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as “Say on Pay” proposals.
Company,As a shareholder, you are being provided with the Bank and their affiliates. The 1998 Plan by its terms provides that no option may be issued underopportunity to provide an advisory vote on the 1998 Plan after December, 2007. As of March 20, 2008, 122,815 shares of Common Stock were subject to outstanding options granted underCompany's executive compensation as disclosed in this proxy statement through the 1998 Plan.following resolution:
| "RESOLVED, that the stockholders approve the compensation of the Company's executive officers, as disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission (which disclosure shall include the Compensation Discussion and Analysis, the compensation tables and any related material) in the Company's proxy statement for the 2009 annual meeting of stockholders." |
In order to permitBecause the continued use of equity-related incentives to attract and retain key employees, directors and other persons who make significant contributions to the Company, the Board has adopted, subject to stockholder approval, the 2008 Equity Incentive Plan (the “Incentive Plan”) to replace the 1998 Plan. The total number of shares authorized for issuance under the Incentive Planvote is 500,000 shares plus the number of shares subject to options under the 1998 Plan which expire or are terminated without exercise.
The Company is submitting the Incentive Plan to stockholders for approval in accordance with the Nasdaq Stock Market listing standards that require stockholder approval of most equity-based compensation plans, including the Incentive Plan. The Incentive Plan is also being submitted for stockholder approval so that, among other reasons, the requisite stockholder approval may be obtained to permit the issuance of incentive stock options under the Internal Revenue Code of 1986, as amended (the “Code”) and to permit the Company to deduct certain performance-based compensation under Section 162(m) of the Code. The Incentive Plan is described below.
The Incentive Plan will replace the 1998 Plan on a prospective basis. If the Incentive Plan is approved by the Company’s stockholders, the Company intends to make new grants under the Incentive Plan. Any awards previously granted under the 1998 Plan will continue to vest and/or be exercisable in accordance with their original terms and conditions. If the Incentive Plan is not approved, the Company generallyadvisory, it will not be able to make equity awards to its directors, officers or employees.
Description of the Incentive Plan
The following summary of the Incentive Plan is qualified in its entirety by the specific language of the Incentive Plan, which is attached as Appendix A to this proxy statement. Capitalized terms used but not defined below have the meanings set forth in the Incentive Plan.
General
The purposes of the Incentive Plan are to attract and promote the long-term retention of key employees, directors and certain other persons who are in a position to make significant contributions to the success of the Company, to reward these employees, directors and other persons for their contributions, to provide additional incentive to such employees, directors and other persons to continue making similar contributions and to further align the interests of these employees, directors and other persons with those of the Company’s stockholders. To achieve these purposes, the Incentive Plan permits grants of incentive stock options (“ISOs”), options not intended to qualify as incentive stock options (“non-ISOs”), stock appreciation rights (“SARs”), restricted and unrestricted stock awards, restricted stock units, performance awards, supplemental cash grant awards and combinations of the foregoing (collectively referred to as “Awards”). Awards of restricted and unrestricted stock, restricted stock units and/or deferred stock may also be issued to participants in connection with management or employee purchase programs. Shares issuable under Awards that terminate unexercised, shares subject to Awards that are later forfeited and shares that, at the election of the plan participant, are withheld by the Company to pay the exercise or purchase price of the Award or applicable withholding taxes will be available for future Awards under the Incentive Plan and will not count against the maximum number of shares that may be issued under the Incentive Plan.
The Incentive Plan is subject to Section 162(m) of the Code (the “Section 162(m) Limitations”), which limits the deductibility of certain compensation in excess of $1,000,000 per year paid by a publicly traded corporation to “Covered Employees.” “Covered Employees” are determined at the end of the tax year, and are the chief executive officer and any other employee of the Company whose compensation is required to be reported to stockholders under applicable SEC rules and regulations by reason of such employee’s being among the three (3) highest compensated executive officers for the taxable year (other than the chief executive officer and the chief financial officer).
Compensation paid to Covered Employees will not be subject to the Section 162(m) Limitations if it is considered “qualified performance-based compensation.” Under the regulations to Section 162(m), compensation related to Awards is deemed to constitute qualified performance-based compensation if the Award meets the following conditions: (i) it is made by a committee of the board of directors comprised solely of two or more outside directors; (ii) the plan under which the Award is made sets forth the maximum number of shares with respect to Awards that may be granted to any individual during a specified period; (iii) under the terms of the Award, the amount of compensation that an employee can receive is based solely on the satisfaction of pre-established subjective performance criteria or an increase in the value of the Common Stock after the date of the grant or award; and (iv) the material terms of plan are disclosed to and approved by stockholders. As described in more detail below, the terms of the Incentive Plan are intended to satisfy the foregoing requirements with respect to Awards to “Covered Employees.”
