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 Tuesday, May 6, 2008, at 10:00 a.m. for the following purposes:

 

 

The Board of Directors has fixed the close of business of March 17, 2008 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 4, 2008

 

Financial Institutions, Inc.

www.fiiwarsaw.com

220 Liberty Street     P. O. Box 227     Warsaw, New York 14569

 

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”) for the Annual Meeting of Shareholders of FII to be held on May 6, 2008.

 

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.

 

The close of business of March 17, 2008 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 11,001,852 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 4, 2008.

 

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 four 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. Four Directors are nominated for re-election. The nominees and information about them are listed in the following table:

 

 

The Board of Directors unanimously recommends a vote FOR the nominees, John E. Benjamin, Barton P. Dambra, Susan R. Holliday and Peter G. Humphrey.

The following table sets forth information about the Directors continuing in office.

 

 

 

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 2007, 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 2007 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 Stockholder Information tab on the FII website (http://www.fiiwarsaw.com). The Company has a written Code of Business Conduct & 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 Stockholder Information tab on the FII website (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 2007, 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 required “audit committee financial expert”. All committee members are “independent” as defined in Securities and Exchange Commission 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 2007, the Management Development and Compensation Committee held nine 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 2007, the Executive, Nominating and Governance Committee held three meetings. The Executive, Nominating and Governance Committee will consider nominations made by shareholders or Directors 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.

 

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”, including a financial expert, as defined by the National Association of Securities Dealers (NASD), 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, 2007 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.

 

I.   AUDIT FEES

 

Fees billed by 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 $433,000 for fiscal year ended December 31, 2007 and $445,000 for fiscal year ended December 31, 2006.

 

II.  AUDIT RELATED FEES

 

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 $24,200 for fiscal year ended December 31, 2007 and $23,900 for fiscal year ended December 31, 2006.

 

Tax Fees

 

Aggregate fees for tax compliance and advisory services for the fiscal year ended December 31, 2007 were $38,880 and $74,685 for the fiscal year ended December 31, 2006.

 

All Other Fees

 

No additional fees other than those reported as audit fees, audit related fees and tax fees were billed by KPMG for the fiscal years ended December 31, 2007 and December 31, 2006.

 

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. Certain routine additional professional services not to exceed $10,000 per quarter may be performed at the request of the Company. 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, 2007, 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 FII 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.

 

Peter G. Humphrey and James H. Wyckoff are first cousins.

 

The Company maintains a policy on Related Party Transactions that provides for the oversight of such transactions by the FII Chief Risk Officer and the Company’s Audit Committee. Under our policy, related parties are required to report to the Chief Risk Officer any such potential transaction with the Company. All proposed related party transactions greater than $120,000, must be referred to the Audit Committee for prior approval. The Audit Committee may approve the potential transaction only if it finds the transaction to be consistent with the FII Code of Business Conduct & Ethics policy and any other applicable credit or business standards.

 

During 2007 neither FII nor any subsidiary of FII was a party to any transaction or series of transactions in which the amount involved exceeded $120,000 and which any Director, executive officer, or related interests had or will have a direct or indirect material interest other than:

 

 

Our Directors, executive officers and many of our substantial shareholders and their affiliates are also customers of Five Star Bank. “Affiliates” include corporations, partnerships and other organizations in which they are officers or partners, or in which they and their immediate families have at least a 10% interest. On December 31, 2007, the aggregate principal amount of loans by Five Star Bank to the FII Directors, named executive officers and their affiliates was $654,753. Loans outstanding by Five Star Bank to certain officers, Directors or companies in which they have 10% or more beneficial ownership (including officers and Directors of FII as well as its subsidiaries) were approximately $910,743 at December 31, 2007. All of these loans were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as comparable transactions with other customers. Loans to Directors, executive officers, their affiliates and substantial shareholders are subject to limitations contained in the Federal Reserve Act, which requires that such loans satisfy certain criteria.

 

During 2007 the Company engaged the law firm of Hiscock & Barclay, LLP, of which Director Robert N. Latella was a partner, to provide legal services. Fees paid for these services totaled $18,121.

