SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
[_] Filed by the registrant
[_] Filed by a party other than the registrant
Check the appropriate box:
[_] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Under Rule 14a-12
Community Bank System, Inc.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies.
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is
calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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[Logo]
COMMUNITY BANK SYSTEM, INC.
5790 Widewaters Parkway
DeWitt, New York 13214-1883
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
April 21, 2003
TO THE SHAREHOLDERS OF COMMUNITY BANK SYSTEM, INC.:
At the direction of the Board of Directors of COMMUNITY BANK SYSTEM, INC.,
a Delaware corporation (the "Company"), NOTICE IS HEREBY GIVEN that the Annual
Meeting of Shareholders of the Company (the "Meeting") will be held at 1:00 p.m.
on Wednesday, May 28, 2003 at the Radisson Hotel in Corning, New York for the
purpose of considering and voting upon the following matters:
1. The election of four directors to hold office for a term of
three years and until their successors have been duly
elected.
2. The transaction of any other business which may properly be
brought before the Meeting or any adjournment thereof.
By Order of the Board of Directors
/s/ Donna J. Drengel
Donna J. Drengel
Secretary
- --------------------------------------------------------------------------------
YOUR VOTE IS IMPORTANT. YOU ARE THEREFORE REQUESTED TO SIGN AND RETURN THE
ENCLOSED PROXY CARD AS PROMPTLY AS POSSIBLE, EVEN IF YOU EXPECT TO BE
PRESENT AT THE MEETING. YOU MAY WITHDRAW YOUR PROXY AT ANY TIME PRIOR TO
THE MEETING, OR IF YOU DO ATTEND THE MEETING, YOU MAY WITHDRAW YOUR PROXY
AT THAT TIME AND VOTE IN PERSON IF YOU WISH.
- --------------------------------------------------------------------------------
[Logo]
COMMUNITY BANK SYSTEM, INC.
5790 Widewaters Parkway
DeWitt, New York 13214-1883
PROXY STATEMENT
FOR ANNUAL MEETING OF SHAREHOLDERS, MAY 28, 2003
This Proxy Statement is furnished as part of the solicitation of proxies by
the Board of Directors of Community Bank System, Inc. (the "Company"), the
holding company for Community Bank, N.A. (the "Bank"), for use at the Annual
Meeting of Shareholders of the Company (the "Meeting") to be held at 1:00 p.m.
on Wednesday, May 28, 2003, at the Radisson Hotel in Corning, New York. This
Proxy Statement and the form of Proxy are first being sent to Shareholders on
approximately April 21, 2003.
At the Meeting, the Shareholders will be asked to vote for the election of
directors. Four of the total of twelve directors who serve on the Company's
Board of Directors will stand for re-election to the Board at the Meeting. In
addition, voting will be conducted on any other matters which are properly
brought before the Meeting.
VOTING RIGHTS AND PROXIES
The Board of Directors of the Company has fixed the close of business on
April 7, 2003 as the record date for determining which Shareholders are entitled
to notice of and to vote at the Meeting. At the close of business on the record
date, 13,017,305 shares of common stock, no par value, were outstanding and
entitled to vote at the Meeting. This is the Company's only class of voting
stock outstanding. Each share of outstanding common stock is entitled to one
vote with respect to each item to come before the Meeting. There will be no
cumulative voting of shares for any matter voted upon at the Meeting. The Bylaws
of the Company provide that one-third of the outstanding shares of the Company,
represented in person or by proxy, shall constitute a quorum at a shareholder
meeting. The Company is not aware of any persons who beneficially own more than
5% of the outstanding voting stock of the Company as of the record date for the
Meeting.
If the enclosed form of Proxy is properly executed and returned to the
Company prior to or at the Meeting, and if the Proxy is not revoked prior to its
exercise, all shares represented thereby will be voted at the Meeting and, where
instructions have been given by a Shareholder, will be voted in accordance with
such instructions.
Any Shareholder executing a Proxy which is solicited hereby has the power to
revoke it at any time prior to its exercise. A Proxy may be revoked by giving
written notice to the Secretary of the Company at the Company's address set
forth above, by attending the Meeting and voting the shares of stock in person,
or by executing and delivering to the Secretary a later-dated Proxy.
The Company will bear all costs of soliciting Proxies. The solicitation of
Proxies will be by mail, but Proxies may also be solicited by telephone,
telegram, or in person by directors, officers, and other regular employees of
the Company or of the Bank. Should the Company, in order to solicit Proxies,
request the assistance of other financial institutions, brokerage houses, or
other custodians, nominees, or fiduciaries, the Company will reimburse such
persons for their reasonable expenses in forwarding proxy materials to
Shareholders and obtaining their Proxies.
The Annual Report of the Company for the fiscal year ended December 31,
2002, incorporating the Annual Report on Form 10-K filed by the Company with the
Securities and Exchange Commission, is being sent to Shareholders with this
Proxy Statement.
ELECTION OF DIRECTORS AND INFORMATION WITH
RESPECT TO DIRECTORS AND EXECUTIVE OFFICERS
The first Item to be acted upon at the Meeting is the election of four
directors, each to hold office for three years and until his successor shall
have been duly elected and qualified. The nominees receiving a plurality of the
votes represented in person or by proxy at the Meeting will be elected
directors.
All Proxies in proper form which are received by the Board prior to the
election of directors at the Meeting will be voted "FOR" the nominees listed
below, unless authority is withheld in the space provided on the enclosed Proxy.
Each nominee is presently a director of the Company, and each director of the
Company is also a director of the Bank. In the event any nominee declines or is
unable to serve, it is intended that the Proxies will be voted for a successor
nominee designated by the Board. All nominees have indicated a willingness to
serve, and the Board knows of no reason to believe that any nominee will decline
or be unable to serve if elected. The twelve members of the Board (including the
nominees for re-election at the Meeting, if elected) are expected to continue to
serve on the Board until their respective terms expire.
The information set forth below is furnished for each nominee for director
to be elected at the Meeting and each director of the Company whose term of
office continues after the Meeting. The share ownership numbers for certain
directors include shares that would be issuable upon exercise of "Offset
Options" granted to these directors in order to reduce the Company's liability
under its Stock Balance Plan. The purpose of the Offset Options, which were
approved by the Company's Shareholders at the 1998 Annual Meeting, is explained
on page 7. See footnote "(e)" on page 5 for the number of currently exercisable
stock options (including, without limitation, Offset Options) held by specific
directors.
NOMINEES FOR DIRECTOR AND DIRECTORS CONTINUING IN OFFICE
SHARES OF COMPANY COMMON
STOCK BENEFICIALLY OWNED (C)
AS OF APRIL 7, 2003 (D)
BUSINESS -----------------------------------
NAME AND DIRECTOR OF THE EXPERIENCE DURING
AGE (A) COMPANY SINCE PAST FIVE YEARS (B) NUMBER(E) PERCENT
- --------------------------- ------------------ ---------------------------------------- --------------- -----------------
NOMINEES (FOR TERMS TO EXPIRE AT ANNUAL MEETING IN 2006):
Sanford A. Belden 1992 President and Chief Executive Officer of 78,367 .60%
Age 60 the Company.
Lee T. Hirschey 1991 Chairman and Chief Executive Officer, 61,016 .47%
Age 67 Climax Manufacturing Company, converter
and manufacturer of paper products with
facilities in Castorland, Lowville, and
West Carthage, New York.
Peter A. Sabia(f) 2001 Owner, Valley Dodge Truck Center, 126,035 .97%
Age 71 Dunmore, Pennsylvania.
David C. Patterson 1991 President and owner of Wight and 66,210 .51%
Age 61 Patterson, Inc., manufacturer and seller
of livestock feed located in Canton, New
York.