Administration
The Incentive Plan is administered by the Compensation Committee (the “Committee”) ofbinding upon the Board of Directors, which has full and exclusive power to administer and interpret the Incentive Plan, to grant Awards and to adopt such administrative rules, regulations, procedures and guidelines governing the Incentive Plan and the Awards as it may deem necessary in its sole discretion, from time to time. The Committee is comprised solely of outside directors of the Company who are intended to satisfy the requirements of independence under applicable Nasdaq standards and the Section 162(m) Limitations, among others. The Committee’s authority will include the authority to: (i) determine the type of Awards to be granted under the Incentive Plan; (ii) select Award recipients and determine the extent of their participation; (iii) determine the method or formula for establishing the fair market value of the Common Stock for various purposes under the Incentive Plan, provided however, for purposes of determining the exercise price of ISOs, fair market value will be determined in accordance with Treas. Reg. Section 1.422-2(e) and in the case of Awards other than ISOs, fair market value will be determined in a manner that complies with Section 409A of the Code; and (iv) establish all other terms, conditions, restrictions and limitations applicable to Awards and the Common Stock issued pursuant to Awards, including, but not limited to, those relating to a participant’s retirement, death, disability, leave of absence or termination of employment. The Committee may accelerate or defer the vesting or payment of Awards, cancel or modify outstanding Awards, waive any conditions or restrictions imposed with respect to Awards or the Common Stock issued pursuant to Awards and make any and all other interpretations and determinations which it deems necessary with respect to the administration of the Incentive Plan, other than a reduction of the exercise price of an option after the grant date and subject to the provisions of Section 162(m) of the Code with respect to “Covered Employees”, and, in the case of ISOs, in a manner that complies with Sections 422 and 424 of the Code and, in the case of Awards other than ISOs, in a manner that complies with Section 409A of the Code. The Committee’s right to makeoverrule any decision interpretation or determination under the Incentive Plan shall be in its sole and absolute discretion.
The Committee may delegate some or all of its authority to one or more subcommittees consisting of at least one Committee member. Additionally, the Committee may, subject to criteria, limitations and instructions as the Committee determines, delegate to an appropriate officer of the Company the authority to determine the individual Participants and amount and nature of the Award to be issued to such Participants; provided, that no Awards may be made pursuant to such delegation to a Participant who is a Covered Employee and/or is subject to Section 16(b) of the Securities Exchange Act of 1934, as amended.
Eligibility
ISOs may be granted under the Incentive Plan only to employees of the Company and its subsidiaries. All current and future employees of the Company and its subsidiaries, directors and other persons who, in the opinion of the Committee, are in a position to make significant contributions to the success of the Company, such as consultants and non-employee directors, are eligible to receive all other types of Awards under the Incentive Plan.
Number of Shares Available for Issuance
The aggregate number of shares of Common Stock for which Awards may be granted under the Incentive Plan is 500,000 shares of Common Stock; provided, however, that such authorized share reserve shall be increased from time to time by a number of shares equal to the number of shares of Common Stock that are issuable pursuant to option grants outstanding under the 1998 Plan as of the Effective Date (“Existing Options”) that but for the termination or suspension of the 1998 Plan, would otherwise have reverted to the share reserve of the 1998 Plan pursuant to the terms thereof as a result of the expiration, termination, cancellation or forfeiture of such options. As of the date of this proxy statement, 122,815 shares of Common Stock are subject to Existing Options under the 1998 Plan. Accordingly, if these options expire, the shares of Common Stock subject to such options will also be available for issuance under the Incentive Plan.
Shares issuable under Awards that terminate unexercised, shares subject to Awards that are later forfeited and shares that, at the election of the plan participant, are withheld by the Company to pay the exercise or purchase price of the Award or applicable withholding taxes will be available for future Awards under the Incentive Plan and will not count against the maximum number of shares that may be issued under the Incentive Plan. The maximum number of shares of Common Stock that may be issued under the Incentive Plan also will not be affected by (i) the payment in cash of dividends or dividend equivalents in connection with outstanding Awards; (ii) the granting or payment of stock-denominated Awards which by their terms may be settled only in cash; or (iii) Awards that are granted through the assumption of, or in substitution for, outstanding awards previously granted to individuals who have become employees as a result of a merger, consolidation, or acquisition or other corporate transaction involving the Company.
The maximum number of shares of Common Stock for which Stock Options may be granted to any person in any fiscal year and the maximum number of shares of Common Stock subject to SARs granted to any person in any fiscal year each will be 100,000 shares. The maximum number of shares of Common Stock subject to other Awards granted to any person in any fiscal year will be 100,000 shares. The foregoing provisions will be construed in a manner consistent with Section 162(m).
Adjustments
In the event of any stock dividend, stock split, combination or exchange of equity securities, merger, consolidation, recapitalization, reorganization, divestiture or other distribution of assets (other than ordinary cash dividends) to stockholders, or any other event affecting the Common Stock that the Committee deems, in its sole discretion, to be similar circumstances, the Committee may make such adjustments as it may deem appropriate, in its discretion, to:
· | the maximum number of shares available for issuance under the Incentive Plan; |
· | the maximum number of Awards and shares of Common Stock subject to Awards that may be granted to any one participant; |
· | the number or kind of shares of Common Stock covered by outstanding Awards in a manner consistent with Sections 422 and 424 of the Code (in the case of ISOs) and Section 409A of the Code (in the case of Awards that are subject to Section 409A of the Code); |
· | the exercise price applicable to outstanding Awards; |
· | any measure of performance that relates to an Award to the extent necessary to reflect such change in the Common Stock; and/or |
· | any other affected terms of any equity-based Award to the extent necessary to reflect such change in Common Stock. |
Exercise Price
The Committee will determine the exercise price applicable to each ISO, non-ISO and SAR, which will not be less than the fair market value of the Company’s Common Stock at the time of the grant, as described in this proposal. The Incentive Plan does not permit the repricing of options without prior stockholder approval.
