock Incentive Plan. 50% of the restricted shares earned will vest 24 months from the grant date, and 50% vest 36 months from the grant date.

 

For 2008, the performance targets were earnings per share, net charge offs, and efficiency ratio, weighted 60%, 20%, and 20%, respectively. Subject to the service requirements, each participant could earn between 92% and 100% of the restricted shares if performance targets between 95% and 103% of the Company goals were achieved. If a performance target was not at least 95% satisfied, the shares associated with that target were forfeited.

For 2008, only partial stock awards were made because the Company did not achieve the EPS and net charge-off goals. The Company’s 2008 efficiency ratio target was met therefore, 20% of the restricted award was earned. Restricted stock awards made to executive officers are shown in the Outstanding Equity Awards Table. For 2009, a qualitative “gateway” performance goal must be attained before any restricted stock awards are considered. The 2009 plan will once again use performance targets of earnings per share, efficiency ratio and net charge offs to determine actual awards.

 

 

 

To directly align the interests of executive officers with the interests of the shareholders, the Committee requires that each named executive officer maintain a minimum ownership interest in the Company, which varies depending upon the executive’s position. The CEO is required to own a number of shares at least equal in value to his base salary, while the other named executive officers are required to own a number of shares with a value of at least $50,000. Executives are required to satisfy their stock ownership requirement within five years of the effective date of the plan, or December 31, 2010, or within five years beginning in January following the year they become subject to the ownership requirement. Until this requirement is satisfied, executives are required to retain at least 75% of the net shares acquired through the Company’s Management Stock Incentive Plan. Once achieved, ownership of the required shares must be maintained for as long as the individual is subject to the requirements.

 

401(k) Plan

 

The Company maintains a 401(k) Plan for the benefit of our employees who have attained the age of 201/2, including our named executive officers. The Company’s plan provides for a matching Company contribution equal to the sum of 100% of the amount of the employee’s salary reductions that are not in excess of 3% of compensation, plus 50% of the amount of salary reductions in excess of 3%, but not more than 6% of compensation, and also allows for additional Company contributions. Participating employees may make pre-tax contributions of up to 100% of their compensation up to the current Internal Revenue Service limits. Participants may authorize up to 25% of their 401(k) account balance to be invested in Company common stock.

Health and Welfare Benefits

 

Eligible employees, including our named executive officers, may participate in our health and welfare benefit programs, including medical, dental, vision coverage, disability and life insurance.

 

Perquisites and other Personal Benefits

 

The Company provides named executive officers and other senior management officers with perquisites that the Company and the Committee believe are reasonable and consistent with the Company’s overall compensation program and enhance the Company’s ability to attract and retain employees for key positions. The named executive officers are provided use of Company owned vehicles and memberships in various clubs and organizations, which provide opportunities for business development activities and demonstrate the Company’s philosophy of community involvement in the markets in which we do business.

 

Material Terms and Conditions

 

The Company sponsors a Defined Benefit Pension Plan covering substantially all employees hired prior to January 1, 2007. Benefits are based on years of service and the employee’s average W-2 compensation during the highest five consecutive years of employment affording the highest such average. The plan provides for 100% vesting after five years of qualified service. The Plan was closed to new Participants effective December 31, 2006.

 

A Participant’s Normal Retirement Benefit is an annual pension benefit commencing on his Normal Retirement Date. Normal Retirement Age for participants who first participated in the plan prior to January 1, 2004, is age 62 with ten years of vesting service, as defined in the plan. Normal Retirement Age is age 65 for any participant who first participates in the plan on or after January 1, 2004. Basic benefits are determined by formulas that recognize benefit service accrued prior to January 1, 2004 and service accrued on or after January 1, 2004.

The following table provides information regarding the present value of the accumulated benefit and years of credited service for the named executive officers under the Company’s pension plan:

 

 

Executives Eligible for Early Retirement:

 

The following named executives are eligible for early retirement:

 

Ronald A. Miller
James T. Rudgers

 

Participants are eligible for early retirement upon attaining age 55. Early retirement benefits are reduced by formulas that recognize the participant’s date of plan participation, the date on which the participant becomes vested, and employment to age 55.

