UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

SCHEDULE 14A

(RULE 14a-101)

SCHEDULE 14A INFORMATION

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.     )

Filed by the Registrant þ

Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

 

FINANCIAL INSTITUTIONS, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DEAR SHAREHOLDERS:

 

The Annual Meeting of Shareholders of Financial Institutions, Inc. will be held at the Company’s offices at 220 Liberty Street, Warsaw, New York 14569 on Wednesday, May 2, 2007, at 10:00 a.m. for the following purposes:

 

 

The Board of Directors has fixed the close of business of March 16, 2007 as the record date for the determination of shareholders entitled to notice of and to vote at the meeting.

 

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

 

Thank you for your cooperation and support.

 

On behalf of the Board of Directors,

 

 

 

April 2, 2007

 

Financial Institutions, Inc.

www.fiiwarsaw.com

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

 

FINANCIAL INSTITUTIONS, INC.

 

Table of Contents

 

 

This Proxy Statement is furnished in connection with solicitation of proxies on behalf of the Board of Directors of Financial Institutions, Inc. (“FII”) for the Annual Meeting of Shareholders of FII to be held on May 2, 2007.

 

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

 

The close of business of March 16, 2007 has been fixed as the record date for determination of the shareholders entitled to notice of, and to vote at, the meeting. On that date there were outstanding and entitled to vote 11,329,410 shares of common stock, each of which is entitled to one vote on each matter at the meeting. The approximate date on which this Proxy Statement and the enclosed proxy card are being sent to shareholders is April 2, 2007.

 

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

 

Our Board of Directors is divided into three classes, one of which is elected at each Annual Meeting for a term of three years and until their successors have been elected and qualified. The Board of Directors has nominated four persons for election as directors for the terms indicated in the following table. The Board of Directors believes that the nominees will be available and able to serve as directors, but, if for any reason any of them should not be, the persons named in the proxy may exercise discretionary authority to vote for a substitute proposed by the Board of Directors. The holders of a majority of the outstanding shares of common stock are required to be present in person or to be represented by proxy at the

meeting in order to constitute a quorum for transaction of business. Directors are elected by a plurality of the votes cast. Proxies indicating abstentions and broker non-votes are counted as present for quorum purposes but are not counted for or against the election of directors. Our By-laws govern the methods for counting votes and vest this responsibility in the Inspectors of Election appointed to perform this function.

 

The Board of Directors currently consists of twelve members. Joseph F. Hurley, whose term expires in 2007, is not standing for re-election. Three directors are nominated for re-election and James L. Robinson is nominated to fill the vacancy created by Mr. Hurley’s decision. The nominees and information about them are listed in the following table:

 

 

The Board of Directors unanimously recommends a vote FOR the nominees, Thomas P. Connolly, Samuel M. Gullo, James L. Robinson and James H. Wyckoff.

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

 

 

 

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

 

In 2006, the Board of Directors held thirteen meetings. All directors attended more than 75% of the Board meetings and the meetings of Committees on which they serve. There is no required attendance policy with respect to the Annual Meeting of Shareholders, however all of the directors did attend the 2006 Annual Meeting.

 

The Board of Directors has established the following three standing committees: Audit; Management Development and Compensation; and Executive, Nominating and Governance. All the committees function under written charters that outline the respective authority, membership, meetings, duties and responsibilities. These committee charters may be viewed by accessing the Stockholder Information tab on the FII website

(http://www.fiiwarsaw.com). The Company has a written Code of Business Conduct & Ethics policy to assist its directors, officers, and employees in adhering to their ethical and legal responsibilities. The current version of the Code of Business Conduct & Ethics policy may also be viewed by accessing the Stockholder Information tab on the FII website (http://www.fiiwarsaw.com).

 

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

 

The Audit Committee reviews the general scope of the audit conducted by our independent auditors and matters relating to our financial reporting, internal control systems and credit quality. In performing its function, the Audit Committee meets separately with representatives of the independent auditors, internal auditors and senior management. In 2006, the Audit Committee held five meetings and two teleconferences. The Audit Committee members are Barton P. Dambra, Chairman, John R. Tyler, Jr., Joseph F. Hurley, and Karl V. Anderson, Jr. Mr. Dambra is the required “audit committee financial expert”. All committee members are “independent” as defined in Securities and Exchange Commission rules applicable to audit committees.