Options
Recipients of stock options under the Incentive Plan will have the right to purchase Common Stock at a stated exercise price, during a period of time and on such other terms and conditions as are determined by the Committee and set forth in the award. For ISOs, the recipient must be an employee, the exercise price must be at least 100% (110% if issued to a greater than ten percent stockholder of the Company) of the fair market value of the Company’s Common Stock on the date of grant and the term cannot exceed ten years (five years if issued to a greater than ten percent stockholder of the Company) from the date of grant. The exercise price of a non-ISO must be at least 100% of the fair market value of the Common Stock on the date of grant. An option exercise price may be paid in cash or by check, bank draft or money order payable to the order of the Company, or if permitted by the Committee and subject to certain conditions, by delivery of shares (including by way of the “attestation method”) of Common Stock [that have been owned by the recipient for at least six months (unless the Board of Directors, expressly approves a shorter period) and] which have a fair market value on the date of exercise at least equal to the exercise price, or an unconditional and irrevocable undertaking by a broker to promptly deliver the necessary funds (including in connection with so-called “cashless exercise” effected by such broker) or by a combination of such methods. The Committee may at any time accelerate the time at which all or any part of the option may be exercised. The maximum number of shares of Common Stock with respect to ISOs that may be awarded under the Incentive Plan will not exceed 500,000 shares of Common Stock plus the number of shares of Common Stock that become available as a result of the expiration, termination, cancellationcreate or forfeiture of existing options under the 1998 Plan, subject to adjustment as described above.
Stock Appreciation Rights
SARs may be granted under the Incentive Plan either alone or in tandem with stock options. Generally, recipients of SARs are entitled to receive upon exercise, cash or Common Stock (valued at the then fair market value of Common Stock) equal to the fair market value of the shares subject to the SARimply any additional fiduciary duty on the date of exercise minus the fair market value of such shares on the date of grant (110% in the case of a 10% or greater stockholder), although certain other measurements also may be used. A SAR granted in tandem with a stock option is exercisable only if and to the extent that the option is exercised.
The maximum number of shares of Common Stock with respect to which SARs may be awarded under the Incentive Plan will not exceed 500,000 shares of Common Stock subject to adjustment as described above.
Stock Awards
The Incentive Plan provides for restricted and unrestricted stock awards, restricted stock units and deferred stock awards. Stock Awards allow the recipient to acquire Common Stock for no consideration, nominal consideration or any higher price determined by the Committee. In the case of restricted stock awards, the shares acquired are subject to a vesting schedule and other possible conditions determined by the Committee. A restricted stock unit is an award denominated in restricted Common Stock, pursuant to a formula determined by the Committee, which may be settled either in restricted Common Stock or in cash, in the discretion of the Committee, subject to such other terms, conditions, restrictions and limitations determined by the Committee from time to time. A deferred stock award entitles the recipient to receive Common Stock to be delivered in the future. Delivery of the Common Stock will take place at such time or times, and on such terms and conditions, as the Committee may determine.
The maximum number of shares of Common Stock with respect to which Stock Awards may be awarded under the Incentive Plan will not exceed 500,000 shares of Common Stock, subject to adjustment as described above.
Supplemental Cash Awards
Under the Incentive Plan and subject to applicable law, supplemental cash awards may be granted to recipients of Awards to help defray taxes due as a result of the Awards. The terms and conditions of supplemental cash awards are determined by the Committee.
Performance Awards
The Incentive Plan provides for performance awards entitling the recipient to receive Awards, with or without payment, upon achieving certain performance goals determined by the Committee. At the discretion of the Committee, any of the above-described Awards may be contingent on attainment of performance goals which are based on certain pre-established criteria. Performance goals may involve overall corporate performance, operating group or business unit performance, personal performance or any other category of performance determined by the Committee.
Termination of Awards
Upon termination of a recipient’s employment or other relationship with the Company due to death, disability or retirement, except as otherwise determined by the Committee: (i) stock options and SARs will automatically become exercisable in full and will remain exercisable for a period of one year in the event of death or disability, but not longer than the term of the stock option or SAR, and for a period equal to the unexpired term of the stock option or SAR in the case of retirement; (ii) all restricted stock and restricted stock units shall automatically become free of all restrictions and conditions; and (iii) any payment or benefit under deferred stock awards, performance awards and supplemental grants shall be made by the Company. Retirement is defined in the Incentive Plan as termination of employment with or service to the Company by a participant other than by reason of death or permanent disability or termination for cause at a time when such participant has attained age 65 or greater (age 70 in the case of non-employee directors); provided that such participant has performed a minimum of five years of service for the Company.
Upon termination of a recipient’s employment or other relationship with the Company for any reason other than death, Disability or Retirement, except as otherwise determined by the Committee: (i) stock options and SARs will remain exercisable for a period of 90 days , but not longer than the term of the stock option or SAR, to the extent that they were exercisable at the time of termination; (ii) all restricted stock shall be transferred to the Company for purchase for the amount of cash paid for such stock, or forfeited to the Company if no cash were paid; and (iii), any payment or benefit under restricted stock units, deferred stock awards, performance awards and supplemental grants to which the recipient was not irrevocably entitled at the time of termination shall be forfeited and such Awards cancelled as of the date of such termination.
In the discretion of the Committee, all Awards held by a participant whose employment, directorship, consulting, service or other relationship with the Company is terminated for cause, as defined in the Incentive Plan, shall terminate immediately.
Deferral of Awards
In connection with the adoption of the Incentive Plan, the Board of DirectorsDirectors. The Compensation Committee may, adopt a deferred compensation plan that will permit participants inhowever, take into account the Incentive Plan to defer receipt of Awards granted pursuant to the Incentive Plan. If deferred, the Awards would be paid at a future date pursuant to the deferred compensation plan.