 

As part of the Company’s management succession planning, the Committee entered into voluntary retirement agreements with James T. Rudgers, Executive Vice President and Chief of Community Banking, and Ronald A. Miller, Executive Vice President and Chief Financial Officer, on September 24, 2008. Key elements of the agreements approved by the Committee are as follows:

 

Mr. Rudgers will retire effective June 30, 2009. The Company will make one hundred and twenty (120) equal monthly payments to Mr. Rudgers of $6,250, less required deductions and withholdings, beginning with the first regular pay period of January 2010. Mr. Rudgers’ participation in Company non-vested fringe benefits will cease effective on the date of his retirement and he will be subject to a covenant not to compete. In addition, Mr. Rudgers will provide consulting services to the Company’s Board of Directors for a two-year period beginning July 1, 2009. For these services, the Company will make twenty-four (24) equal monthly payments to Mr. Rudgers of $4,166.66.

Mr. Miller will retire effective March 31, 2010. The Company will make one hundred and twenty (120) equal monthly payments to Mr. Miller of $5,500, less required deductions and withholdings, beginning with the first regular pay period of October 2010. Mr. Miller’s participation in Company non-vested fringe benefits shall cease effective on the date of his retirement.

 

The Company is evaluating the impact of recent legislative restrictions on executives of TARP participants, which may impact these agreements.

 

None of our named executive officers currently participate in a nonqualified deferred cash or deferred compensation plan.

 

Deductibility of Executive Compensation

 

As part of its role, the Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1,000,000 that is paid to certain individuals. The Company believes that compensation paid is fully deductible for federal income tax purposes. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) “Share-Based Payment”. Accordingly, compensation expense, for awards granted after the adoption date, is recognized over the requisite service period of the award. In addition, as a condition to participate in the U.S. Treasury’s Capital Purchase Program, no deduction will be claimed for remuneration for federal income tax purposes in excess of $500,000 for each senior executive officer of the Company.

 

 

The MD&C Committee of the Company’s Board of Directors has reviewed and discussed the Compensation Discussion and Analysis with management and, based on such review and discussions, the MD&C Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement. The MD&C Committee certifies that it has completed the reviews of executive compensation arrangements required by the rules promulgated under Section 111(b)(2)(A) of the Emergency Economic Stabilization Act of 2008, Division A of Public Law 110-343.

 

The Management Development & Compensation Committee

 

Susan R. Holliday, Chair

John E. Benjamin

Thomas P. Connolly

Samuel M. Gullo

Effect of the American Recovery and Reinvestment Act of 2009

 

The Compensation Discussion and Analysis set forth above was prepared based on various rules, regulations and laws applicable to the Company as of February 11, 2009, the date the Management Development and Compensation Committee approved the Management Development and Compensation Committee Report. Subsequent to the approval of the Management Development and Compensation Committee Report, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was enacted on February 17, 2009. This Act contains expansive new restrictions on executive compensation for CPP participants. These new legislative and regulatory restrictions may impact the executive compensation decisions by the Management Development and Compensation Committee going forward until such time the Company no longer is subject to the restrictions.

 

The following table contains information concerning the compensation earned by the Company’s Named Executive Officers in the fiscal years ended December 31, 2008, 2007 and 2006.