 

During 2007, the Company’s Audit Committee approved a $235,000 related party transaction involving the sale of real estate owned by Five Star Bank to BRW of Greece, LLC (BRW) whose principal is Director Susan R. Holliday’s brother. Director Susan R. Holliday has no financial interest in BRW. The proposed transaction was thoroughly vetted by the Company’s Audit Committee which determined that the transaction was non-preferential and in the best interests of the Company.

 

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 nine times during 2007.

 

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 CEO. Decisions regarding the non-equity compensation of other senior executive officers are made by the Chief Executive Officer (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, which included cash and long-term equity incentives. 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. Based on the analysis of the peer group data, it was determined that base salaries for our senior executives were comparable to the market median. Total compensation for Company executives was determined to be competitive with our peer group of publicly traded banks with the Committee’s approval of the new performance-based equity incentive plan in January 2008.

 

The principal components of our executive compensation program are:

 

 

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, the named executive officers’ salaries were increased by an average of 1.6% for 2008, as compared to 4% for 2007 and 2006, respectively. Based on his performance, Mr. Humphrey was eligible for a merit increase of 2.5%, but he declined any increase.

 

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.

 

Our Annual 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 2007 annual incentive plan awards started at 80% of goal and were capped at an achievement level of 120% of goal. For 2007, the Committee chose earnings per share (“EPS”) as the corporate performance measurement and set the target at $1.20 per common share. Incentive awards were also subject to an adjustment factor based on the individual’s performance.

 

For 2007, 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 2007 reported EPS was reduced from $1.33 to $1.24 to exclude the contribution to reported earnings from the proceeds of corporate-owned life insurance. The adjusted EPS of $1.24 exceeded the goal of $1.20. Accordingly, the annual incentive award to Messrs. Humphrey, Rudgers, Miller and Hagi reflected achievement of 103% of goal, adjusted for individual performance. Based on the Company’s performance as compared to the EPS goal of $1.20, and the Committee’s evaluation of his individual performance, Mr. Humphrey received an incentive award of $198,233. Comparisons of 2007 awards to 2006 awards are skewed due to the one-time enhanced cash incentive paid for 2006. Mr. Klotzbach, who was subject to different criteria under the Annual Incentive Plan, received 50% of his annual incentive target opportunity based on achievement of the EPS goal, with the remaining 50% based on individual performance.

 

The 2008 Annual Incentive Plan will again use EPS as the performance trigger 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 attributed to the EPS goal to be earned.

 

Long-term incentives are important components of our compensation program because they have the effect of retaining executives, aligning executives’ financial interests with the interests of the shareholders, and rewarding the achievement of the Company’s long-term

goals. Two types of long-term equity-based incentive awards may be granted to executive officers:

 

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, and 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 stock options and restricted stock grants awarded to named executive officers in 2007 was based on their positions and relative responsibilities and did not take into consideration the executive’s shareholdings or previous awards.

 

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. For 2008, the targets are earnings per share, net charge offs, and efficiency ratio, weighted 60%, 20%, and 20%, respectively. Subject to the service requirements, each participant may earn between 92% and 100% of the restricted shares if performance targets between 95% and 103% of the Company goals are achieved. If a performance target is not at least 95% satisfied, the shares associated with that target will be forfeited. 50% of the restricted shares earned will vest 24 months from the grant date, and 50% will vest 36 months from the grant date.

 

This new performance-based equity plan reflects the Committee’s intent to move away from stock options and restricted stock grants, which vest based only on time, to a program that grants restricted shares that are earned through a combination of time vesting and achievement of Company performance targets.

 

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. These requirements were established effective January 1, 2005, and executives are required to satisfy their stock ownership requirement within five years of the effective date, 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 amount 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. Effective January 1, 2007, the Company adopted a safe harbor which 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. The plan was amended so that 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. Only employees whose employment commencement date is on or before December 31, 2006, and who are participating in the Plan on or before January 1, 2008, are eligible to participate in the Plan.

 

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:

 

George D. Hagi
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.

 

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.