Section 162(m) Limitations
If the Committee determines at the time an Award that is intended to qualify as performance-based compensation for purposes of Section 162(m)outcome of the Code is granted to a recipient that such recipient is, or may be as of the end of the tax year for which the Company would claim a tax deduction in connection with such Award, a “Covered Employee,” then the Committee may provide that the Award be subject to the achievement of specified levels of one or more of the following performance goals, unless and until the Company’s stockholders approve a change to such performance goals: operating income, net earnings, earnings before interest, taxes, depreciation and amortization (EBITDA), earnings before interest and taxes (EBIT), net income, earnings per share, total stockholder return, cash flow, return on assets, decrease in expenses, Common Stock price, price-earnings multiple, comparisons to market indices, sales growth, market share, the achievement of certain quantitatively and objectively determinable non-financial performance measures including, but not limited to, operational measures, growth strategies, strategic initiatives, corporate development and leadership development, and any combination of the foregoing. The performance goals shall be determined and approved by the Committee no later than the 90th day of the applicable fiscal year. Awards subject to such conditions may not be adjusted upward; however, the Committee shall retain the discretion to adjust such Awards downward. Prior to the payment of any Award subject to these Section 162(m) Limitations, the Committee shall certify in writing that the applicable performance goal was satisfied.
The Committee shall have the discretion to impose such other restrictions on Awards as it may deem necessary or appropriate to ensure that such Awards qualify as performance-basedvote when considering future executive compensation for purposes of Section 162(m) of the Code. In the event that applicable tax/and or securities laws change to permit the Committee the discretion to alter the governing performance goals without obtaining stockholder approval, the Committee shall have the sole discretion to make such changes without obtaining stockholder approval. In addition, in the event that the Committee determines that it is advisable to grant Awards that shall not qualify as performance-based compensation for purposes of Section 162(m) of the Code, the Committee may make such grants without satisfying the Section 162(m) Limitations.
Change in Control
The Incentive Plan generally provides that, unless the Committee determines otherwise at the time of grant with respect to a particular Award, in the event of a change in control (as defined below), (1) any options and SARs shall automatically become exercisable in full upon the occurrence of such change of control, (2) any restricted stock shall automatically become free of all restrictions and conditions upon the occurrence of such change of control, and (3) any conditions on restricted stock units, deferred stock awards, performance awards and supplemental grants which relate only to the passage of time and continued employment shall automatically terminate upon the occurrence of such change of control.
A change in control means: (i) the occurrence of an event that would, if known to the Company’s management, be required to be reported by the Company as a change in control pursuant to the SEC’s Current Report on Form 8-K under to the Securities Exchange Act of 1934, as amended (the “Exchange Act”); or (ii) the acquisition or receipt, in any manner, by any person (as defined for purposes of the Exchange Act) or any group of persons acting in concert, of direct or indirect beneficial ownership (as defined for purposes of the Exchange Act) of more than 50% of the Company’s combined voting securities ordinarily having the right to vote for the election of directors of the Company; or (iii) a change in the constituency of the Board of Directors with the result that individuals (the “Incumbent Directors”) who are members of the Board on the effective date of the Incentive Plan cease for any reason to constitute at least a majority of the Board of Directors, provided that any individual who is elected to the Board after the effective date of the Incentive Plan and whose nomination for election was unanimously approved by the Incumbent Directors shall be considered an Incumbent Director beginning on the date of his or her election to the Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest (as defined for purposes of the Exchange Act) with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person other than the Board of Directors; or (iv) the sale, exchange, liquidation or other disposition of all or more than 50% of the Company’s business or assets; unless in any such case, at least a majority of the Incumbent Directors determine, prior to the occurrence of such change in control, that no change in control has or will have occurred; or (v) the occurrence of a reorganization, merger, consolidation or other corporate transaction involving the Company, in each case, with respect to which the Company’s stockholders immediately prior to such transaction do not, immediately after such transaction, own more than 50% of the combined voting securities ordinarily having the right to vote for the election of directors of the Company or other corporation resulting from such transaction; or (vi) the approval by the Company’s stockholders of a complete liquidation or dissolution of the Company; or (vii) any similar transaction, circumstance or event which the Committee determines to constitute a change in control.
The Committee may, in its discretion, at the time an Award is made or at any time prior to, coincident with or after the time of a change in control: (i) require the purchase and sale of any Awards for an amount of cash equal to the amount which a participant could have obtained upon the exercise or realization of such rights had such Awards been currently exercisable; (ii) make such adjustment to the Awards then outstanding as the Committee deems appropriate to reflect such change in control; (iii) if applicable, provide that such Awards shall be cancelled upon the effectiveness of such Change of Control and converted into the right to receive the same consideration as stockholders are receiving in such Change of Control (net of any exercise price and/or purchase price payable by the Participant and/or base amount in the case of a SAR); and/or (iv) cause the Awards then outstanding to be assumed, or their rights substituted therefor, by the surviving or acquiring corporation in such change in control. The Committee may, in its discretion, include such further provisions and limitations in any Award agreement as it may deem in the best interests of the Company.
Additional Cancellation Provisions
In any instance where the rights of a recipient under an Award continue after termination of their relationship with the Company, all of such rights shall terminate and be forfeited if, in the determination of the Committee, the recipient, at any time prior or subsequent to such termination, breached or violated, in a material way, the terms of any agreement with the Company, including any employment agreement, termination agreement, confidentiality agreement, non-solicitation agreement or non-competition agreement or engaged or engages in conduct that would have permitted the Company to terminate the recipient’s employment for cause, as defined in the Incentive Plan, if the recipient was still an employee of the Company.
Reduction of Payments to Participants
If any payment under the Incentive Plan constitutes a “parachute payment” within the meaning of Section 280G of the Code and is subject to the non-deductibility rules of Section 280G and the excise tax imposed by Section 4999 of the Code (the “Excise Tax”), then such payment will be reduced, if on an after-tax basis (including the Excise Tax), such reduction would result in the recipient receiving a greater amount of the payment.
Summary of Federal Income Tax Consequences
The following is a brief summary of the principal United States federal income tax consequences of transactions under the Incentive Plan, based on current United States federal income tax laws. This summary is not intended to be exhaustive, does not constitute tax advice and, among other things, does not describe state, local or foreign tax consequences.