COMPENSATION OF NAMED EXECUTIVE OFFICERS
Summary Compensation Table

																											Non-equity					Change in
																	Stock					Option					Incentive Plan					Pension					All Other
							Salary					Bonus					Awards					Awards					Compensation					Value					Compensation					Total
Name & Position		Year					($)					($)					($)(1)					($)(1)					($)(3)					($)					($)(4)					($)
Peter G. Humphrey			2008					398,169					—					64,128					83,362					—					159,816					74,183					779,658
President & Chief			2007					398,169					—					39,451					95,535					198,233					59,852					75,381					866,621
Executive Officer FII and Five			2006					388,457					—					11,958					67,527					415,593					51,924					65,543					1,001,002
Star Bank
Ronald A. Miller			2008					191,950					—					5,040	(2)				8,151					—					103,546					24,521					333,208
Executive Vice			2007					189,113					—					9,956					26,192					72,428					54,688					22,232					374,609
President & Chief			2006					184,500					—					2,847					30,486					154,368					49,534					15,894					437,629
Financial Officer FII and Five Star Bank
James T. Rudgers			2008					267,805					—					—	(2)				13,205					—					36,634					30,446					348,090
Executive Vice			2007					262,805					—					21,602					22,579					103,527					20,370					22,965					453,848
President & Chief of			2006					255,150					—					5,694					40,398					218,842					17,259					16,271					553,614
Community Banking FII and Five Star Bank
John J. Witkowski(5)			2008					218,484					58,477					23,988					16,531					—					16,899					24,010					358,389
Senior Vice President & Retail Banking Executive/ Regional President Five Star Bank
Martin K. Birmingham(5)			2008					195,732					52,479					23,988					13,561					—					14,085					26,365					326,210
Senior Vice President & Commercial Banking Executive/Regional President Five Star Bank

 

 

All Other Compensation

			Use of										401(k)					Split Dollar
			Company					Club					Matching					Insurance
			Vehicle					Memberships					Contribution					Premium					Other					Total
Executive Name			($)					($)					($)					($)					($)(1)					($)
Peter G. Humphrey				2,571					1,210					10,350					50,831					9,221					74,183
Ronald A. Miller				10,497					—					10,350					—					3,674					24,521
James T. Rudgers				4,050					10,776					10,350					—					5,270					30,446
John J. Witkowski				4,228					5,807					10,350					—					3,625					24,010
Martin K. Birmingham				1,109					11,281					10,350					—					3,625					26,365

 

The following table includes certain information with respect to the value of all unexercised options and non-vested restricted stock awards granted under the 1999 Management Stock Incentive Plan.

 

 

Outstanding Equity Awards at Fiscal Year-End Table

			Option awards																														Stock awards
																																																			Equity Incentive
																																																			Plan Awards:
																																																			Market
																																													Equity incentive						or Payout
															Equity Incentive																														Plan Awards:						Value of
															Plan Awards:																								Market						Number						Unearned
			Number of						Number of						Number of																		Number of						Value of						of Unearned						Shares, Units
			Securities						Securities						Securities																		Shares or						Shares or						Shares, Units						or Other
			Underlying						Underlying						Underlying						Option												Units of						Units of						or Other						Rights
			Unexercised						Unexercised						Unexercised						Exercise						Option						Stock that						Stock that						Rights						that Have
			Options (#)						Options (#)						Unearned						Price						Expiration						Have not						Have not						that Have						not Vested
Executive Name			Exercisable						Unexercisable						Options (#)						($/sh)						Date						Vested (#)						Vested ($)						not Vested (#)						($)
Peter G. Humphrey				94,000						—						—						14.00						06/25/09						8,400	(2)					120,540						6,000						86,100
				14,083						—						—						23.80						02/04/14
				12,494						4,165	(1)					—						21.05						02/23/15
				4,250						4,250	(1)					—						19.75						07/26/16
				2,125						6,375	(1)					—						19.41						07/25/17
Ronald A. Miller				3,750						—						—						13.75						08/25/10						2,200	(2)					31,570						5,500						78,925
				3,867						—						—						14.13						01/30/11
				2,200						—						—						25.33						01/30/12
				2,600						—						—						22.51						02/18/13
				3,490						—						—						23.80						02/04/14
				3,303						1,110	(1)					—						21.05						02/23/15
				824						826	(1)					—						19.75						07/26/16
				375						1,125	(1)					—						19.41						07/25/17
James T. Rudgers				6,060						2,021	(1)					—						21.05						02/23/15						5,000	(2)					71,750						5,500						78,925
				1,750						1,750	(1)					—						19.75						07/26/16
				375						1,125	(1)					—						19.41						07/25/17
John J. Witkowski				5,587						1,863	(1)					—						17.80						09/07/15						2,500	(2)					35,875						5,000						71,750
				824						826	(1)					—						19.75						07/26/16
				375						1,125	(1)					—						19.41						07/25/17
Martin K. Birmingham				3,447						1,149	(1)					—						20.39						03/16/15						2,500	(2)					35,875						5,000						71,750
				824						826	(1)					—						19.75						07/26/16
				375						1,125	(1)					—						19.41						07/25/17

 

 

 

 

 

In fiscal 2008, Mr. Miller acquired 1,477 shares of Company stock by exercising stock options. No restricted stock awards have vested.