 

The Management Development and Compensation Committee (MD&C) of the Board is responsible for establishing the performance goals and objectives, evaluating the performance, and evaluating and approving all components of compensation for the Company’s CEO. The Committee is responsible for oversight of performance, compensation, benefit plans, and succession plans for senior and executive management. The MD&C Committee also reviews and makes recommendations to the full Board with regard to compensation of Directors. All committee members are “independent” under NASDAQ rules. The Management Development and Compensation Committee members are Susan R. Holliday, Chair, Samuel M. Gullo, John E. Benjamin, and Thomas P. Connolly. In 2006, the Management Development and Compensation Committee held seven meetings.

 

The Executive, Nominating and Governance Committee is charged with assisting the Board of Directors with strategic planning, in identifying qualified individuals to become directors, determining membership on Board committees and addressing corporate governance issues. The Committee members are John R. Tyler, Jr., Chairman, James H. Wyckoff, Robert N. Latella, Samuel M. Gullo and John E. Benjamin. All committee members are considered “independent” under Nasdaq rules. In 2006, the Executive, Nominating and Governance Committee held five meetings. The Executive, Nominating and Governance Committee will consider nominations made by shareholders or directors that are timely received pursuant to our By-laws. The evaluation process will include, but not be limited to, determining (i) whether the nominee would be “independent”, and (ii) that the nominee fits the Board’s then current needs for diversity, geographic distribution and professional expertise. Written nominations should be directed to our Director of Human Resources. The Executive, Nominating and Governance Committee will evaluate all nominees on the same basis, provided that current directors may be evaluated solely on the basis of their record of performance as an FII director.

 

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

 

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

 

In connection with these responsibilities, the Company’s Audit Committee met with management and the independent accountants to review and discuss the Company’s December 31, 2006 consolidated financial statements. The Audit Committee also discussed with the independent accountants the matters required by Statement on Auditing Standards No. 61 (Communication with Audit Committees). The Audit Committee received written disclosures from the independent accountants required by Independence Standards Board Standard No. 1 (Independence Discussions with Audit Committees) and considered the compatibility of non-audit services with KPMG’s independence.

 

I.   AUDIT FEES

 

Fees billed by KPMG for professional services rendered in connection with the audits of the Company’s consolidated financial statements included in the Company’s Form 10-K and the limited reviews of the interim consolidated financial statements included in the Company’s Forms 10-Q were $445,000 for fiscal year ended December 31, 2006 and $633,000 for fiscal year ended December 31, 2005.

 

II.  AUDIT RELATED FEES

 

Audit-related fees consist of services rendered in connection with the audits of the Company’s broker-dealer subsidiary’s financial statements, financial statements of employee benefit plans and regulatory compliance procedures. These fees were $23,900 for fiscal year ended December 31, 2006 and $36,000 for fiscal year ended December 31, 2005.

Tax Fees

 

Aggregate fees for tax compliance and advisory services for the fiscal year ended December 31, 2006 were $74,685 and $67,540 for the fiscal year ended December 31, 2005.

 

All Other Fees

 

No additional fees than reported as audit fees, audit related fees and tax fees were billed by KPMG for the fiscal years ended December 31, 2006 and December 31, 2005.

 

Procedures have been adopted that require Audit Committee pre-approval of all permissible services to be performed by the independent accountant, including the fees and other compensation to be paid; certain routine additional professional services not to exceed $10,000 per quarter may be performed at the request of the Company. The additional professional services include tax assistance, research and compliance, assistance in research of accounting literature, and assistance in due diligence activities. A listing of the additional services provided to the Company each quarter, if any, is provided to the Company’s Audit Committee at the first scheduled meeting after the end of the quarter.

 

Based upon the Audit Committee’s discussions with management and the independent accountants, and its review of the information described above, the Audit Committee recommended that the Board of Directors include the audited consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006, to be filed with the Securities and Exchange Commission.

 

THE AUDIT COMMITTEE

Barton P. Dambra, Chairman

John R. Tyler, Jr.

Joseph F. Hurley

Karl V. Anderson, Jr.

