BNC Bancorp DEF 14A 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
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831 Julian Avenue
Thomasville, North Carolina 27360
NOTICE OF 2008 ANNUAL MEETING OF SHAREHOLDERS
To Be Held on May 20, 2008
NOTICE IS HEREBY GIVEN that the 2008 Annual Meeting of Shareholders of BNC Bancorp (the Company) will be held as follows:
The purposes of the Annual Meeting are:
The Board of Directors has established March 21, 2008, as the record date for the determination of shareholders entitled to notice of and to vote at the Annual Meeting. If an insufficient number of shares is present in person or by proxy to constitute a quorum at the time of the Annual Meeting, the Annual Meeting may be adjourned in order to permit further solicitation of proxies by the Company.
A form of proxy is enclosed to enable you to vote your shares at the Annual Meeting. You are urged, regardless of the number of shares you hold, to complete, sign, date and return the proxy promptly. A return envelope, which requires no postage if mailed in the United States, is enclosed for your convenience.
Thomasville, North Carolina
April 22, 2008
Annual Meeting of Shareholders
To Be Held On May 20, 2008
This Proxy Statement is being mailed to our shareholders on or about April 6, 2008, for solicitation of proxies by the Board of Directors of BNC Bancorp. Our principal executive offices are located at 831 Julian Avenue, Thomasville, North Carolina 27360. Our telephone number is (336) 476-9200.
In this Proxy Statement, the terms we, us, our, BNC and the Company refer to BNC Bancorp. The term Bank means Bank of North Carolina, our wholly-owned, North Carolina-chartered bank subsidiary. The terms you and your refer to the shareholders of the Company.
INFORMATION ABOUT THE ANNUAL MEETING
Your vote is very important. For this reason, our Board is requesting that you allow your common stock to be represented at the 2008 annual meeting of shareholders by the proxies named on the enclosed proxy card.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The Exchange Act requires that any person who acquires the beneficial ownership of more than five percent of the Companys common stock notify the Securities and Exchange Commission (the SEC) and the Company. Following is certain information, as of the Record Date, regarding those persons or groups who held of record, or who are known to the Company to own beneficially, more than five percent of the outstanding common stock.
Set forth below is certain information, as of the Record Date, regarding those shares of common stock owned beneficially by each of the persons who currently serves as a member of the Board of Directors, is a nominee for election to the Board at the annual meeting, or is a named executive officer of the Company. Also shown is the number of shares of common stock owned by the directors and executive officers of the Company as a group.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Companys executive officers and directors, and persons who own more than ten percent of the common stock, to file reports of ownership and changes in ownership with the SEC. Executive officers, directors and greater than ten percent beneficial owners are required by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file.
Based solely on a review of the copies of such forms furnished to the Company and written representations from the Companys executive officers and directors, the Company believes that during the fiscal year ended December 31, 2007, its executive officers and directors and greater than ten percent beneficial owners.
ELECTION OF DIRECTORS
Our Board of Directors has set its number at 15 members. Our Bylaws provide that in order to be eligible for consideration at Annual Meeting of Shareholders, all nominations of directors, other than those made by the Nominating Committee or the Board of Directors, must be in writing and must be delivered to the Secretary of the Company not less than 50 days nor more than 90 days prior to the meeting at which such nominations will be made; provided, however, that if less than 60 days notice of the meeting is given to the shareholders, such nominations must be delivered to the Secretary of the Company not later than the close of business on the tenth day following the day on which the notice of meeting was mailed.
The following table provides information about the five nominees for election to the Board of Directors, as well as the ten continuing directors.
NOMINEES FOR TERM ENDING AS OF THE 2011 ANNUAL MEETING (3-YEAR TERM)
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ALL OF THE NOMINEES NAMED ABOVE FOR ELECTION AS DIRECTORS.
The following table gives information about our directors continuing in office.
No director or principal officer is related to another director or principal officer. No director is a director of any company with a class of securities registered pursuant to the Exchange Act.