 

 

Option Exercises and Stock Vested Table

			Option Awards										Stock Awards
			Number of shares					Value realized on					Number of Shares					Value Realized on
			Acquired on					Exercise					Acquired on Vesting					Vesting
			Exercise #					$					#					$
Peter G. Humphrey				—					—					—					—
Ronald A. Miller				1,477					6,514					—					—
James T. Rudgers				—					—					—					—
John J. Witkowski				—					—					—					—
Martin K. Birmingham				—					—					—					—

The following table sets forth certain information with respect to options and restricted stock granted during the fiscal year ended December 31, 2008 to each of the executive officers named in the Summary Compensation Table.

 

 

Grants of Plan-Based Awards Table

																																						All Other					All Other
																																						Stock					Option
																																						Awards:					Awards:										Grant Date
								Estimated Future Payouts															Estimated Future Payouts															Number					Number of					Exercise or					Fair Value of
								under Non-Equity Incentive															under Equity Incentive Plan Awards(1)															of Shares					Securities					Base Price					Stock and
																																						of Stock					Underlying					of Option					Option
			Grant					Threshold					Target					Maximum					Threshold					Target					Maximum					or Units					Options					Awards					Awards
Executive Name			Date					($)					($)					($)					(#)					(#)					(#)					(#)					(#)					($/Sh)					($)(2)
Peter G. Humphrey				1/16/08					—					—					—										5,820					6,000					—					—					—					115,320
Ronald A. Miller				1/16/08					—					—					—										5,335					5,500					—					—					—					105,710
James T. Rudgers				1/16/08					—					—					—										5,335					5,500					—					—					—					105,710
John J. Witkowski				1/16/08					—					—					—										4,850					5,000					—					—					—					96,100
Martin K. Birmingham				1/16/08					—					—					—										4,850					5,000					—					—					—					96,100

 

 

 

For 2009, Messrs. Humphrey, Miller, Witkowski, and Birmingham, were granted shares of restricted stock in the amounts of 6,000, 5,500, 5,000, and 5,000, respectively, subject to attainment of 2009 performance targets.

 

The Company has entered into Change of Control Agreements with certain key employees, including Messrs. Humphrey, Rudgers, Miller, Witkowski, and Birmingham. The Change of Control Agreements are designed to promote stability and continuity of senior management. If a change of control, as defined in the agreement, occurs during the Executive’s employment, and if within the twelve-month period following such change of control, either the Company terminates the Executive, other than for cause, or the Executive terminates his employment for good reason, as defined in the agreement, the Executive will be entitled to benefits as provided in the Agreement. Each Change of Control Agreement includes covenants by the executive not to solicit employees of the Company during a period following their notice of termination, and not to compete during the term of the Agreement and during any period for which the executive is entitled to receive compensation and six months thereafter.

 

The following summary sets forth potential cash payments and benefits in the event that a named executive’s employment terminates as a result of an involuntary termination or the executive terminates his employment because of good reason at any time within twelve months after a change of control:

 

 

The Company participated in the U.S. Treasury’s Capital Purchase Program (CPP). As a result, the Company is prohibited from making any “golden parachute” payments to the named executives during the period the Treasury holds any of the Company’s securities issued under the CPP. The senior executive officers have agreed to executive compensation waivers and agreements which specify the limitations on their compensation arrangements required by the CPP. The value of Mr. Humphrey’s potential payments following a change in control has been recalculated so that the gross value is not deemed a “golden parachute” payment. The potential payments to Messrs. Miller, Rudgers Witkowski and Birmingham are not affected by the CPP limitations.