 

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

 

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

 

During 2006 neither FII nor any subsidiary of FII was a party to any transaction or series of transactions in which the amount involved exceeded $120,000 and which any director, executive officer, or related interests had or will have a direct or indirect material interest other than:

 

 

Our directors, executive officers and many of our substantial shareholders and their affiliates are also customers. “Affiliates” include corporations, partnerships and other organizations in which they are officers or partners, or in which they and their immediate families have at least a 10% interest. During 2006, our subsidiary bank, Five Star Bank, made loans in the ordinary course of business to several of our directors, officers, principal shareholders and their affiliates. On December 31, 2006, the aggregate principal amount of loans to the FII directors, named executive officers and their affiliates was $820,108. Loans outstanding by Five Star Bank to certain officers, directors or companies in which they have 10% or more beneficial ownership (including officers and directors of FII as well as its subsidiaries) were approximately $1,119,000 at December 31, 2006. Loans made by Five Star Bank to officers, directors or companies in which they have a 10% or more beneficial interest (including officers and directors of FII as well as its subsidiaries) were made in the ordinary course of business on substantially the same terms, including interest rate and collateral, as comparable transactions with other customers. Loans to directors, executive officers and substantial shareholders are subject to limitations contained in the Federal Reserve Act, which requires that such loans satisfy certain criteria. We expect to have such transactions or transactions on a similar basis with our directors, executive officers, principal shareholders and their associates in the future.

 

During 2005 the Company engaged the firm of K&K West, Inc., of which director Erland E. Kailbourne was a consultant, to provide management consulting services. Cash payments made to K&K West, Inc. in 2006 for these services totaled $41,487.

 

During 2006 the Company engaged the law firm of Hiscock & Barclay, LLP, of which director Robert N. Latella was a partner, to provide legal services. Fees paid for these services totaled $6,104.

The Company has formalized and adopted a policy on Related Party Transactions that provides for the oversight of such transactions by the FII Director of Human Resources, as outlined in the Code of Business Conduct & Ethics policy, and the Company’s Audit Committee.

 

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

 

The MD&C Committee Charter calls for the Committee to meet at least three times annually, or more frequently as circumstances warrant. The MD&C Committee met seven times during fiscal 2006.

 

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

 

The Committee reviews and approves all compensation decisions for the executive officers named in the Summary Compensation Table which follows, and approves recommendations of all equity awards to officers of the Company. Decisions regarding the non-equity compensation of other senior officers are made by the Chief Executive Officer (CEO). The Chairman of the Board and the CEO annually review the performance of each executive officer, other than the CEO, whose performance is reviewed by the Committee. The conclusions reached and recommendations based on these reviews, with respect to salary adjustments and annual award amounts, are presented to the Committee. The Committee can exercise its discretion in modifying or adjusting any awards to executives.

 

The MD&C Committee reviews compensation practices of other banking organizations of like size and structure in order to assess our competitiveness. In late 2005, the Company engaged Milliman Consultants and Actuaries (Milliman), a compensation and benefits consultant, to study the Company’s executive and director compensation plans. Milliman determined that our base salaries were comparable to the market median when compared to the following peer group of publicly traded banks and thrifts: S&T Bancorp, Inc., Independent Bank Corp., TrustCo Bank Corp NY, Unizan Financial Corp., First Place Financial Corp., KNBT Bancorp, Inc., United Community Financial Corp., Lakeland Bancorp, Inc., Omega Financial Corporation, Tompkins Trustco,. Inc., Community Banks, Inc., OceanFirst Financial Corp., Peoples Bancorp, Inc., Univest Corporation of Pennsylvania. Short-term incentive targets for our executives were found to be comparable to the market median. However, because the Company’s long-term incentives were below the peer group, total direct compensation for executives was found to be below that of the peer group. Based on Milliman’s recommendations, the Committee determined that executive compensation packages provided by the Company should include cash and stock-based compensation, including restricted stock.

 

The principal components of our executive compensation program are:

 

 

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

 

The base salaries of our executive officers are reviewed on an annual basis. In determining whether to increase or decrease base compensation to our named executive officers, the MD&C Committee takes into account the changes (if any) in the market pay levels, the performance of the executive officer, and any changes in responsibilities and roles of the executive officer. For 2006, the named executives’ salaries were increased by an average of

4% as compared to 2005 salaries. For 2007, the named executive officers’ salaries were increased by an average of 4% over 2006 salaries.