Non-ISOs. No taxable income is recognized by a participant upon the grant of a non-ISO. Upon the exercise of a non-ISO, the participant will recognize ordinary income in an amount equal to the excess, if any, of the fair market value of the Common Stock for which the option is exercised over the aggregate non-ISO exercise price, even though that Common Stock may be subject to a restriction on transferability or may be subsequently forfeited, in limited circumstances. Income and payroll taxes are required to be withheld by the Company on the amount of ordinary income resulting to the participant from the exercise of a non-ISO. Any ordinary income recognized by the participant is generally deductible by the Company for federal income tax purposes, subject to the possible limitations on deductibility of compensation paid to some executives under Section 162(m) of the Code. The participant’s tax basis in Common Stock acquired by exercise of a non-ISO will be equal to the exercise price plus the amount taxable as ordinary income to the participant.
Upon a sale of the Common Stock received by the participant upon exercise of the non-ISO, any gain or loss will generally be treated for federal income tax purposes as long-term or short-term capital gain or loss, depending upon the holding period of that stock. The participant’s holding period for shares acquired after the exercise of a non-ISO begins on the date of exercise of that option.
If the participant pays the exercise price in full or in part by using shares of previously acquired Common Stock, the exercise will not affect the tax treatment described above and no gain or loss generally will be recognized to the participant with respect to the previously acquired shares. The shares received upon exercise which are equal in number to the previously acquired shares used will have the same tax basis as the previously acquired shares surrendered to the Company, and will have a holding period for determining capital gain or loss that includes the holding period of the shares used. The value of the remaining shares received by the participant will be taxable to the participant as compensation, even though those shares may be subject to sale restrictions. The remaining shares will have a tax basis equal to the fair market value recognized by the participant as ordinary income and the holding period will commence on the exercise date. Shares used to pay applicable income and payroll taxes arising from that exercise will generate taxable income or loss equal to the difference between the tax basis of those shares and the amount of income and payroll taxes satisfied with those shares. The income or loss will be treated as long-term or short-term capital gain or loss depending on the holding period of the shares used. Where the shares used to pay applicable income and payroll taxes arising from that exercise generate a loss equal to the difference between the tax basis of those shares and the amount of income and payroll taxes satisfied with those shares, that loss may not be currently recognizable if, within a period beginning 30 days before the exercise date and ending 30 days after that date, the participant acquires or enters into a contract or option to acquire additional Common Stock.
ISOs. No taxable income is recognized by a participant upon the grant or exercise of an ISO. If Common Stock is issued to a participant after the exercise of an ISO and if no disqualifying disposition of those shares is made by that participant within two years after the date of grant or within one year after the receipt of those shares by that participant, then:
· | upon the sale of those shares, any amount realized in excess of the option exercise price will be taxed to that participant as a long-term capital gain, and |
· | the Company will not be allowed a deduction. |
Additionally, the exercise of an ISO will give rise to an item of tax preference that may result in alternative minimum tax liability for the participant.
If Common Stock acquired upon the exercise of an ISO is disposed of prior to the expiration of either holding period described above, that disposition would be a “disqualifying disposition,” and generally:
· | the participant will realize ordinary income in the year of disposition in an amount equal to the excess, if any, of the fair market value of the shares on the date of exercise, or, |
· | if less, the amount realized on the disposition of the shares, over the ISO exercise price, and |
· | the Company will be entitled to deduct that amount. |
Any other gain realized by the participant on that disposition will be taxed as short-term or long-term capital gain, and will not result in any deduction to the Company. If a participant pays the exercise price in full or in part with previously acquired Common Stock, the exchange will not affect the tax treatment of the exercise. Upon the exchange, no gain or loss generally will be recognized upon the delivery of the previously acquired shares to the Company, and the shares issued in replacement of the shares used to pay the exercise price will have the same basis and holding period for capital gain purposes as the previously acquired shares. A participant, however, would not be able to utilize the holding period for the previously acquired shares for purposes of satisfying the ISO statutory holding period requirements. Additional Common Stock will have a basis of zero and a holding period that commences on the date the Common Stock is issued to the participant upon exercise of the ISO. If this exercise is affected using Common Stock previously acquired through the exercise of an ISO, the exchange of the previously acquired shares may be a disqualifying disposition of those shares of Common Stock if the holding periods discussed above have not been met.
If an ISO is exercised at a time when it no longer qualifies as an ISO, the option will be treated as a non-ISO. Subject to some exceptions for permanent disability or death, an ISO generally will not be eligible for the federal income tax treatment described above if it is exercised more than three months following a termination of employment (one year if termination is due to death or disability, as defined in the Code).
Stock Appreciation Rights. Upon the exercise of a SAR, the participant will recognize ordinary income in an amount equal to the cash received plus the fair market value of any Common Stock received from the exercise. The participant’s tax basis in the Common Stock received in the exercise of the SAR will be equal to the ordinary income recognized with respect to the Common Stock. The participant’s holding period for shares acquired on the exercise of a SAR begins on the exercise date. Income and payroll taxes are required to be withheld on the amount of compensation attributable to the exercise of the SAR, whether the income is paid in cash or shares. Upon the exercise of a SAR, the Company will generally be entitled to a deduction in the amount of the ordinary income recognized by the participant, subject to the possible limitations on deductibility of compensation paid to some executives under Section 162(m) of the Code.