 

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 Management Development & Compensation Committee

Susan R. Holliday, Chair

John E. Benjamin

Thomas P. Connolly

Samuel M. Gullo

 

																						Non-equity				Change in
														Stock				Option				Incentive Plan				Pension				All Other
						Salary				Bonus				Awards				Awards				Compensation				Value				Compensation				Total
Name & Position		Year				($)				($)				($)(1)				($)(1)				($)(2)				($)				($)(3)				($)
Peter G. Humphrey			2007				398,169				—				39,451				95,535				198,233				59,852				75,381				866,621
President & Chief Executive Officer FII			2006				388,457				—				11,958				67,527				415,593				51,924				65,543				1,001,002
James T. Rudgers			2007				262,805				—				21,602				22,579				103,527				20,370				22,965				453,848
Executive Vice President & Chief of Community Banking FII			2006				255,150				—				5,694				40,398				218,842				17,259				16,271				553,614
Ronald A. Miller			2007				189,113				—				9,956				26,192				72,428				54,688				22,232				374,609
Executive Vice President & Chief Financial Officer FII			2006				184,500				—				2,847				30,486				154,368				49,534				15,894				437,629
George D. Hagi			2007				186,300				—				10,801				44,699				78,690				10,733				17,153				348,376
Executive Vice President & Chief Risk Officer FII			2006				180,000				20,000				2,847				11,652				102,528				—				16,059				333,086
Kevin B. Klotzbach			2007				151,655				—				10,801				20,613				44,017				11,697				17,760				256,543
Senior Vice President & Treasurer			2006				133,000				—				2,847				8,510				37,905				9,994				13,282				205,538

 

 

			Use of										401(k)					Split Dollar
			Company					Club					Matching					Insurance
			Vehicle					Memberships					Contribution					Premium					Other					Total
Executive Name			($)					($)					($)					($)					($)(1)					($)
Peter G. Humphrey				3,237					4,210					13,000					50,831					4,103					75,381
James T. Rudgers				4,004					6,104					11,657					—					1,200					22,965
Ronald A. Miller				9,962					—					11,706					—					564					22,232
George D. Hagi				8,403					—					8,150					—					600					17,153
Kevin B. Klotzbach				8,662					—					8,498					—					600					17,760

 

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.

 

			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															Number of					Value of					of Unearned					Shares, Units
			Securities					Securities					of 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 (#)(1)					($ / sh)					Date					Vested (#)					Vested ($)					not Vested (#)(1)					($)
Peter G. Humphrey				94,000					—					—					14.00					6/25/2009					4,200					74,844					—					—
				10,562					3,521					—					23.80					2/4/2014					4,200					74,844					—					—
				8,329					8,330					—					21.05					2/23/2015					—					—					—					—
				2,125					6,375					—					19.75					7/26/2016					—					—					—					—
				—					8,500					—					19.41					7/25/2017					—					—					—					—
James T. Rudgers				4,040					4,041					—					21.05					2/23/2015					2,000					35,640					—					—
				875					2,625					—					19.75					7/26/2016					3,000					53,460					—					—
				—					1,500					—					19.41					7/25/2017					—					—					—					—
Ronald A. Miller				1,477					—					—					14.00					6/25/2009					1,000					17,820					—					—
				3,750					—					—					13.75					8/25/2010					1,200					21,384					—					—
				3,867					—					—					14.13					1/30/2011					—					—					—					—
				2,200					—					—					25.33					1/30/2012					—					—					—					—
				2,600					—					—					22.51					2/18/2013					—					—					—					—
				2,617					873					—					23.80					2/4/2014					—					—					—					—
				2,202					2,202					—					21.05					2/23/2015					—					—					—					—
				412					1,238					—					19.75					7/26/2016					—					—					—					—
				—					1,500					—					19.41					7/25/2017					—					—					—					—
George D. Hagi				1,511					4,536					—					19.59					1/18/2016					1,000					17,820					—					—
				412					1,238					—					19.75					7/26/2016					1,500					26,730					—					—
				—					1,500					—					19.41					7/25/2017					—					—					—					—
Kevin B. Klotzbach				800					—					—					25.33					1/30/2012					1,000					17,820					—					—
				774					—					—					22.51					2/18/2013					1,500					26,730					—					—
				867					290					—					23.80					2/4/2014					—					—					—					—
				1,275					1,278					—					21.05					2/23/2015					—					—					—					—
				412					1,238					—					19.75					7/26/2016					—					—					—					—
				—					1,500					—					19.41					7/25/2017					—					—					—					—

 

 

 

In fiscal 2007, none of the named executive officers acquired shares of Company stock by exercising grants of stock options. No restricted stock awards have vested.