2
NOMINEES FOR DIRECTOR AND DIRECTORS CONTINUING IN OFFICE
SHARES OF COMPANY COMMON
STOCK BENEFICIALLY OWNED (C)
AS OF APRIL 7, 2003 (D)
BUSINESS -----------------------------------
NAME AND DIRECTOR OF THE EXPERIENCE DURING
AGE (A) COMPANY SINCE PAST FIVE YEARS (B) NUMBER(E) PERCENT
- --------------------------- ------------------ ---------------------------------------- --------------- -----------------
DIRECTORS CONTINUING IN OFFICE
TERMS EXPIRING AT ANNUAL MEETING IN 2005:
Paul M. Cantwell, Jr. 2001 Owner, law firm of Cantwell & Cantwell, 74,657 .57%
Age 61 Malone, New York. Prior to January 2001,
Chairman and President, The Citizens
National Bank of Malone.
William M. Dempsey 1984 Retired. Prior to 2001, Assistant to the 55,994 .43%
Age 64 President, Rochester Institute of
Technology, Rochester, New York;
President/Dean, American College of Man-
agement and Technology (RIT), Dubrovnik,
Croatia (August 1997 - July 1999); prior
to August 1997, Vice President of
Finance and Administration, RIT.
Saul Kaplan(f) 2001 Co-Owner, M.C.F., Inc. and Partner, D&T 523,849 4.02%
Age 77 Real Estate, Scranton, Pennsylvania.
Prior to April 2003, Co-Owner, Montage
Foods, Inc., Scranton, Pennsylvania.
William N. Sloan 1991 Vice President for Administration 53,128 .41%
Age 68 Emeritus, The State University of New
York College at Potsdam, Potsdam,
New York.
TERMS EXPIRING AT ANNUAL MEETING IN 2004:
John M. Burgess 1991 Retired. Prior to 1991, President of 59,995 .46%
Age 66 Kinney Drugs, Inc., a drug and retail
chain with stores located throughout
northern New York.
Nicholas A. DiCerbo 1984 Partner, law firm of DiCerbo and 130,939 1.00%
Age 56 Palumbo, Olean, New York.
James A. Gabriel 1984 Owner, law firm of Franklin & Gabriel, 90,846 .69%
Age 55 Ovid, New York.
Harold Kaplan(f) 2001 Co-Owner, M.C.F., Inc. and Partner, D&T 142,914 1.10%
Age 69 Real Estate, Scranton, Pennsylvania.
Prior to April 2003, Co-Owner, Montage
Foods, Inc., Scranton, Pennsylvania.
3
In addition to the information provided above,
the following summarizes the security ownership SHARES OF COMPANY COMMON
of the highest paid executive officers who are STOCK BENEFICIALLY OWNED (C)
not also directors of the Company: AS OF APRIL 7, 2003 (D)
------------------------
NUMBER(E) PERCENT
----------- -----------
James A. Wears President, Banking 75,865 .58%
Age 53
Michael A. Patton President, Financial Services 72,806 .56%
Age 57
David G. Wallace Executive Vice President 93,784 .72%
Age 58 and Chief Financial Officer
David J. Elias President, Chief Executive Officer 14,093 .11%
Age 57 and Chief Investment Officer,
Elias Asset Management, Inc.(g)
Number of shares of Company common stock 1,720,498 12.68%
beneficially owned by all directors, persons
chosen to become directors and executive officers
of the Company as a group (16 persons)
(a) Harold Kaplan and Saul Kaplan are brothers. No other family
relationships exist between any two or more of the current directors
or named executive officers of the Company.
(b) No nominee for director or continuing director of the Company holds a
directorship with any company (other than the Company) which is
registered pursuant to Section 12 or subject to the requirements of
Section 15(d) of the Securities Exchange Act of 1934, or with any
company which is a registered investment company under the Investment
Company Act of 1940.
(c) Represents all shares as to which named individual possessed sole or
shared voting or investment power as of April 7, 2003, including
shares held by, in the name of, or in trust for, spouse and dependent
children of named individual and other relatives living in the same
household, even if beneficial ownership has been disclaimed as to any
of these shares by the nominee or director.
(d) The listed amounts include shares as to which certain directors and
named executive officers are beneficial owners but not the sole
beneficial owners as follows: Mr. Belden is the beneficial owner of
693 shares held by the Company's 401(k) plan; Mr. Burgess' wife holds
5,100 shares; Mr. Cantwell's wife holds 5,100, and Mr. Cantwell holds
10,608 shares as Trustee under a decedent's will; Mr. DiCerbo holds
28,261 shares jointly with his wife, 40,491 shares are held in the
name of the law partnership of DiCerbo and Palumbo, and 802 shares are
held by his wife; Mr. Elias's wife owns 7,868 shares; Mr. Hirschey's
wife holds 1,000 shares, and Mr. Hirschey holds 13,040 shares as
Trustee for the Retirement Plan of Employees of Climax Manufacturing
Company and 350 shares as Trustee of an Internal Revenue Code Section
2503C trust; 43,288 shares are held by a limited partnership
controlled by Mr. H. Kaplan; 42,000 shares are held by a limited
partnership controlled by Mr. S. Kaplan; Mr. Patterson holds 2,380
shares jointly with his wife, and 1,547 shares as Trustee for the
Wight and Patterson Retirement Plan; Mr. Patton is the beneficial
owner of 4,352 shares held by the Company's 401(k) plan, and his wife
holds 1,400 shares; 26,488 shares are held in the name of Valley Dodge
Truck Center, of which Mr. Sabia is owner; Mr. Sloan holds 179 shares
jointly with his wife, and his wife holds 492 shares; Mr. Wallace is
the beneficial owner of 15,454 shares held by the Company's 401(k)
plan; and Mr. Wears is the beneficial owner of 19,003 shares held by
the Company's 401(k) plan, he holds 12,453 shares jointly with his
wife, and his wife holds 700 shares; and his children hold 2,554
shares.
4
(e) Includes shares that the following individuals currently have the
right to acquire, or will have the right to acquire within 60 days of
April 7, 2003, through exercise of stock options issued by the
Company: Mr. Belden, 35,623 shares; Mr. Burgess, 46,093 shares; Mr.
Cantwell, 3,400 shares; Mr. Dempsey, 54,394 shares; Mr. DiCerbo,
54,577 shares; Mr. Gabriel, 58,564 shares; Mr. Hirschey, 40,284
shares; Mr. H. Kaplan, 9,573 shares; Mr. S. Kaplan, 9,573 shares; Mr.
Patterson, 55,085 shares; Mr. Patton, 36,359 shares; Mr. Sabia, 3,400
shares; Mr. Sloan, 50,979 shares; Mr. Wallace, 53,732 shares; and Mr.
Wears, 36,959 shares. These shares are included in the total number of
shares outstanding for the purpose of calculating the percentage
ownership of the foregoing individuals and of the group as a whole,
but not for the purpose of calculating the percentage ownership of
other individuals listed in the foregoing table.
(f) Pursuant to the terms of a Merger Agreement dated as of November 29,
2000 providing for the merger of First Liberty Bank Corp. ("First
Liberty") with and into the Company (which merger was consummated in
May 2001), the Company agreed to appoint three of First Liberty's
former directors, Saul Kaplan, Peter A. Sabia and Harold Kaplan, to
serve as members of its Board of Directors for terms expiring at the
2002, 2003 and 2004 annual Shareholders meetings, respectively. The
Merger Agreement further provided that, subject to the exercise of the
Board's fiduciary duty, Messrs. Kaplan, Sabia and Kaplan would be
nominated for at least one additional three-year term upon expiration
of these initial terms, and that the Board would recommend that the
Company's Shareholders vote in favor of their reelection.
(g) Elias Asset Management, Inc. is a wholly-owned subsidiary of the Bank.
BOARD COMMITTEES AND MEETINGS
The Board of Directors of the Company held twelve regularly scheduled
meetings and three special meetings during the fiscal year ended December 31,
2002. During this period, each director of the Company attended at least 75% of
the aggregate of the total number of meetings of the Board and the total number
of meetings held by committees of the Board on which he served.
Among its standing committees, the Board of the Bank has an
Audit/Compliance/Risk Management Committee which also serves as the Company's
Audit Committee. As described more fully on page 17, the Audit/Compliance/Risk
Management Committee reviews internal and external audits of the Company and the
Bank and the adequacy of the Company's and the Bank's accounting, financial, and
compliance controls, and investigates and makes recommendations to the Company's
Board and the Bank's Board regarding the appointment of independent auditors.