Unrestricted and Restricted Stock. Upon the grant of an unrestricted stock award, the participant realizes ordinary income equal to the fair market value on the date of grant minus the price paid for the shares awarded. A recipient of a restricted stock award realizes ordinary income only as of and when the shares vest or are no longer subject to a substantial risk of forfeiture (as defined in the Code). The ordinary income realized on each vesting or transfer date equals the fair market value on that date less any purchase price paid for the shares. A recipient of a restricted stock award may, however, choose or be required by the terms of the award to elect under Section 83(b) of the Code to have the ordinary income associated with all of the restricted shares realized and measured on the date of grant. A recipient who makes such an election and later forfeits restricted shares may not claim a loss for tax purposes. The Company will generally be entitled to a deduction at the time and in the amount of the ordinary income recognized by the participant, subject to the possible limitations on deductibility of compensation paid to some executives under Section 162(m) of the Code.
Restricted Stock Units. A recipient of a restricted stock unit award realizes ordinary income only as of and when the shares vest or are no longer subject to a substantial risk of forfeiture (as defined in the Code). The ordinary income realized on each vesting or transfer date equals the fair market value on that date less the price paid for the shares. The Company will generally be entitled to a deduction at the time and in the amount of the ordinary income recognized by the participant, subject to the possible limitations on deductibility of compensation paid to some executives under Section 162(m) of the Code.
Performance Awards and Supplemental Grants. The tax consequences of a performance award depend upon the nature of the underlying award earned if and when the performance goals are achieved. The recipient of a supplemental cash award realizes ordinary income equal to the amount received, and the Company will generally be entitled to a corresponding deduction.
Certain Limitations on Deductibility of Executive Compensation. As discussed above, the Section 162(m) Limitations apply to all Awards granted under the Incentive Plan, unless certain conditions are satisfied. Compensation under the Incentive Plan is intended to satisfy those conditions and constitute “qualified performance-based compensation.”
Amendment and Termination
The Incentive Plan may be amended or terminated by the Committee at any time, without the approval of stockholders or participants, provided that no amendment that would require stockholder
approval under the applicable Nasdaq Stock Market listing standards, applicable law or the Code, including but not limited to Section 162(m) and Section 422 (with respect to ISOs), may become effective without stockholder approval. No Awards may be granted under the Incentive Plan from and after April 30, 2018, unless the Incentive Plan is otherwise terminated prior to that date.
New Plan Benefitsarrangements.
The Board of Directors approvedbelieves that the Incentive PlanCompany's executive compensation program is reasonable in February 2008, subjectcomparison both to stockholder approval. To date, no Awards have been made undersimilar sized companies in the Incentive Planindustry and no determinations have been made with respect to the type or number of Awards to be made under the Incentive Plan. In addition, there were no options granted in 2007 under the 1998 Plan.
On March 5, 2008, the closing priceperformance of the Company’s Common Stock was $9.40Company during 2008. We also believe that the Company's compensation program strongly aligns the interests of the executives with the interests of the Company's stockholders in the creation of long-term value of the Company as reported onwell as the Nasdaq Capital Market.components that drive long-term value.
RecommendationRecommendation:: The Board of Directors recommends that youa vote “FOR” the approval of a non-binding advisory vote on executive compensation as described in the Severn Bancorp, Inc. 2008 Equity Incentive Plan.
EquityExecutive and Director Compensation Plan Information
The following table provides certain information assection of December 31, 2007 with respect to the Company’s equity based compensation plans.this Proxy Statement.
Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted-average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance Under equity compensation plans |
| | |
| | |
| | |
| | |
| | |
| | |
Equity compensation plan approved by security holders | | 122,815 | | 15.85 | | - |
| | | | | | |
Equity compensation plans not approved by security holders | | - | | - | | - |
| | | | | | |
Total | | 122,815 | | 15.85 | | |
EXECUTIVE AND DIRECTOR COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
Background
Because the Company does not have any employees, compensation decisions are made by the Compensation Committee of the Bank’s Board of Directors. The non-employee directors, consisting of Louis DiPasquale, Jr., Melvin Hyatt, Ronald Pennington, T. Theodore Schultz, Albert W. Shields and Keith Stock serve as members of the Compensation Committee. Melvin Hyatt, a director of the Bank,
does not participate in compensation decisions relating to our Chairman, President and Chief Executive Officer Alan J. Hyatt, his nephew.
The Compensation Committee operates under a written charter adopted by the Board of Directors. The responsibilities of the Committee include:
· | formulating, evaluating and approving the compensation of the Company’s executive officers; |
· | overseeing all compensation programs involving the issuance of the Company’s stock and other equity securities of the Company; and |
· | reviewing and discussing with the Company’s management the Compensation Discussion and Analysis and preparing the Compensation Committee’s report thereon for inclusion in the Company’s annual proxy statement. |
Objectives of Our Compensation Program
The primary objectives of the Compensation Committee with respect to executive compensation are:
· | To attract and retain the best possible executive talent; |
· | To tie annual and long-term cash and stock incentives to achievement of corporate and individual performance objectives; and |
· | To align executives’ incentives with stockholder value creation. |
To achieve these objectives, the Compensation Committee has implemented and maintains compensation plans that tie a substantial portion of executives’ overall compensation to the financial performance of the Company. Overall, the total compensation opportunity is intended to create an executive compensation program that is set at the median competitive levels of comparable public savings and loan companies.
The Bank’s executive officers have no employment contracts. Annually, the Bank’s Compensation Committee evaluates profiles of comparable financial institutions to assure that the compensation to its executive officers is comparable to its peer group.similar sized companies in the industry. Other factors used by the Compensation Committee in determining compensation for its executive officers include an assessment of the overall financial condition of the Bank, including an analysis of the Bank’s asset quality, interest rate risk exposure, capital position, net income and consistency of earnings. The Bank’s return on average assets and return on equity are considered and compared to its peer group. In addition, the Compensation Committee interviews each executive officer individually and collectively to evaluate performance of the Company and the individual executive officers. This input is used to determine the total compensation package for each executive officer, and the allocation between the different components within the compensation package. The complexity of the activities of the executive officers are considered, and intangible items are considered such as the reputation and general standing of the Bank within the community and the likelihood of continuing successful and profitable results.