 

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

 

Our Annual Incentive Plan is a cash-based incentive that was initiated in January 2006 and is designed to reward employees who do not participate in any direct sales incentive plan. The Annual Incentive Plan is intended to compensate employees for achieving the Company’s financial goal at corporate and business unit levels and for achieving measurable individual annual performance objectives. For fiscal 2006, the MD&C Committee chose earnings per share (“EPS”) as the corporate performance measurement. The goal was set at $1.14 per common share.

 

For 2006, the target incentives for executives ranged from 30% to 50% of base salary, depending on the executive officer’s position. The amount of an executive’s actual annual incentive award, in relation to the executive’s target opportunity, was based on the Company’s performance as compared to its EPS goal and, if applicable, the executive’s individual performance. The individual performance component of the annual incentive was based on measures of performance relevant to the particular individual’s job responsibilities. The target incentive was subject to application of an individual modifier, which ranges from 0% to 125%.

 

Earnings per share of $1.40 per common share was achieved for fiscal year 2006 and exceeded the goal of $1.14 by 23%. The annual incentive plan is capped at an achievement level of 120% of goal. Accordingly the annual incentive paid to Messrs. Humphrey, Rudgers, Miller and Hagi reflected achievement of 120% of goal, adjusted for individual performance. Mr. Klotzbach, who was subject to different criteria under the Annual Incentive Plan, received 50% of his annual incentive based on achievement of the EPS goal, with the remaining 50% based on individual performance.

 

Messrs. Humphrey, Rudgers and Miller did not receive an annual incentive bonus for 2005 because the Company’s annual financial goals were not achieved, even though they had successfully led the consolidation of our bank subsidiaries, resolved regulatory issues, improved the Company’s risk profile, and restructured the organization, all of which advanced our strategic objectives and improved the Company’s future financial performance. In order to recognize their efforts to improve the Company’s financial performance in

2006, the Board of Directors approved a one-time cash incentive opportunity for these executives. Payment of one-third of the incentive was dependent upon the Company achieving an earnings per share target at June 30, 2006, one-third upon achieving an earnings per share target at July 31, 2006, and one-third upon achieving an earnings per share target at September 30, 2006. If the Company achieved at least 80% of the earnings per share target at each measurement date, these bonuses would be paid in an amount prorated to the percent of target achievement up to a maximum of 100%. The targeted earnings per share were attained in each measurement period, and Messrs. Humphrey, Rudgers and Miller received 100% of their incentive. The EPS targets and results were as follows:

 

2006 Period End			Target					Results
June 30			$	.56				$	.74
July 31			$	.67				$	.86
September 30			$	.85				$	1.17

 

 

Long-term incentive compensation is an important component of our program because it has the effect of retaining executives, aligning executives’ financial interests with the interests of the shareholders, and rewarding the achievement of the Company’s long-term goals. Two types of long-term equity-based incentive awards may be granted annually to executive officers:

 

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

 

Restricted Stock.  Restricted stock is also used to incent executive officers. The value of each share is determined as of the close of business on the date of the grant. The executive is entitled to receive dividends paid with respect to unvested shares. Restricted stock grants are not subject to gradual vesting but become 100% vested on the third anniversary of the date of grant, provided the participant remains in continuous employment with the Company.

 

Timing of Grants.  Stock options and restricted stock grants are approved at regularly scheduled predetermined meetings of the MD&C Committee.

 

The number of stock options and restricted stock grants awarded to executives were based on the recommendations contained within the Milliman study and on the executive’s position and relative responsibilities in the Company. Generally, the MD&C Committee does not consider an executive’s shareholdings or previous stock option or restricted stock grants

when determining future grants. It is intended that a combination of non-qualified stock options and restricted stock will be awarded to executive officers in 2007.