During 2002, this Committee held five meetings and its present members are
Directors William M. Dempsey (Chair), John M. Burgess, Lee T. Hirschey and
William N. Sloan.
The Bank's Board also has a Compensation Committee which reviews and makes
recommendations to the Bank's Board regarding compensation adjustments and
employee benefits to be instituted and which also serves as the Company's
Compensation Committee. As described more fully on pages 13-15, the Compensation
Committee reviews the compensation of nonofficer employees in the aggregate, and
the salaries and performance of executive officers are reviewed individually.
The Compensation Committee held nine meetings in 2002, and its present members
are Directors William N. Sloan (Chair), Lee T. Hirschey, David C. Patterson and
Peter A. Sabia.
The Company has a Nominating Committee which makes recommendations to the
Board for nominees to serve as directors. The Nominating Committee will consider
written recommendations from shareholders for nominees to serve on the Board
that are sent to the Secretary of the Company at the Company's main office. The
Nominating Committee held one meeting in 2002, and its present members are
Directors William M. Dempsey (Chair), John M. Burgess, Lee T. Hirschey, and
David C. Patterson.
5
The President and Chief Executive Officer of the Company serves as an ex
officio member of all Board committees except the Audit/Compliance/Risk
Management Committee, the Compensation Committee, and the Nominating Committee,
and receives no compensation for serving in this capacity. Mr. Gabriel, as Chair
of the Board, also serves as a member of all Board Committees except the
Audit/Compliance/Risk Management Committee, the Compensation Committee, and the
Nominating Committee.
COMPENSATION OF DIRECTORS
As directors of both the Company and the Bank, Board members receive an
annual retainer of $10,000, $750 for each Board meeting they attend, and $500
for each committee meeting they attend. Mr. Belden does not receive an annual
retainer or compensation for attending Board and committee meetings. The Chair
of the Board receives an all inclusive $55,000 retainer for serving in that
capacity. The Chair of the Audit/Compliance/Risk Management Committee receives
an annual retainer of $5,000; the Chairs of the Loan Committee, the Compensation
Committee, and the Strategic/Executive Committee each receive an annual retainer
of $3,500; and the Chairs of the Investment Committee, the Technology Committee,
and the Trust Committee each receive an annual retainer of $1,000. The Company
pays the travel expenses incurred by each director in attending meetings of the
Board.
Directors may elect to defer all or a portion of their director fees
pursuant to a Deferred Compensation Plan for Directors. Directors who elect to
participate in the Plan designate the percentage of their director fees which
they wish to defer (the "deferred fees") and the date to which they wish to
defer payment of benefits under the plan (the "distribution date"). The plan
administrator establishes an account for each participating director and credits
to such account (i) on the date a participating director would have otherwise
received payment of his deferred fees, the number of deferred shares of Company
Common Stock which could have been purchased with the deferred fees, and (ii)
from time to time such additional number of deferred shares which could have
been purchased with any dividends which would have been received had shares
equal to the number of shares credited to the account actually been issued and
outstanding. On the distribution date, the participating director shall be
entitled to receive shares of Company common stock equal to the number of
deferred shares credited to the director's account either in a lump sum or in
annual installments over a three, five or ten year period. The effect of the
plan is to permit directors to invest deferred director fees in stock of the
Company, having the benefit of any stock price appreciation and dividends as
well as the risk of any decrease in the stock price. To the extent that
directors participate in the plan, the interests of participating directors will
be more closely associated with the interests of shareholders in achieving
growth in the Company's stock price.
In 1995, the directors re-evaluated their total compensation arrangement, in
light of the increased responsibility associated with the changing nature of the
Company and the "Blue Ribbon Report" issued by the National Association of
Corporate Directors. Among other things, the Blue Ribbon Report suggests that
director compensation be structured so that it is specifically aligned with the
long-term interests of shareholders. Effective January 1, 1996, the Company's
1994 Long Term Incentive Compensation Program (the "Incentive Plan") was amended
to allow for the issuance of Non-Qualified Stock Options to nonemployee
directors. The Board believes that providing for the grant of Non-Statutory
Stock Options to nonemployee directors is in the best interests of the Company.
In the spirit of the Blue Ribbon Report, such a provision more closely aligns
the interests of individual directors with the long-term interests of the
Company's Shareholders, and enables the Company to continue to attract qualified
individuals to serve on the Board. In particular, when directors receive
equity-based compensation such as stock options, their overall compensation is
enhanced when the market price of the Company's common stock increases and is
adversely affected when the market price of the Company's common stock
decreases.
The Incentive Plan provides that each eligible nonemployee director is to
receive an option to purchase 2,000 shares of common stock on or about January
1st of each year. Each option granted to a nonemployee director is granted at an
option price per share equal to the market value per share of the Company's
common stock on the date of grant, and is fully exercisable upon its date of
grant, provided that shares of common stock acquired pursuant to the exercise of
such options may not be sold or otherwise transferred by a director within six
months of the grant. Each option is exercisable until the earlier of (i) ten
years from the date of grant, or (ii) termination of the optionee's service on
the Board for cause (as
6
defined in the Incentive Plan). Notwithstanding the foregoing, to the extent
that the Committee appointed by the Board to administer the Incentive Plan
determines that grants may be exempt from Section 16(b) of the Securities
Exchange Act of 1934, as amended, the Non-Statutory Stock Options granted to
eligible nonemployee directors shall relate to a number of shares of common
stock to be determined based upon the financial performance of the Company. Such
financial performance shall be determined based upon factors including (but not
limited to) the Company's growth in earnings per share, asset quality, return on
equity, and CAMELS rating (a measurement of capital, assets, management,
earnings, liquidity and sensitivity utilized by the Office of the Comptroller of
the Currency, the Bank's primary regulator). Pursuant to the 1996 amendment to
the Incentive Plan, each eligible nonemployee director received an option to
purchase 2,800 shares effective January 1, 2002.
In addition, in keeping with the spirit of the Blue Ribbon Report, effective
January 1, 1996, the Board adopted a "Stock Balance Plan" for nonemployee
directors of the Company who have completed at least six months of service as
director. The plan establishes an account for each eligible director. Amounts
credited to those accounts reflect the value of 200 shares of the Company's
Common Stock for each year of service between 1981 and 1995 at the December 31,
1995 market value, plus an annual amount equal to 200 additional shares of
Common Stock beginning in 1996, plus an annual earnings credit equal to the
one-year average total return on the Company's Common Stock. The crediting of
additional units beginning in 1996 is subject to an adjustment factor which
reflects the Company's asset quality, return on equity and CAMELS rating. The
account balance is payable to each director in the form of a lifetime annuity
or, at the election of the director, monthly installment payments over a three,
five, or ten year period following the later of age 55 or disassociation from
the Board, is subject to a six-year vesting schedule, and is forfeitable in the
event of termination from the Board for cause.
In 1998, amendments to the Stock Balance Plan and the Incentive Plan were
approved by the Company's shareholders allowing the grant of "Offset Options" to
directors under the Incentive Plan. The effect of these Offset Options is to
permit the Company to reduce the grantee's Stock Balance Plan account balance by
an amount equal to the growth in value of the Offset Options (i.e., the amount
by which the aggregate fair market value of the Common Stock underlying the
Offset Options exceeds the aggregate exercise price of the Offset Options) as of
the date on which the director's account is valued, provided that a director's
account may not be reduced below zero. As such, the Offset Options are not
intended to materially change the level of compensation to participating
directors under the Stock Balance Plan, but are intended to reduce the cost of
director compensation to the Company. In the event that the growth in value of a
director's Offset Options is less than the value of the director's Stock Balance
Plan account as of the date that the Offset Options are exercised, the shortfall
will be paid to the director either in cash or, at the Company's option in the
case of an exercise prior to retirement, by the issuance of additional Offset
Options. In the event that the growth in value of a director's Offset Options
exceeds the value of the director's Stock Balance Plan account, no adjustment
will be made.