Compensation Components
Compensation consists of the following components:
Base Salary. Base salaries are used to attract and retain employees by providing a portion of compensation that is not considered “at risk.” Base salaries are designed to reward the performance of our executive officers in the daily fulfillment of their responsibilities to us. Base salaries for our executives are established based on the scope of their responsibilities and historical compensation levels, taking into account competitive market compensation paid by other companies for similar positions. Generally, the Company 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 at comparable companies in line with our compensation philosophy. Base salaries are reviewed annually, and adjusted from time to time to realign salaries with market levels after taking into account individual responsibilities, performance and experience.
Annual Bonus. The purpose of the annual bonus program is to align the interests of executive officers with Company stockholders by motivating executive officers to achieve superior annual financial and annual operational performance. Our annual bonus plan for our executives provides for a discretionary cash bonus, dependent upon the level of achievement of corporate and personal goals. In addition, the discretionary bonus for the executive officers named in the proxy statement is determined based on the Company’s performance compared to budgets and projections. The Board of Directors establishes specific financial and operational goals for the Company at the beginning of each year and annual discretionary bonus funding is in part related to achievement of these annual goals. The Compensation Committee approves the annual award for the Chief Executive Officer and for each other Executive Officer.executive officer.
Long-Term Incentive Program. The Compensation Committee believes that long-term performance is achieved through an ownership culture that encourages long-term performance by our executive officers through the use of stock-based awards. In connection with this, our board of directors had adopted the Severn Bancorp, Inc. Stock Option and2008 Equity Incentive Plan (the “1998“2008 Plan”), which was ratified by our stockholders at the 19982008 annual meeting and expired in 2007. The Board of Directors has recently adopted the Severn Bancorp, Inc. 2008 Equity Incentive Plan (the “2008 Plan”), subject to the approval of the Company’s stockholders.meeting. The purpose of the 2008 Plan is to enable the Company to (i) promote the long-term retention of employees; (ii) further reward these employees, directors and other persons for their contributions to the Company’s growth and expansion; (iii) provide additional incentive to these employees, directors and other persons to continue to make similar contributions in the future; and (iv) to further align the interests of these employees, directors and other persons with those of the Company’s stockholders. These purposes will be achieved by granting to such employees, directors and other persons, in accordance with the 2008 Plan, Options, Stock Appreciation Rights, Restricted Stock or Unrestricted Stock, Deferred Stock, Restricted Stock Units or Performance Awards (collectively the “Awards”), for shares of the Company’s common stock. By encouraging such stock ownership, the Company seeks to attract, retain and motivate the best available personnel for positions of substantial responsibility and to provide additional incentive to our directors and key employees and to promote the success of the business. The Company anticipates granting options under the 2008 Plan, and will consider other Awards under the 2008 Plan when determining long-term incentive programs.
Other Compensation. Our executive officers participate in other employee benefit plans generally available to all employees, including the following:
· | The Bank maintains a 401(k) plan, and contributes, on behalf of each participating employee, a matching contribution of 50% of salary deferred by an employee up to 6% of each participant’s salary. The Bank’s plan also allows a non-matching profit sharing contribution to be determined at the discretion of the Board of Directors. |
· | The Company maintains an Employee Stock Ownership Plan (the “ESOP”) for employees of the Bank and its subsidiaries. The ESOP provides an opportunity for the employees of the Bank to become stockholders and thus strengthen their direct interest in the success of the Bank. In addition, the ESOP assists the Bank in attracting and retaining capable personnel. As of December 31, 2007,2008, a total of 792,356694,033 shares of the Company’s Common Stock were owned by the ESOP, of which 782,908651,933 shares were allocated to employees. |
· | The Bank provided Messrs. Meekins and Kirkley with the use of a company owned automobile during 2007, and paid or reimbursed them for all insurance, maintenance, registration and fuel costs. The Bank also reimbursed Mr. Bevivino for automobile costs incurred relating to inspections of construction sites made by Mr. Bevivino during 2007. Effective January 1, 2008, the Bank no longer provides automobiles for Messrs. Meekins and Kirkley, and no longer reimburses Mr. Bevivino for automobile costs incurred during inspections. The Bank gave Mr. Meekins his automobile in December, 2007, and Mr. Kirkley his automobile in 2008. |
Determination of Executive Compensation
Traditionally, the Compensation Committee reviews our executive compensation program in November of each year, although decisions in connection with new hires and promotions are made on an as-needed basis. As part of the review process, each executive provides input into the performance of the company and the performance of each executive officer, including himself. However, no executive officer participates in the Compensation Committee’s deliberations or decisions. Each executive’s current and prior compensation is considered in setting future compensation. In addition, the Compensation Committee performs an informal survey of area companies and banks and reviews the compensation practices of the surveyed companies. To some extent, the compensation plan (base salary, bonus and 2008 Plan) is similar to the elements used by many companies; however, additional emphasis on fair treatment of all employees requires that the Company limits executive salaries at a level that does not prohibit us from competing for quality employees. The exact salary, annual bonus and stock option grants are chosen in an attempt to balance our competing objectives of fairness to all employees and attracting and retaining executive officers. Based on the informal survey of area companies and banks, the performance of the Company and each of the executive officers in 2007,2008, the Compensation Committee awarded a bonus to Messrs. Hyatt Kirkley, and BevivinoKirkley totaling approximately 25% to 30%50% less than the bonus awarded to them in 2006.2007. The Compensation Committee also awarded a bonus to Mr. MeekinsBevivino totaling approximately 50% less14% more than the bonus awarded to him in 2006. This larger2007. The percentage decrease for Mr. MeekinsMessrs. Hyatt and Kirkley was because the Compensation Committee concluded, that while Mr. Meekinsthey performed at the same level as the other executives during 2007, he would no longer servethe Company’s 2008 results did not warrant such a large bonus as awarded in the same capacity after his retirement effective December 31, 2007.previous year. The increased bonus for Mr. Bevivino was because the Compensation Committee concluded that Mr. Bevivino’s performance warranted a bonus more in line with Messrs. Hyatt and Kirkley. In addition, the Compensation Committee determined that Messrs. Hyatt Kirkley and Bevivino would receive a base salary increase for 2009 of approximately 4% and 5%, respectively. Mr. Kirkley’s base salary was decreased by approximately 18%. The Compensation Committee had given Messrs. Hyatt, Kirkley and Bevivino a base salary increase for 2008 of approximately 17%, 7% and 4%, respectively. The Compensation Committee had given Messrs. Hyatt, and Bevivino a base salary increase for 2007 of approximately 5%. Mr. Kirkley received a base salary increase of approximately 6% for 2007. Mr. Meekins will not receive a salary in 2008, but instead will begin receiving a director’s fee as a non-employee director.