 

Based on their 2008 base salaries, a share price of $14.35 as of December 31, 2008, and the number of options and restricted stock held by each of the named executive officers that were unearned and unvested as of December 31, 2008, the estimated values of cash payments and acceleration of stock options and restricted stock grants held by each named executive officer in the event of a change in control are as follows:

			Continuation					Salary plus					Stock					Restricted					Medical &					Gross
			Period					Incentives					Options					Stock					Dental					Value
Executive Name			(time)					($)					($)					($)					($)					($)
Peter G. Humphrey				36 months					1,363,058	(1)				—					206,640					13,302					1,583,000
Ronald A. Miller				24 months					615,369					—					110,495					13,302					739,166
James T. Rudgers				24 months					859,482					—					150,675					1,062					1,011,219
John J. Witkowski				12 months					272,419					—					107,625					13,302					393,346
Martin K. Birmingham				12 months					239,014					—					107,625					13,302					359,941

 

 

The Company uses a combination of cash and stock-based compensation to attract and retain qualified candidates to serve on the Board. In setting Director compensation the Company considers the significant amount of time that Directors expend in fulfilling their duties to the Company, as well as the skill levels required of members of the Board. Directors are subject to a minimum stock ownership requirement. Within five years after joining the Board, each Director is required to own shares of the Company’s Common Stock with a value of $50,000 based on the trailing 365-day average closing common stock price.

 

For the fiscal year ended December 31, 2008, members of the Board who were not employees of the Company received an annual cash retainer of $10,000 for serving as a Company Director and a $5,000 retainer for serving on the Board of the Company’s wholly-owned subsidiary, Five Star Bank. Half of the retainers is paid in shares of the Company’s common stock on the date of the Company’s Annual Organizational Meeting and half is paid in cash six months thereafter. Directors may elect to receive cash instead of stock. Board service fees are specified in the table which follows. Company and Bank Board meetings are normally scheduled on the same day, therefore only one meeting fee is paid. In the event a Bank Board or Committee meeting is held on a day other than a Company meeting, fees are paid in accordance with the schedule for Company meetings. Board members are reimbursed for reasonable travel expenses to attend meetings.

 

As part of the Company’s Board succession planning, the Board of Directors approved the position of Vice Chairman of the Board, at its meeting held on December 19, 2008, along with a corresponding compensation package, as recommended by the MD&C Committee.

 

 

 

 

 

Non-employee Directors are granted nonqualified stock options under the Company’s 1999 Directors Stock Incentive Plan. These grants are made at the Company’s Annual Organizational meeting. 1,000 stock options are granted to each Company Director and 1,000 options are granted to each Bank Director. The exercise price of the grants is the fair market value of the stock at the time the option is granted. Each option vests over a three-year period with 331/3% vesting each year on the anniversary date of the grant. The options expire not more than ten years from the date of grant.

 

The following table sets forth certain information regarding 2008 total director compensation.

 

Director Compensation Summary for 2008

																							Change in
																							Pension Value
			Fees Earned					Fees Earned										Non-equity					and Non-qualified
			or Paid in					or Paid in					Option					Incentive Plan					Deferred Compensation					All Other
			Cash					Stock					Awards					Compensation					Earnings					Compensation					Total
Director Name			($)					($)(1)					($)(2)					($)					($)					($)(3)					($)
Karl V. Anderson, Jr.				31,614					7,486					2,892					—					—					1,481					43,473
John E. Benjamin				32,914					7,486					3,428					—					—					2,308					46,136
Thomas P. Connolly				30,364					7,486					3,432					—					—					5,693					46,975
Barton P. Dambra				39,825					9,975					3,428					—					—					297					53,525
Samuel M. Gullo				34,114					7,486					3,428					—					—					595					45,623
Susan R. Holliday				39,714					7,486					3,365					—					—					634					51,199
Erland E. Kailbourne				79,021					34,979					3,495					—					—					6,643					124,138
Robert N. Latella				28,864					7,486					3,432					—					—					787					40,569
James L. Robinson				31,614					7,486					2,779					—					—					2,024					43,903
John R. Tyler, Jr.				39,364					7,486					3,428					—					—					1,299					51,577
James H. Wyckoff				27,364					7,486					3,428					—					—					6,060					44,338