Effective February 20, 2002, the Board of Directors granted an option to
purchase 1,000 shares of Common Stock to each nonemployee director, in
consideration of the significant efforts by these directors in connection with
the Company's successful November 2001 equity offering. The exercise price for
these options was fixed at $26.35 per share, the price at which shares were
offered and sold in the offering.
The Bank has a consulting agreement with Paul M. Cantwell, Jr., a director
of the Company and the Bank and the former Chairman and President of Citizens
National Bank of Malone. Under this agreement, Mr. Cantwell will provide
consulting services to the Bank until January 26, 2006 to facilitate the
transition of Citizens National Bank's business and operations to the Bank,
develop new business opportunities in the market areas formerly served by
Citizens National Bank, and advise the Bank regarding corporate and business
matters. Mr. Cantwell will provide these services on a part-time basis (not to
exceed 250 hours per year), and will be paid $50,000 per year. This amount is to
paid on a "grossed-up" basis for any Medicare and social security taxes (but not
federal, state or local income taxes) payable by Mr. Cantwell on the amount.
This means that in effect the Company will pay his Medicare and social security
taxes. Pursuant to the agreement, the Bank has also agreed to pay the premiums
for a life insurance policy for Mr. Cantwell's beneficiaries. This policy must
provide coverage for no less than the remaining payments due under the
consulting agreement. Finally, the Bank will make available health insurance
coverage for Mr. Cantwell and his spouse on the same basis as its employees
until age 65 and, thereafter, on the same basis as other retirees of the Bank.
7
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth information concerning compensation paid to
those persons who served as chief executive officer (or in an equivalent
capacity) during 2002 and to the other most highly compensated executive
officers whose annual salary and bonus earned during 2002 exceeded $100,000.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation Awards
---------------------------------------------------------------------------------------------------
Other Annual All Other
Name and Compensation Stock Compensation
Principal Position Year Salary($) Bonus ($)(1) ($)(2) Options (#) ($)(3)
- ----------------------------- --------------- ------------- --------------- --------------- --------------- ---------------
Sanford A. Belden 2002 485,550 242,775 5,055 26,340 361,997
President and Chief 2001 468,000 187,200 4,355 29,534 227,487
Executive Officer 2000 450,000 159,200 4,987 23,206 254,177
James A. Wears 2002 188,926 54,900 3,555 8,645 39,008
President, Banking 2001 176,500 52,950 3,822 8,480 36,104
2000 161,500 46,500 3,378 7,230 12,687
Michael A. Patton 2002 188,926 54,900 2,746 8,645 51,271
President, Financial 2001 176,500 52,950 1,878 8,480 43,164
Services 2000 161,500 48,450 2,697 7,230 13,983
2002 184,590 51,000 0 19,582 199,486
David G. Wallace 2001 164,000 49,200 0 7,823 34,163
Executive Vice President 2000 149,000 44,700 0 6,647 26,041
and Chief Financial Officer
2002 296,827 0 1,823 7,500 15,741
David J. Elias 2001 315,000 31,217 2,096 11,814 3,471
President, Chief Executive 2000 227,628 162,658 2,628 0 3,242
Officer and Chief
Investment Officer, Elias
Asset Management, Inc.
(1) The amounts shown in this column for Messrs. Belden, Wears, Patton,
and Wallace reflect payments under the Company's Management Incentive Plan, an
annual cash award plan based on performance and designed to provide incentives
for employees. The amount shown in this column for Mr. Elias reflects payments
under Mr. Elias's Employment Agreement.
(2) The amounts disclosed in this column include the reportable value of
the personal use of Company-owned vehicles for Messrs. Belden, Wears, Patton,
and Elias, which amounted to $5,055, $3,555, $2,746, and $1,823, respectively,
in 2002.
(3) The amounts in this column include: (a) the value of group term life
insurance benefits in excess of $50,000 under a plan available to all full-time
employees for which Messrs. Belden, Wears, Patton, Wallace, and Elias received
$2,970, $779, $1,507, $1,499, and $1,290 in 2002, respectively; (b) Company
contributions to the Employee Savings and Retirement Plan, a defined
contribution plan, amounting to $6,000 for Mr. Belden, $3,291 for Mr. Wears,
$5,794 for Mr. Patton, $4,518 for Mr. Wallace, and $14,451 for Mr. Elias in
2002; (c) Company contributions under the Company's Deferred Compensation Plan,
amounting to $17,690 for Mr. Belden, $6,672 for Mr. Wears, $6,672 for Mr.
Patton, and $6,199 for Mr. Wallace in 2002; and (d) the expense associated with
supplemental retirement plans, amounting to $335,317 for Mr. Belden, $28,266 for
Mr. Wears, $37,298 for Mr. Patton, and $187,270 for Mr. Wallace in 2002. The
Company does not maintain any "split-dollar" arrangements for any of the named
executives.
8
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides further information on grants of stock options
pursuant to the Company's Long-Term Incentive Compensation Program in fiscal
year 2002 to the named executives as reflected in the Summary Compensation Table
on page 8.
% of Total
Options Potential Realizable Value at
Granted to Exercise Assumed Annual Rates of Stock Price
Employees or Market Appreciation for Option Term
Options in Fiscal Base Price Expiration Value on ----------------------------------------
Name Granted (#) Year ($/Sh) Date Grant Date 0% 5% 10%
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
Sanford A. Belden 25,340 12.26% 26.20 1/1/12 26.20 0 417,528 1,058,098
Sanford A. Belden 1,000 0.48% 26.35 2/20/12 29.05 2,700 20,969 48,998
James A. Wears 7,645 3.70% 26.20 1/1/12 26.20 0 125,967 319,225
James A. Wears 1,000 0.48% 26.35 2/20/12 29.05 2,700 20,969 48,998
Michael A. Patton 7,645 3.70% 26.20 1/1/12 26.20 0 125,967 319,225
Michael A. Patton 1,000 0.48% 26.35 2/20/12 29.05 2,700 20,969 48,998
David G. Wallace 7,104 3.44% 26.20 1/1/12 26.20 0 117,053 296,635
David G. Wallace 5,000 2.42% 26.35 2/20/12 29.05 13,500 104,847 244,991
David G. Wallace 7,478 3.62% 31.35 12/31/12 31.35 0 147,435 373,629
David J. Elias 7,500 3.63% 26.20 1/1/12 26.20 0 123,578 313,170
Effective January 1, 2002, the Board of Directors issued incentive stock
options to Messrs. Belden, Wears, Patton, Wallace, and Elias at the then current
market price of $26.20 per share. Such options become exercisable over the
course of five years, with one-fifth of the options becoming exercisable on
January 1, 2003, 2004, 2005, 2006, and 2007.
Effective February 20, 2002, the Board of Directors issued non-statutory
stock options to Messrs. Belden, Wears, Patton, and Wallace at the price of
$26.35 per share, in consideration of the significant efforts by these
individuals in connection with the Company's successful November 2001 equity
offering. The exercise price for these options is equal to the price at which
shares were offered and sold in the offering. Such options vest over the course
of five years, with one-fifth of the options becoming exercisable on February
20, 2003, 2004, 2005, 2006, and 2007.
Effective December 31, 2002, the Board of Directors issued incentive stock
options to Mr. Wallace at the then current market price of $31.35 per share. In
accordance with the arrangements with Mr. Wallace described on page 11, all such
options were exercisable immediately.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
The following table provides information for the named executive officers, with
respect to (i) stock options exercised in fiscal year 2002, (ii) the number of
stock options held at the end of fiscal year 2002, and (iii) the value of
in-the-money stock options at the end of fiscal year 2002.