 

To directly align the interests of executive officers with the interests of the shareholders the Committee requires that each named executive officer maintain a minimum ownership interest in the Company. The amount of ownership required varies depending upon the executive’s position. The CEO is required to own and retain a minimum number of shares equal in value to his base salary, while all other named executive officers are required to own and retain a number of shares with a minimum value of $50,000. These requirements were established effective January 1, 2005. Executives are required to achieve their stock ownership requirement within five years of the effective date, or December 31, 2010, or five years beginning in January following the year the executive becomes subject to ownership requirements. Until the stock ownership requirement is achieved, the participant is required to retain at least 75% of net shares delivered through the Company’s Management Stock Incentive Plan. Once achieved, ownership of the required amount must be maintained for as long as the individual is subject to the stock ownership requirements.

 

401(k) Plan

 

The Company maintains a 401(k) Plan for the benefit of our employees. Employees eligible to participate in the Plan are those who have attained the age of 201/2. Effective January 1, 2007, the Company adopted a safe harbor plan which provides for a matching Company contribution equal to the sum of 100% of the amount of the employee’s salary reductions that are not in excess of 3% of compensation, plus 50% of the amount of salary reductions in excess of 3%, but not more than 6% of compensation. The plan also allows for additional Company contributions. The Plan was amended so that participating employees may make pre-tax contributions of up to 100% of their compensation up to the current Internal Revenue Service limits. Employees may authorize up to 25% of their 401(k) account balance to be invested in Company common stock.

 

Health and Welfare Benefits

 

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

 

Perquisites and other Personal Benefits

 

The Company provides named executive officers and other senior management officers with perquisites that the Company and the Committee believe are reasonable and consistent

with the Company’s overall compensation program and better enable the Company to attract and retain employees for key positions. The named executive officers are provided use of Company owned vehicles and memberships in various clubs and organizations, which provide opportunities to expand business development activities and demonstrate the Company’s philosophy of community involvement in the markets in which we do business.

 

Material Terms and Conditions

 

The Company sponsors a Defined Benefit Pension Plan covering substantially all employees who were hired prior to January 1, 2007. Benefits are based on years of service and the employee’s highest average compensation during five consecutive years of employment. Compensation used to determine benefits is all wages and other compensation as reported on form W-2. By amendment, effective December 31, 2006, the Plan is closed to new Participants. Only employees whose employment commencement date is on or before December 31, 2006, and who are participating in the Plan on or before January 1, 2008, are eligible to participate in the Plan. A Participant’s Normal Retirement Benefit is an annual pension benefit commencing on his Normal Retirement Date payable in the Normal Benefit Form in an amount equal to:

 

Basic Benefit

 

For Benefit Service accrued prior to January 1, 2004:

 

 

For Benefit Service accrued on or after January 1, 2004:

 

 

Offset Benefit

 

 

The Normal Benefit Form is payable as a Single Life Pension with 60 payments guaranteed. There are a number of optional forms of benefit available to participants, all of which are adjusted actuarially.

Prior to January 1, 2007, an Employee became a participant in the Plan on the 1st of the month, which coincided with or next followed the completion of 12 months of Eligibility Service and attainment of age 21.

 

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

 

 

Participants are eligible for early retirement upon obtaining age 55; Ronald A. Miller and James T. Rudgers are eligible for early retirement. Early retirement benefits are determined as follows:

 

Benefits for participants who first participated in the plan prior to January 1, 2004 and who are 100% vested as of December 31, 2003 and who remain in the employment of the employer until they reach the age of 55 are reduced 3% for the basic benefit and 6% for the offset benefit.

 

Benefits for participants who first participated in the plan prior to January 1, 2004 and who were not 100% vested as of December 31, 2003, and who did not remain in the employment of the employer until they reach the age of 55, are reduced 3% for the basic benefit and 6% for the offset benefit for accrued benefit attributable to service earned as of December 31, 2003, and for service earned on or after January 1, 2004 the accrued benefit is determined as of the Early Retirement Date, reduced by 1/180 for each of the first 60 months and by 1/360 for each of the next 60 months that the Early Retirement Date precedes the Normal Retirement Date.

 

Participants who first participate in the plan on or after January 1, 2004 shall have their accrued benefit determined as of the Early Retirement Date, reduced by 1/180 for each of the first 60 months and by 1/360 for each of the next 60 months that the Early Retirement Date precedes the Normal Retirement Date.