The following table sets forth certain information with respect to options and restricted stock granted during the fiscal year ended December 31, 2007 to each of the executive officers named in the Summary Compensation Table.

 

																																						All Other					All Other
																																						Stock					Option
																																						Awards:					Awards:										Grant Date
								Estimated Future															Estimated Future															Number of					Number of					Exercise or					Fair Value
								Payouts under															Payouts under															Shares of					Securities					Base Price					of Stock
								Non-equity Incentive Plan Awards															Equity Incentive Plan Awards(1)															Stock or					Underlying					of Option					and Option
Executive			Grant					Threshold					Target					Maximum					Threshold					Target					Maximum					Units					Options					Awards					Awards
Name			Date					($)					($)					($)					($)					($)					($)					(#)					(#)					($/Sh)					($)(2)
Peter G. Humphrey				7/25/2007					—					—					—					—					—					—					4,200					8,500					19.41					140,512
James T. Rudgers				7/25/2007					—					—					—					—					—					—					3,000					1,500					19.41					68,640
Ronald A. Miller				7/25/2007					—					—					—					—					—					—					1,200					1,500					19.41					33,702
George D. Hagi				7/25/2007					—					—					—					—					—					—					1,500					1,500					19.41					39,525
Kevin B. Klotzbach				7/25/2007					—					—					—					—					—					—					1,500					1,500					19.41					39,525

 

 

The Company has entered into Change of Control Agreements with certain key employees, including Messrs. Humphrey, Rudgers, Miller and Hagi. The Change of Control Agreements are designed to promote stability and continuity of senior management. If a change of control occurs, as defined in the agreement, 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 after the termination of the Agreement 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:

 

 

 

Based on their 2007 base salaries, a share price of $17.82 as of December 31, 2007, and the number of options and restricted stock held by each of the named executive officers that were unvested as of December 31, 2007, we estimate the 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 to be as follows:

			Continuation					Salary plus					Stock					Restricted					Medical &					Gross
			Period					Incentives					Options					Stock					Dental					Value
Executive Name			(time)					($)					($)					($)					($)					($)
Peter G. Humphrey				36 months					1,817,897					359,080					149,688					12,240					2,338,905
James T. Rudgers				24 months					744,452					—					89,100					—					833,552
Ronald A. Miller				24 months					532,594					35,213					39,204					12,240					619,251
George D. Hagi				24 months					577,656					—					44,550					12,240					634,446

 

 

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 by the Company of members of the Board. Similar to executive officers, 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, 2007, 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. The other 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 Bank 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.

 

 

 

 

 

Non-management 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.

 

Director Compensation Summary for 2007

																							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			($)					($)(3)					($)(4)					($)					($)					($)(5)					($)
Karl V. Anderson, Jr.				30,053					7,497					16,065					—					—					—					53,615
John E. Benjamin				37,950					—					18,801					—					—					—					56,751
Thomas P. Connolly				30,403					7,497					17,356					—					—					—					55,256
Barton P. Dambra				38,367					9,983					18,801					—					—					—					67,151
Samuel M. Gullo				32,653					7,497					18,801					—					—					—					58,951
Susan R. Holliday				38,053					7,497					18,302					—					—					—					63,852
Joseph F. Hurley(1)				7,600					—					3,641					—					—					—					11,241
Erland E. Kailbourne				73,019					34,981					15,960					—					—					656					124,616
Robert N. Latella				26,153					7,497					17,356					—					—					—					51,006
James L. Robinson(2)				22,253					7,497					15,660					—					—					—					45,410
John R. Tyler, Jr.				33,003					7,497					18,801					—					—					—					59,301
James H. Wyckoff				26,153					7,497					18,728					—					—					—					52,378

 

 

 

The following table sets forth information, based upon representations by the entities, believed by FII to be the beneficial owners of more than 5% of its outstanding common stock.

 

 

The following table sets forth information, as of February 27, 2008, with respect to the beneficial ownership of FII’s common stock (including presently exercisable options) by (a) each of the continuing Directors and nominees, (b) the “Named Executive Officers” specified in the Summary Compensation Table, and (c) all Directors and executive officers of FII as a group.