Value of Unexercised
Number of Unexercised Options In-the-Money Options
at 12/31/02 (#) at 12/31/02 ($) (1)
Shares --------------------------------- ---------------------------------
Acquired on Value
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
- ----------------------- ---------------- ---------------- --------------------------------- ---------------------------------
Sanford A. Belden 19,115 135,148 23,123 74,260 23,437 421,096
James A. Wears 0 0 29,697 23,413 283,177 129,983
Michael A. Patton 9,200 189,326 29,097 23,413 274,242 129,983
David G. Wallace 23,830 371,003 53,732 0 361,153 0
David J. Elias 0 0 2,362 16,952 15,589 101,008
(1) Based on the closing price of the Company's common stock on December
31, 2002 of $31.35 per share.
9
PENSION PLAN TABLE
YEARS OF SERVICE
Highest Five
Year Average
Compensation(1) 15 20 25 30 35
- --------------- ------ ------ ------ ------ ------
20,000 2,700 3,600 4,500 5,400 6,300
50,000 7,779 10,372 12,965 15,558 18,151
100,000 19,404 25,872 32,340 38,808 45,276
125,000 25,217 33,622 42,028 50,433 58,839
150,000 31,029 41,372 51,715 62,058 72,401
200,000 42,654 56,872 71,090 85,308 99,526
(1) For 2002, the Internal Revenue Code limits the total compensation that
may be taken into account in calculating benefits to $200,000.
The table above sets forth the estimated annual benefits under the formula
adopted for post-1988 years of service, payable upon retirement at age 65 in the
form of a single life annuity. Benefits are computed based on the average annual
compensation for the highest consecutive five years in the 10 years preceding
retirement. The amounts are not subject to any deduction for Social Security.
For purposes of calculating the benefit, an employee may not be credited with
more than 35 years of service. The base salary and cash award amounts in the
Summary Compensation Table on page 8 reflect the covered compensation under the
plan for Messrs. Belden, Wears, Patton, Wallace, and Elias. Messrs. Belden,
Wears, Patton, and Wallace have been credited with 10, 32, 32, and 14 years of
service, respectively, under the plan. Mr. Elias has been credited with 22 years
of service under the plan for purposes of eligibility and vesting, and 3 years
of service for purposes of benefit calculation.
The pension plan maintained by the Company is a noncontributory defined
benefit plan which is funded by the Company and administered by a retirement
committee which consists of persons appointed by the Board of Directors. The
plan covers all employees of the Company who have completed one full year of
continuous service. The Company first entered into a nonqualified supplemental
retirement plan agreement with Mr. Belden in January 1995, with Mr. Wallace in
March 1997 and with Messrs. Wears and Patton in January 2001. The Company does
not currently maintain a nonqualified retirement plan for Mr. Elias.
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with Mr. Belden providing for his
employment as the Company's President and Chief Executive Officer until December
31, 2007. The agreement provides that during the period from April 1, 2002
through December 31, 2002, the Company shall pay Mr. Belden a base salary at the
annual rate in effect on March 31, 2002, which was $485,550. Mr. Belden's base
salary for calendar years after 2002 shall be increased at the same rate as the
rate applied by the Company in its merit pool for salary increases to be paid
for the applicable calendar year. The agreement may be terminated by the Board
for cause at any time, and shall be terminated upon Mr. Belden's death or
disability. If Mr. Belden's employment is terminated by the Company prior to
December 31, 2007 for reasons other than cause, death or disability, Mr. Belden
will be entitled to severance pay equal to the greater of (i) the sum of Mr.
Belden's annual base salary at the time of the termination and the most recent
payment to Mr. Belden under the Company's Management Incentive Plan, or (ii)
amounts of base salary and expected Management Incentive Plan payments that
otherwise would have been payable to Mr. Belden through the unexpired term of
his employment (provided that in the event that Mr. Belden's involuntary
termination without cause occurs under circumstances entitling him to the change
in control benefits described in the following paragraph, the foregoing
severance pay shall be reduced by the consulting fee payments to be made to Mr.
Belden as described below). In addition, Mr. Belden will be permitted to dispose
of any restricted stock previously granted to him, all of his stock options will
become fully exercisable, and the Company will cover Mr. Belden and his eligible
dependents under all benefit plans and programs available to its retired
employees.
10
If Mr. Belden's employment is terminated for reasons other than cause,
death or disability within two years following a change of control, or if Mr.
Belden voluntarily resigns during this period based upon an involuntary and
material adverse change in his title, duties, responsibilities, working
conditions, total remuneration, or the geographic location of his assignment,
the Company will retain him as a consultant for three years at an annual
consulting fee equal to his base salary plus the award to Mr. Belden under the
Management Incentive Plan for the year immediately preceding the change in
control, will reimburse him for any loss incurred on the sale of his home, will
permit him to dispose of any restricted stock previously granted to him, and all
of his stock options will become fully exercisable. As an alternative to paying
change of control benefits to Mr. Belden over a three-year period, the Board of
Directors may elect, in its sole discretion, to pay all benefits due to Mr.
Belden in a single lump sum payment within 90 days following the change of
control and Mr. Belden's termination of employment. The agreement provides that
the amount of any change in control payments made to Mr. Belden will be "grossed
up" to hold Mr. Belden harmless from all income and excise tax liability
attributable to the payments.
The Company also maintains four year employment agreements with Messrs.
Wears and Patton providing for their continued employment until December 31,
2004. These agreements provide for severance pay, in the event of a termination
for reasons other than cause, death, or disability equal to the greater of (i)
the sum of the employee's annual base salary at the time of termination and the
most recent payment to the employee under the Company's Management Incentive
Plan, or (ii) amounts payable to the employee through the unexpired term of his
employment. In addition, if the agreement is not renewed at the end of its term
(other than by reason of the employee's refusal to negotiate or rejection of a
bona fide offer from the Company), the employee is entitled to severance pay
equal to one year of the employee's then current annual base salary, provided
that such severance pay shall be reduced to the extent that the employee
receives wages or self-employment income during the one year period following
expiration of the agreement. The agreements also provide change of control
benefits which include a three year consulting engagement and accelerated
vesting on all outstanding stock options. The employee may voluntarily terminate
his employment within two years following a change in control, in which event
the employee shall be entitled to full change in control benefits, with his
consulting fees to be reduced by any non-Company wages or self-employment income
derived by the employee during the three-year consulting period. As an
alternative to paying change of control benefits to the employee over a
three-year period, the Board of Directors may elect, in its sole discretion, to
pay all benefits due to the employee in a single lump sum payment within 90 days
following the change of control and the employee's termination of employment. In
the event this lump sum payment is made, the amount of the payment will be
increased to hold the employee harmless from any increased tax liability
resulting from the accelerated payment.
In 2002, Mr. Wallace informed the Company of his desire to leave the Company
during the second quarter of 2003 due to a family relocation to Florida. In
connection with this transition, Mr. Wallace ceased to be an employee of the
Company as of December 31, 2002, all of his stock options became exercisable as
of that date, and the Company entered into a Consulting Agreement with Mr.
Wallace effective as of January 1, 2003. Pursuant to the Consulting Agreement,
Mr. Wallace is to serve as the Company's Chief Financial Officer on an
independent contractor basis through May 10, 2003 or such earlier date as the
Company may appoint a successor Chief Financial Officer (the "CFO Period"), and
will thereafter provide such consulting services as may be agreed upon between
the parties through December 31, 2004. The Company is to pay Mr. Wallace $88,350
for services rendered during the CFO Period (to be pro-rated in the event he
does not serve as CFO for the entire CFO Period), plus a pro-rated bonus for
service during the CFO Period at the same rate as if he had been employed during
this period. Thereafter, the Company is to pay Mr. Wallace the sum of $265,500
immediately following the CFO Period (the "First Payment Date") and $265,500 on
the date that is halfway between the First Payment Date and December 31, 2004.
The $265,500 payments are subject to gross-up for the Company's share of social
security and Medicare taxes which it would have paid had these amounts been paid
to Mr. Wallace as an employee, as well as the increase in the marginal income
tax rate which would otherwise have been applicable to Mr. Wallace based on
earnings from the Company had he remained as an employee. The Company may
terminate the Consulting Agreement during the CFO Period for "cause" as defined
in the Agreement, and thereafter for breach by Mr. Wallace of certain
confidentiality and non-competition obligations set forth in the Agreement.