 

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

 

Deductibility of Executive Compensation

 

As part of its role, the Committee reviews and considers the deductibility of executive compensation under Section 162(m) of the Internal Revenue Code, which provides that the Company may not deduct compensation of more than $1,000,000 that is paid to certain individuals. The Company believes that compensation paid is generally fully deductible for federal income tax purposes. Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R) “Share-Based Payment”. Accordingly, compensation expense, for awards granted after the adoption date, is recognized over the requisite service period of the award.

 

The MD&C Committee of the Company’s Board of Directors has reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of SEC Regulation S-K with management and, based on such review and discussions, the MD&C Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Proxy Statement.

 

THE MANAGEMENT DEVELOPMENT & COMPENSATION COMMITTEE

Susan R. Holliday, Chair

John E. Benjamin

Thomas P. Connolly

Samuel M. Gullo

 

																										Change
																										in Pension
																										Value And
																										Non-qualified
																						Non-equity				Deferred
														Stock				Option				Incentive Plan				Compensation				All Other
						Salary				Bonus				Awards				Awards				Compensation				Earnings				Compensation				Total
Name & Position		Year				($)				($)(1)				($)(2)				($)(2)				($)(3)				($)				($)(4)				($)
Peter G. Humphrey			2006				388,457				—				11,958				67,527				415,593				51,924				65,543				1,001,002
President & Chief Executive Officer FII
James T. Rudgers			2006				255,150				—				5,694				40,398				218,842				17,259				16,271				553,614
Executive Vice President & Chief of Community Banking of FII
Ronald A. Miller			2006				184,500				—				2,847				30,486				154,368				49,534				15,894				437,629
Executive Vice President & Chief Financial Officer FII
George D. Hagi			2006				180,000				20,000				2,847				11,652				102,528				—				16,059				333,086
Executive Vice President & Chief Risk Officer FII
Kevin B. Klotzbach			2006				133,000				—				2,847				8,510				37,905				9,994				13,282				205,538
Senior Vice President & Treasurer

 

			Use of															401(k)					Split Dollar
			Company					Club					Moving					Matching					Insurance
			Vehicle					Memberships					Expenses					Contribution					Premium					Other					Total
Executive Name			($)					($)					($)					($)					($)					($)(1)					($)
Peter G. Humphrey				2,503					3,926					—					6,138					50,831					2,146					65,543
James T. Rudgers				4,134					5,819					—					6,138					—					180					16,271
Ronald A. Miller				9,666					—					—					6,138					—					90					15,894
George D. Hagi				5,730					—					10,239					—					—					90					16,059
Kevin B. Klotzbach				8,515					—					—					4,677					—					90					13,282

 

 

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

 

			Option awards																									Stock awards
																																											Equity Incentive
																																											Plan Awards:
																																											Market
																																						Equity Incentive					or Payout
													Equity Incentive																									Plan Awards:					Value of
													Plan Awards:																				Market					Number					Unearned
			Number of					Number of					Number															Number of					Value of					of Unearned					Shares, Units
			Securities					Securities					of Securities															Shares or					Shares or					Shares, Units					or Other
			Underlying					Underlying					Underlying					Option										Units of					Units of					or Other					Rights
			Unexercised					Unexercised					Unexercised					Exercise					Option					Stock that					Stock that					Rights					that Have
			Options (#)					Options (#)					Unearned					Price					Expiration					Have Not					Have Not					that Have					Not Vested
Executive Name			Exercisable					Unexercisable					Options (#) **					($/sh)					Date					Vested (#)					Vested ($)					Not Vested (#) **					($) **
(a)			(b)					(c)					(d)					(e)					(f)					(g)					(h)					(i)					(j)
Peter G. Humphrey				94,000					—					—					14.00					6/25/2009					4,200					96,810					—					—
				7,041					7,042					—					23.80					2/4/2014					—					—					—					—
				4,164					12,495					—					21.05					2/23/2015					—					—					—					—
				—					8,500					—					19.75					7/26/2016					—					—					—					—
Ronald A. Miller				1,477					—					—					14.00					6/25/2009					1,000					23,050					—					—
				3,750					—					—					13.75					8/25/2010					—					—					—					—
				3,867					—					—					14.13					1/30/2011					—					—					—					—
				2,200					—					—					25.33					1/30/2012					—					—					—					—
				2,600					—					—					22.51					2/18/2013					—					—					—					—
				1,745					1,745					—					23.80					2/4/2014					—					—					—					—
				1,101					3,303					—					21.05					2/23/2015					—					—					—					—
				—					1,650					—					19.75					7/26/2016					—					—					—					—
James T. Rudgers				2,020					6,061					—					21.05					2/23/2015					2,000					46,100					—					—
				—					3,500					—					19.75					7/26/2016					—					—					—					—
George D. Hagi				—					6,047					—					19.59					1/18/2016					1,000					23,050					—					—
				—					1,650					—					19.75					7/26/2016					—					—					—					—
Kevin B. Klotzbach				800					—					—					25.33					1/30/2012					1,000					23,050					—					—
				774					—					—					22.51					2/18/2013					—					—					—					—
				578					579					—					23.80					2/4/2014					—					—					—					—
				637					1,916					—					21.05					2/23/2015					—					—					—					—
				—					1,650					—					19.75					7/26/2016					—					—					—					—