Accounting and Tax Considerations
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R. This accounting standard requires us to record as compensation expense the grant date fair value of a stock option over the life of the option. Prior to the adoption of FAS 123R, no compensation expense was required to be recorded in connection with stock options granted at fair market value. The Compensation Committee intends to consider the compensation expense of option grants when making future awards; however, given that, traditionally, the Compensation Committee has not made large grants of option awards to our executive officers and employees, the Company does not expect that the compensation expense associated with option grants will have a material adverse effect on our reported earnings.
Generally, Section 162(m) of the Code, and the IRS regulations adopted under that section, which are referred to collectively as Section 162(m), denies a deduction to any publicly held corporation, such as the Company, for certain compensation exceeding $1,000,000 paid during each calendar year to each of the chief executive officer and the four other highest paid executive officers, excluding, among other things, certain qualified performance-based compensation. Our policy is to maximize the tax deductibility of compensation paid to our most highly compensated executives under Section 162(m). For example, our proposed 2008 Equity Incentive Plan is intended to satisfy an exemption for “qualified performance-based compensation” under Section 162(m). TARP imposes additional requirements under Section 162(m). For certain “covered executives” for purposes of Section 162 (m), during the TARP Period, the Company cannot deduct annual compensation for the covered executives in excess of $500,000. The Companyperformance-based exception does not believe thatapply to this TARP related deduction limit. Section 162(m) willdid not have a material adverse effect on usthe Company in 2008.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis section appearing above with our management. Based on this review and these discussions, the Compensation Committee recommended to our Board of Directors that the Compensation Discussion and Analysis Section be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20072008 and in this proxy statement.
Compensation Committee Members:
The information contained in this Compensation Committee Report is not “soliciting material” and has not been “filed” with the Securities and Exchange Commission. This Compensation Committee Report will not be incorporated by reference into any of our future filings under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company may specifically incorporate it by reference into a future filing.
Summary Compensation Table
The following table sets forth information regarding compensation earned by our Chief Executive Officer, our Chief Financial Officer and our other most highly compensated executive officersofficer during the year ended December 31, 2007.
2008.
Summary Compensation Table
Name and Principal Position | | | | | All Other Compensation (3) | | | | | | All Other Compensation (4) | |
| | | | | | | | | | |
Alan J. Hyatt | 2007 | $278,000 | $145,000 | $ - | $10,698 | $433,698 | 2008 | $325,000 | $ 72,000 | $20,430 | $132,625 | $550,055 |
President and Chief Executive Officer | 2006 | $265,000 | $191,000 | $16,515 | $11,307 | $483,822 | |
President and Chief Executive | | 2007 | $278,000 | $145,000 | $20,430 | $ 10,698 | $454,128 |
Officer | | | | | | |
| | | | | | | | | | |
Melvin E. Meekins, Jr. | 2007 | $330,000 | $ 68,000 | $ - | $61,346 | $459,346 | |
Executive Vice-President | 2006 | $318,250 | $135,300 | $17,519 | $34,440 | $505,509 | |
| | | | | | |
S. Scott Kirkley | 2007 | $236,000 | $ 60,000 | $ - | $29,006 | $325,006 | |
S. Scott Kirkley(3) | | 2008 | $245,000 | $ 30,000 | $20,430 | $25,049 | $320,479 |
Executive Vice-President | 2006 | $225,000 | $ 82,500 | $17,519 | $24,396 | $349,415 | 2007 | $236,000 | $ 60,000 | $20,430 | $29,006 | $345,436 |
| | | | | | | | | | |
Thomas G. Bevivino | 2007 | $167,000 | $ 35,000 | $ - | $27,073 | $229,073 | 2008 | $179,000 | $ 40,000 | $20,430 | $ 9,904 | $249,334 |
Executive Vice-President and Chief Financial Officer | 2006 | $159,000 | $ 50,000 | $17,519 | $12,262 | $238,781 | |
Executive Vice-President and | | 2007 | $167,000 | $ 35,000 | $20,430 | $27,073 | $249,503 |
Chief Financial Officer | | | | | | |
The Company does not have employment agreements with the executive officers. Salary and bonus decisions concerning executive officers are made by the Compensation Committee as described above in “Compensation Discussion and Analysis.” There were no stock options or other awards granted in 20072008 to the executive officers.