11
The Bank has an agreement with Mr. Elias and Elias Asset Management, Inc., a
wholly-owned subsidiary of the Bank ("EAM"), providing for Mr. Elias's
employment as EAM's president, chief executive officer and chief investment
officer until April 3, 2005. The agreement requires that Mr. Elias perform his
duties to the best of his abilities and devote his full working time and
attention to the business and affairs of EAM. In addition to his base salary,
Mr. Elias is entitled to an annual incentive bonus based upon a percentage of
EAM's annual adjusted net income, calculated pursuant to a formula set forth in
the agreement. The agreement may be terminated by EAM for "cause" (as defined in
the agreement) at any time. If Mr. Elias's employment is terminated by EAM
without cause, or if Mr. Elias terminates his employment for "good reason" (as
defined in the agreement), EAM must, at its option, either (i) pay Mr. Elias a
severance benefit equal to the base salary and estimated incentive bonuses that
he would otherwise have received during the remaining term of the agreement, or
(ii) unconditionally release Mr. Elias from post-termination non-compete
provisions that would otherwise apply under the terms of the agreement. The
agreement provides that if Mr. Elias's employment is terminated within two years
following a change of control, EAM shall pay him, in a lump sum as soon as
practicable following termination, 2.9 times his base salary in effect at the
time of termination plus 2.9 times his annual incentive bonus earned during the
term of the agreement; provide him with fringe benefits, or the cash equivalent
of such benefits, for a period of 24 months following termination; and treat as
immediately vested and exercisable all unexpired stock options.
SUPPLEMENTAL RETIREMENT PLAN AGREEMENTS
The Company has Supplemental Retirement Plan Agreements with Mr. Belden,
Mr. Wallace, Mr. Patton, and Mr. Wears.
Under Mr. Belden's Supplemental Retirement Plan Agreement, the Company must
provide Mr. Belden with an annual supplemental retirement benefit equal to the
product of (i) 5% times Mr. Belden's number of years of service, considering
only the first ten years of service, plus 2% times Mr. Belden's number of years
of service in excess of ten years up to a maximum of 15 years, times (ii) his
final five year average salary and cash incentive payment. The supplemental
retirement benefit is reduced by the benefit payable under the Company's pension
plan, 50% of Mr. Belden's Social Security benefit, and Company contributions on
Mr. Belden's behalf and earnings attributable thereto under the Company's 401(k)
Employee Stock Ownership Plan and Deferred Compensation Plan for Certain
Executive Employees. The supplemental retirement benefit is payable upon the
later of Mr. Belden's cessation of employment with the Company or his receipt of
the final payment due under his employment agreement, generally in the form of
an actuarially reduced joint and 100% survivor benefit. Benefits payable prior
to age 62, or in another form, are subject to the same actuarial adjustments as
benefits under the Company's pension plan.
Notwithstanding the foregoing, if Mr. Belden's employment is terminated for
reasons other than cause, death or disability within two years following a
change of control, or if Mr. Belden voluntarily resigns during this period based
upon an involuntary and material adverse change in his title, duties,
responsibilities, working conditions, total remuneration, or the geographic
location of his assignment, the Company must credit Mr. Belden with additional
years of service equal to the greater of three years of service or the years of
service he is retained as a consultant under the terms of his employment
agreement for purposes of determining his supplemental retirement benefit
described above, credit Mr. Belden with two additional years of service for
purposes of determining his supplemental retirement benefit, and determine Mr.
Belden's final five year average compensation as described above by considering
the years he is retained as a consultant under the terms of the employment
agreement as service that precedes his termination and considering amounts paid
to him during that period as salary and cash incentive payments. If the Board of
Directors elects to pay Mr. Belden's change in control benefit under his
employment agreement in a lump sum, the Company will pay his supplemental
retirement benefit in an actuarial equivalent single lump sum payment within 90
days following the change of control and his termination of employment. The
amount of any change in control payments made to Mr. Belden will be "grossed up"
to hold Mr. Belden harmless from all income and excise tax liability
attributable to the payments.
Under Mr. Wallace's Supplemental Retirement Plan Agreement, as amended in
connection with execution of the Consulting Agreement described on page 11, the
Company must contribute to the Company's deferred compensation plan, on behalf
of Mr. Wallace, certain additional amounts as of the last day of calendar year
2003 and 2004. In addition, the Company shall pay Mr. Wallace an annual
supplemental retirement benefit equal to the excess (if any) of (i) the annual
benefit that he would have earned pursuant to the Company's pension plan if (a)
75% of Mr. Wallace's annual
12
compensation that is disregarded for pension plan purposes solely because of the
limit imposed by Internal Revenue Code Section 401(a)(17) is added to the amount
of his annual compensation actually taken into account pursuant to the pension
plan and (b) Internal Revenue Code Section 415 is disregarded, minus (ii) the
annual benefit actually payable to Mr. Wallace pursuant to the pension plan,
with the resulting amount to be supplemented by $2,639 per year. This
supplemental retirement benefit is to be paid as a single life annuity for Mr.
Wallace's life beginning at age 65; provided, however, that in lieu of a single
life annuity, Mr. Wallace may elect to receive the benefit in any of the
optional forms of payment available under the Company's current pension plan
described on page 10, subject to adjustments, based on the factors used to
calculate optional forms of payment for distributions under the pension plan at
the time payments commence.
Under the Supplemental Retirement Plan Agreements for Mr. Patton and Mr.
Wears, the Company shall pay the employee an annual supplemental retirement
benefit equal to the excess (if any) of (i) the annual benefit that the employee
would have earned pursuant to the Company's pension plan if (a) 75% of the
employee's annual compensation that is disregarded for pension plan purposes
solely because of the limit imposed by Internal Revenue Code Section 401(a)(17)
is added to the amount of the employee's annual compensation actually taken into
account pursuant to the pension plan and (b) Internal Revenue Code Section 415
is disregarded, minus (ii) the annual benefit actually payable to the employee
pursuant to the pension plan. The benefit described in the preceding sentence is
payable at age 65 in the form of an actuarially reduced joint and 50% survivor
benefit, provided that benefits payable prior to age 65, or paid in another
form, are subject to the same actuarial adjustments as benefits under the
Company's pension plan.
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
The members of the Compensation Committee of the Bank's Board of Directors
during the last fiscal year were William N. Sloan (Chair), Paul M. Cantwell,
Jr., Nicholas A. DiCerbo, James A. Gabriel and Lee T. Hirschey. The Compensation
Committee reviews and makes recommendations regarding compensation levels and
employee benefits. As noted on page 18, the law firms of DiCerbo and Palumbo, of
which Director DiCerbo is a partner, Franklin & Gabriel, of which Director
Gabriel is owner, and Cantwell & Cantwell, of which Director Cantwell is owner,
provided legal services to the Bank during 2002.
REPORT OF THE COMPENSATION COMMITTEE
ON EXECUTIVE COMPENSATION
The Company has adopted a multi-faceted approach towards compensating all of
its employees, including senior management. The underlying philosophy and
description of major components of the total compensation program are described
below.
PHILOSOPHY
The total compensation program is intended to align compensation with
business objectives and enable the Company to attract and retain individuals who
are contributing to the long-term success of the Company. Towards this end:
THE COMPANY PAYS COMPETITIVELY. The Company regularly compares its
cash, equity and benefits based compensation practices with those of other
companies of similar size, operating in similar geographic market areas, many of
which are represented in the stock performance graph included on page 16, and
establishes compensation parameters based on that review.
THE COMPANY ENCOURAGES TEAMWORK. The Company recognizes that its
long-term success results from the coordinated efforts of employees working
towards common, well established objectives. While individual accomplishments
are encouraged and rewarded, the performance of the Company is a determining
factor in total compensation opportunities.
THE COMPANY STRIVES FOR FAIRNESS IN THE ADMINISTRATION OF PAY. The
Company strives to ensure that compensation levels accurately reflect the level
of accountability that each individual has within the Company; employees are
informed
13
of the total compensation program; decisions made regarding individual
performance which affect compensation matters are based upon an objective
assessment of performance; and all employees have equal access to positions
within the Company which provide for increased levels of total compensation.