 

 

In fiscal 2006, none of the named executive officers acquired shares of Company stock by exercising grants of stock options. No restricted stock awards have vested.

 

The following table sets forth certain information with respect to options and restricted stock granted during the fiscal year ended December 31, 2006 to each of the executive officers named in the Summary Compensation Table.

 

																																						All Other					All Other
																																						Stock					Option										Grant Date
								Estimated Future															Estimated Future															Awards:					Awards:										Fair Value
								Payouts under															Payouts under															Number of					Number of					Exercise or					of Stock
								Non-equity Incentive Plan															Equity Incentive Plan															Shares of					Securities					Base Price					and
								Awards															Awards(1)															Stock or					Underlying					of Option					Option
Executive			Grant					Threshold					Target					Maximum					Threshold					Target					Maximum					Units					Options					Awards					Awards
Name			Date					($)					($)					($)					($)					($)					($)					(#)					(#)					($/Sh)					($)(2)
(a)			(b)					(c)					(d)					(e)					(f)					(g)					(h)					(i)					(j)					(k)					(m)
Peter G. Humphrey				7/26/2006					—					—					—					—					—					—					4,200					8,500					19.75					152,140
Ronald A. Miller				7/26/2006					—					—					—					—					—					—					1,000					1,650					19.75					33,181
James T. Rudgers				7/26/2006					—					—					—					—					—					—					2,000					3,500					19.75					67,990
George D. Hagi				1/18/2006					—					—					—					—					—					—					—					6,047					19.59					48,376
George D. Hagi				7/26/2006					—					—					—					—					—					—					1,000					1,650					19.75					33,181
Kevin B. Klotzbach				7/26/2006					—					—					—					—					—					—					1,000					1,650					19.75					33,181

 

 

Change in Control Agreements

 

The Company has entered into Change of Control Agreements with certain key employees, including Messrs. Humphrey, Rudgers, Miller and Hagi. The Change of Control Agreements are designed to promote stability and continuity of senior management. If a change of control occurs, as defined in the agreement, during the Executive’s employment, and if within the twelve-month period following such change of control, either the Company terminates the Executive, other than for cause, or the Executive terminates his employment for good reason, as defined in the agreement, the Executive will be entitled to benefits as provided in the Agreement.

 

Each Change of Control Agreement includes covenants by the executive not to solicit employees of the Company during a period following their notice of termination, and not to compete during the term of the Agreement and during any period for which the executive is entitled to receive compensation after the termination of the Agreement and six months thereafter.