The process of assessing performance involves the following:
1. Prior to the beginning of each fiscal year, the Chief Executive
Officer establishes and distributes written goals, which must be approved by the
full Board. Those goals include specific financial targets relative to earnings
and asset quality. The Company strives to achieve financial results which are in
the upper third of the results published by its peer group.
2. Individuals at each successive level of management establish
written goals, which must be approved by their respective managers.
3. All goals are reviewed on an ongoing basis to ensure that the
Company is responding to changes in the marketplace and economic climate, and
that accomplishment of retained goals is ensured.
4. At the end of the fiscal year, performance is evaluated against
goals and other key position responsibilities. Such evaluations affect decisions
on salary, cash incentive, and stock option matters.
COMPENSATION PROGRAMS
The Company defines itself as a super-community bank which provides products
of a more comprehensive and advanced nature than those offered by smaller
institutions, while simultaneously providing a level of service which exceeds
the service quality delivered by larger regional and money center organizations.
The delivery of those products and services, in ways that enhance shareholder
value, requires that the Company attract key people, promote teamwork, and
reward results. In furtherance of those requirements, the Company maintains the
following compensation programs.
CASH-BASED COMPENSATION
SALARY The Company sets base salaries for employees by
reviewing the total cash compensation opportunities for competitive positions in
the market. In order to more closely align employee compensation to the
Company's performance, the Company uses a combination of competitive base
salaries and performance incentive opportunities to provide for total
compensation that may exceed those in comparable companies which do not generate
comparable financial results.
MANAGEMENT INCENTIVE PLAN The Company maintains an annual
incentive plan in which 25% of its employees participate. The Company's
performance to targeted asset quality, growth in earnings per share, and CAMELS
rating, which targets are approved by the Board, triggers the payment of cash
awards for all employees in this group. Award levels, which amount to a
percentage of salary, have been established for different organizational levels
within the Company. For Mr. Belden, 100% of his award is determined by the
Company's performance relative to the financial targets described above. For
Messrs. Wears, Patton, and Wallace, 80% of their respective award opportunities
reflect the Company's performance relative to the financial targets, and 20% of
their respective award opportunities reflect performance to other quantitative
and qualitative goals specific to their areas of responsibility. 100% of Mr.
Elias's award opportunity reflects the performance of Elias Asset Management,
Inc. relative to certain financial targets as provided in his employment
agreement.
EQUITY-BASED COMPENSATION
STOCK OPTION PROGRAM The purpose of this program is to
provide additional incentives to employees to work to maximize shareholder
value. The option program serves as an effective tool in recruiting key
individuals and utilizes vesting periods to encourage these individuals to
continue in the employ of the Company. The Board frequently awards options in
years during which the Company has achieved its financial targets. The number of
stock options issued generally reflects a percentage of salary; and various
percentages have been established for different organizational levels within the
Company.
14
RESTRICTED STOCK The Company has, on occasion, issued
limited amounts of restricted stock to individuals to support a variety of
business objectives. Examples include: performance unit shares have been issued
in start-up and turnaround assignments, with vesting schedules tied to specific
performance criteria; and restricted shares have been issued to newly promoted
and hired individuals who received initial stock option awards with no
in-the-money exercisable value.
The Company believes that the use of equity-based compensation such as stock
options and restricted stock is important in that it aligns the interests of key
personnel with those of the Shareholders. In particular, when personnel receive
equity-based compensation, their overall compensation is enhanced when the
market price of the Company's common stock increases and is adversely affected
when the market price of the Company's common stock decreases.
CEO COMPENSATION
In December 2002, the full Board formally reviewed Mr. Belden's performance
for fiscal year 2002, his tenth full year as the Company's President and CEO.
Having determined that the Company's level of performance relative to the
majority of its previously approved annual and long-term financial targets had
been surpassed, the Board, operating under the terms of the Management Incentive
Plan disclosed in this Report, authorized the payment of Mr. Belden's cash award
for 2002, which amounted to $242,775. Mr. Belden's $485,550 base salary level
for 2002 is well supported by competitive wage survey data, and the increase
over his 2001 base salary level is well supported by the Company's strategic
accomplishments and financial performance during the 2001 evaluation period.
The foregoing report has been provided by William N. Sloan (Chair), Lee T.
Hirschey, David C. Patterson, and Peter A. Sabia, present members of the
Compensation Committee.
15
STOCK PERFORMANCE GRAPH
The following graph compares cumulative total shareholder returns on the
Company`s common stock over the last five fiscal years to the Russell 3000 Index
(of which the Company became a member in June 2001) and the Nasdaq Bank Stocks
Index. Total return values were calculated as of December 31 of each indicated
year assuming $100 investment on December 31, 1997 and reinvestment of
dividends.
[Graphic Depiction of the Values Set Forth Below]
1997 1998 1999 2000 2001 2002
-------------- -------------- -------------- -------------- -------------- --------------
Nasdaq Bank Stocks Index 100.00 88.23 81.19 93.10 102.48 107.11
Russell 3000 Index 100.00 122.32 146.08 133.64 116.78 90.14
Community Bank System, Inc. 100.00 96.17 78.79 87.99 96.87 120.19
16
AUDIT COMMITTEE REPORT
In accordance with its written charter adopted by the Board of Directors,
the Bank's Audit/Compliance/Risk Management Committee (which also serves as the
Company's Audit Committee) assists the Board in fulfilling its responsibility
for oversight of the quality and integrity of the accounting, auditing, and
financial reporting practices of the Company and the Bank. The Committee reviews
internal and external audits of the Company and the Bank and the adequacy of the
Company's and the Bank's accounting, financial, and compliance controls, and
investigates and makes recommendations to the Board regarding the appointment of
independent auditors.
In discharging its oversight responsibility as to the audit process, the
Audit/Compliance/Risk Management Committee obtained from the Company's
independent auditors a formal written statement describing all relationships
between the auditors and the Company that might bear on the auditors'
independence consistent with Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees," discussed with the auditors
any relationships that may impact their objectivity and independence and
satisfied itself as to the auditors' independence. The Committee also discussed
with management and the independent auditors the quality and adequacy of the
Company's internal controls. The Committee reviewed with the independent
auditors their audit plans, audit scope, and identification of audit risks.
The Committee discussed and reviewed with the independent auditors all
communications required by generally accepted auditing standards, including
those described in Statement on Auditing Standards No. 61, as amended,
"Communication with Audit Committees," and, with and without management present,
discussed and reviewed the results of the independent auditors' examination of
the financial statements. The Committee also reviewed with management and the
independent auditors the audited financial statements of the Company as of and
for the fiscal year ended December 31, 2002.
Based on the above-mentioned reviews and discussions with management and the
independent auditors, the Committee recommended to the Board of Directors that
the Company's audited financial statements be included in its Annual Report on
Form 10-K for the fiscal year ended December 31, 2002, for filing with the
Securities and Exchange Commission.
The foregoing report has been provided by William M. Dempsey (Chair), John
M. Burgess, Lee T. Hirschey, and William N. Sloan, members of the
Audit/Compliance/Risk Management Committee
AUDIT FEES
The following table sets forth fees billed or expected to be billed to the
Company by PricewaterhouseCoopers L.L.P. for: (i) services rendered for the
audit of the Company's annual financial statements for fiscal year 2002 and
review of quarterly financial statements, (ii) services rendered during fiscal
year 2002 for provision of any financial information systems design and
implementation, and (iii) all other services rendered during fiscal year 2002,
including acquisition assistance and services in connection with the Company's
related equity offerings, routine tax consulting, and other miscellaneous
consulting services. The Audit/Compliance/Risk Management Committee has
considered whether the provision of non-audit services is compatible with
PricewaterhouseCoopers L.L.P.'s independence.
Audit Fees $ 191,500
Financial Information Systems Design
and Implementation Fees $ 0
All Other Fees:
Acquisition Assistance and Equity Offerings for 2001 $ 115,420
Routine Tax Consulting $ 176,800
Tax Consulting and Advisory Services
for 2001 Acquisitions 127,550
Miscellaneous Consulting $ 1,700
---------
Total All Other Fees $ 421,470
---------
Total All Fees $ 612,970
17
TRANSACTIONS WITH MANAGEMENT
Some of the directors and executive officers of the Company and the Bank
(and the members of their immediate families and corporations, organizations,
trusts, and estates with which these individuals are associated) are indebted to
the Bank. However, all such loans were made in the ordinary course of business,
do not involve more than the normal risk of collectibility or present other
unfavorable features, and were made on substantially the same terms, including
interest rate and collateral requirements, as those prevailing at the same time
for comparable loan transactions with unaffiliated persons. No such loan is
nonperforming at present. The Company expects that the Bank will continue to
have banking transactions in the ordinary course of business with the Company's
executive officers and directors and their associates on substantially the same
terms, including interest rates and collateral, as those then prevailing for
comparable transactions with others.
Outside of these normal customer relationships, none of the directors or
executive officers of the Company or the Bank and no 5% shareholders of the
Company (or members of the immediate families of any of the above or any
corporations, organizations, or trusts with which such persons are associated)
maintains any significant business or personal relationship with the Company or
the Bank, other than as arises by virtue of his ownership interest in the
Company or his position with the Company or the Bank. The law firms of (i)
Franklin & Gabriel, owned by Director Gabriel, provided legal services to the
Bank's operations in its Finger Lakes Markets, (ii) DiCerbo and Palumbo, of
which Director DiCerbo is a partner, provided legal services to the Bank's
operations in its Southern Region Markets, and (iii) Cantwell & Cantwell, owned
by Director Cantwell, provided legal services to the Bank's operations in its
Northern Region Markets. For services rendered during 2002 and for related
out-of-pocket disbursements, DiCerbo and Palumbo received $212,394 from the
Bank, Franklin and Gabriel received $49,995 from the Bank, and Cantwell &
Cantwell received $28,806 from the Bank.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors, executive officers and holders of more than 10% of the Company's
common stock (collectively, "Reporting Persons") to file with the Securities and
Exchange Commission initial reports of ownership and reports of changes in
ownership of the common stock. Such persons are required by regulations of the
Securities and Exchange Commission to furnish the Company with copies of all
such filings. Based solely on its review of the copies of such filings received
by it and written representations of Reporting Persons with respect to the
fiscal year ended December 31, 2002, the Company believes that all Reporting
Persons complied with all Section 16(a) filing requirements in the fiscal year
ended December 31, 2002 except as follows: Mr. Patton failed to file three Form
4 Reports with respect to four transactions involving the Company's 401K plan in
2002. These transactions were reported on a Form 5 Report filed in March 2003.
In addition, during early 2003 the Company became aware that Messrs. Kaplan and
Kaplan filed late Form 3 Reports upon becoming directors of the Company in 2001
which did not depict stock options received by them during their service as
directors of First Liberty (pursuant to the terms of the merger of First Liberty
with and into the Company, these options became options to acquire shares of the
Company's Common Stock upon consummation of the merger), and Mr. Sabia filed a
late Form 3 Report upon becoming a director of the Company in 2001 which did not
depict shares held by Valley Dodge Truck Center, of which he is owner. Amended
Form 3 Reports reflecting the options held by Messrs. Kaplan and Kaplan and the
shares held by Valley Dodge Truck Center were filed in March 2003.
SHAREHOLDER PROPOSALS
If shareholder proposals are to be considered by the Company for inclusion
in a proxy statement for a future meeting of the Company's Shareholders, such
proposals must be submitted on a timely basis and must meet the requirements
established by the Securities and Exchange Commission for shareholder proposals.
Shareholder proposals for the Company's 2004 Annual Meeting of Shareholders will
not be deemed to be timely submitted unless they are received by the Company at
its principal executive offices by December 22, 2003. Such shareholder
proposals, together with any supporting statements, should be directed to the
Secretary of the Company. Shareholders submitting proposals are urged to submit
their proposals by certified mail, return receipt requested.
18
INDEPENDENT AUDITORS
PricewaterhouseCoopers L.L.P., Independent Certified Public Accountants,
were retained by the Company at the direction of the Board of Directors. The
independent auditors have audited the financial statements of the Company for
the fiscal year ended December 31, 2002 and performed such other nonaudit
services as the Board requested.
A representative of PricewaterhouseCoopers L.L.P. will be present at the
Meeting. This representative will have the opportunity to make a statement, if
he so desires, and will be available to respond to appropriate questions from
Shareholders.
OTHER MATTERS
The Board of Directors of the Company is not aware of any other matters that
may come before the Meeting. However, the Proxies may be voted with
discretionary authority with respect to any other matters that may properly come
before the Meeting.
Date: April 21, 2003 By Order of the Board of Directors
/s/ Donna J. Drengel
Donna J. Drengel
Secretary
19
[FORM OF PROXY]
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
COMMUNITY BANK SYSTEM, INC.
5790 WIDEWATERS PARKWAY
DEWITT, NEW YORK 13214-1883
The undersigned hereby appoints Charles M. Ertel and Donna J. Drengel,
proxies, with power to act without the other and with power of substitution, and
hereby authorizes them to represent and vote, as designated on the other side,
all the shares of stock of Community Bank System, Inc. standing in the name of
the undersigned with all powers which the undersigned would possess if present
at the Annual Meeting of Shareholders of the Company to be held May 28, 2003 or
any adjournment thereof.
(CONTINUED, AND TO BE MARKED, SIGNED AND DATED ON THE REVERSE SIDE)
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THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE ELECTION OF DIRECTORS.
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
- ------------------------------------------------------------------------------------------------------------------------------------
1. ELECTION OF DIRECTORS In their discretion, such attorneys-in-fact and proxies are
authorized to vote upon such other business as may properly
NOMINEES come before the meeting.
[_] FOR ALL NOMINEES o Sanford A. Belden
o Lee T. Hirschey This Proxy, when properly executed, will be voted in the
[_] WITHHOLD AUTHORITY o Peter A. Sabia mater directed herein by the undersigned.
FOR ALL NOMINEES o David C. Patterson
IF NO DIRECTION IS GIVEN, THIS PROXY WILL BE VOTE "FOR"
[_] FOR ALL EXCEPT PROPOSAL 1.
(See instructions below)
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INSTRUCTION: To withhold authority to vote for any individual
- ----------- nominee(s), mark "FOR ALL EXCEPT" and fill in the
circle next to each nominee you wish to withhold,
as shown here: o
- ---------------------------------------------------------------------
- ---------------------------------------------------------------------
To change the address on your account, please check the
box at right and indicate your new address space above. [_] Please check here if you plan to attend the meting. [_]
Please note that changes to the registered name(s) on
the account may not be submitted via this method.
- ---------------------------------------------------------------------
Signature of Shareholder_____________________________ Date:____________ Signature of Shareholder_____________________ Date: ________
NOTE: This proxy must be signed exactly as the name appears hereon. When shares are held jointly, each holder should
sign. When signing as executor, administrator, attorney, trustee or guardian, please give fill title as such.
If the signer is a corporation, please sign full corporation name by duly authorized officer, giving full title
as such. If signer is a partnership, please sign in partnership name by authorized person.
ANNUAL MEETING OF SHAREHOLDERS OF
COMMUNITY BANK SYSTEM, INC.
May 28, 2003
---------------------------------
PROXY VOTING INSTRUCTIONS
---------------------------------
MAIL - Date, sign and mail your proxy card in the envelope provided as soon as
possible.
-OR-
TELEPHONE - Call toll-free 1-800-PROXIES from any touch-tone telephone and
follow the instructions. Have your control number and proxy card available when
you call.
-OR-
INTERNET - ACCESS "WWW.VOTEPROXY.COM" and follow the on-screen instructions.
Have your control number available when you access the web page.
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COMPANY NUMBER
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ACCOUNT NUMBER
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CONTROL NUMBER
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