 

The following summary sets forth potential cash payments and benefits in the event that a named executive’s employment terminates as a result of an involuntary termination or the

executive terminates his employment because of good reason at any time within twelve months after a change of control:

 

 

For the purpose of our Change of Control Agreements, a “change of control” will be deemed to have occurred if:

 

 

 

 

For the purpose of our change of control agreements, termination for “good reason” means:

 

 

 

Potential Payments Following a Change in Control

 

Based on their 2006 base salaries, a share price of $23.05 as of December 31, 2006, and the number of options and restricted stock held by each of the named executive officers that were unvested as of December 31, 2006, we estimate the value of cash payments and acceleration of stock options and restricted stock grants held by each executive officer to be as follows:

			Continuation					Salary Plus					Stock					Restricted					Medical &					Gross
			Period					Incentives					Options					Stock					Dental					Value
Executive Name			(time)					($)					($)					($)					($)					($)
Peter G. Humphrey				36 months					1,209,098					53,040					96,810					11,313					1,370,261
James T. Rudgers				24 months					510,300					23,672					46,100					—					580,072
Ronald A. Miller				24 months					391,500					12,051					23,050					11,313					437,914
George D. Hagi				24 months					360,000					26,368					23,050					11,313					420,731

 

The 2005 Milliman consulting engagement included an evaluation of the Company’s total compensation practices for independent (outside) directors of the Company. Based on Milliman’s review, it was determined that the Company provides a competitive total compensation package to its outside directors. The Company uses a combination of cash and stock-based compensation to attract and retain qualified candidates to serve on the Board. In setting director compensation, the Company considers the significant amount of time that Directors expend in fulfilling their duties to the Company as well as the skill levels required by the Company of members of the Board. Similar to executive officers, Directors are subject to a minimum stock ownership requirement. Within five years after joining the Board, each Director is required to own shares of the Company’s Common Stock with a value of $50,000 based on the trailing 365-day average closing common stock price.

 

For the fiscal year ended December 31, 2006, members of the Board who were not employees of the Company received an annual cash retainer of $10,000 for serving as a Company Director and a $5,000 retainer for serving on the Board of the Company’s wholly-owned subsidiary, Five Star Bank. 50% of each of the annual retainers is paid by the issuance of shares of the Company’s stock on the date of the Company’s annual organizational meeting, which was held on May 3, 2006. The number of shares is determined by dividing the portion of the annual retainer by the Company’s closing market price on the date of the annual organizational meeting. The remaining 50% of the annual retainers is paid in cash six months thereafter. Each Director may elect to receive cash instead of stock. Board service fees are specified in the table which follows. Company and Bank Board meetings are normally scheduled on the same day, therefore only one meeting fee is paid. In the event a Bank Board or Bank Committee meeting is held on a day other than a Company meeting, fees are paid in accordance with the schedule for Company meetings. Effective January 1, 2007, Board members are reimbursed for reasonable travel expenses to attend meetings. On January 25, 2006, the Board of Directors elected Erland E. Kailbourne as Chairman of the Board of the Company and Chairman of the Board of Five Star Bank. Mr. Kailbourne received the fees effective with his election and received one-third of the Company and Bank 2006 annual retainers for his services prior to the Company’s annual organization meeting held on May 3, 2006.

 

 

 

 

 

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

 

Director Compensation Summary for 2006

																							Change in
																							Pension Value
			Fees Earned					Fees Earned										Non-equity					and Non-qualified
			or Paid in					or Paid in					Option					Incentive Plan					Deferred Compensation					All Other
			Cash					Stock					Awards					Compensation					Earnings					Compensation					Total
Director Name			($)					($)(5)					($)(6)					($)					($)					($)					($)
(a)			(b)					(c)					(d)					(e)					(f)					(g)					(h)
Karl V. Anderson, Jr.(1)				22,834					7,466					18,028					0					0					0					48,328
John E. Benjamin				33,784					7,466					24,493					0					0					0					65,743
Thomas P. Connolly				28,084					7,466					18,501					0					0					0					54,051
Barton P. Dambra				32,832					9,968					24,493					0					0					0					67,293
Samuel M. Gullo				32,834					7,466					24,493					0					0					0					64,793
Susan R. Holliday				36,584					7,466					23,179					0					0					0					67,229
Joseph F. Hurley(2)				30,034					7,466					24,734					0					0					0					62,234
Erland E. Kailbourne(3)				103,346					34,987					17,105					0					0					435					155,873
Robert N. Latella				27,034					7,466					18,501					0					0					0					53,001
James E. Stitt(4)				9,200					0					8,186					0					0					0					17,386
John R. Tyler, Jr.				38,784					7,466					24,493					0					0					0					70,743
James H. Wyckoff				28,584					7,466					23,607					0					0					0					59,657

 

 

 

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