We have no reason to believe that any of the nominees for election will be unable or will decline to serve if elected. In the event of death or disqualification of any nominee or the refusal or inability of any nominee to serve as a director, however, the proxies will vote for the election of another person as they determine in their discretion or may allow the vacancy to remain open until filled by the Board. In no circumstance will any proxy be voted for more than two nominees who are not named in this proxy statement. Properly executed and returned proxies, unless revoked, will be voted as directed by you or, in the absence of direction, will be voted in favor of the election of the recommended nominees. An affirmative vote of a plurality of votes cast at the annual meeting is necessary to elect a nominee as a director.
OUR BOARD OF DIRECTORS
AND ITS COMMITTEES
How often did our Board of Directors meet during 2007?
Our Board is scheduled to meet on a monthly basis or as needed. During 2007, the Board met 14 times. All incumbent directors attended more than 75% of the total number of meetings of the Board and its committees on which they served during the year.
What committees does our Board have?
During 2007, our Board had four standing committees, the Audit Committee, the Compensation Committee, the Nominating Committee, and the Executive Committee. The voting members of these Committees are appointed by the Board annually from among its members. Certain of our executive officers also serve as non-voting, advisory members of these committees.
How can you communicate with the Board or its members?
We do not have formal procedures for shareholder communication with our Board. In general, our directors and officers are easily accessible by telephone, postal mail or e-mail. Any matter intended for your Board, or any individual director, can be directed to W. Swope Montgomery, Jr., our President and Chief Executive Officer or David B. Spencer, our Chief Financial Officer, at our principal executive offices 831 Julian Avenue, Thomasville, North Carolina 27360. You also may direct correspondence to our Board, or any of its members, in care of the Company at the foregoing address. Your communication will be forwarded to the intended recipient unopened.
Although it is customary for all of our directors to attend annual meetings of shareholders, we have no formal policy in place requiring attendance. All directors attended our annual meeting of shareholders held on June 19, 2007.
How can a shareholder nominate someone for election to the Board?
Our Bylaws provide that in order to be eligible for consideration at the annual meeting of shareholders, all nominations of directors, other than those made by the Nominating Committee, must be in writing and must be delivered to the Secretary of the Company not less than fifty days nor more than 90 days prior to the meeting at which such nominations will be made; provided, however, that if less than 60 days notice of the meeting is given to the shareholders, such nominations must be delivered to the Secretary of the Company not later than the close of business on the tenth day following the day on which the notice of meeting was mailed.
The Board may disregard any nominations that do not comply with these requirements. Upon the instruction of the Board, the inspector of voting for an annual meeting may disregard all votes cast for a nominee if the nomination does not comply with these requirements. Written notice of nominations should be directed to the Secretary of the Company.
Who serves on the Board of Directors of the Bank?
The Bank has 15 directors currently serving on its board of directors, who are the same people who are currently Directors of the Company. The Banks board of directors has appointed several standing committees to which certain responsibilities have been delegated the Asset Liability Committee, the Loan Committee and the Personnel Committee.
The members of the Board of Directors who are independent under NASDAQ listing standards meet occasionally in executive session without management present. Executive sessions are generally held in connection with a regularly scheduled Board meeting. In addition, executive sessions may be held when called by two or more directors or at the request of the Board of Directors.
BNCs Nominating Committee consists of W. Groome Fulton, Jr. (chairman), Lenin J. Peters, M.D., Thomas R. Smith, CPA, D. Vann Williford and Thomas R. Sloan. All members of the Nominating Committee are independent as defined in the NASDAQs listing standards. The Nominating Committee evaluates qualifications and candidates for positions on the Companys Board and nominates new and replacement members for the Board. In addition, the Nominating Committee facilitates an annual evaluation by the Board members of the Board, as a whole, and each individual directors performance.
In reviewing candidates for the Board, the Nominating Committee seeks individuals whose background, knowledge and experience will assist the Board in furthering the interests of BNC and its shareholders. Some of the factors considered in this evaluation include experience in the areas of banking and finance, accounting, and the related businesses of the Company and the Bank as well as outstanding achievement in his or her personal career, an understanding of the business environment generally, a willingness to devote adequate time to service on the Board of Directors and integrity. The Nominating Committee reviews the qualifications of, and approves and recommends to the Board, those individuals to be nominated for positions on the Board and submitted to shareholders for election at each annual meeting. In addition, the Nominating Committee will consider nominees for the Board by shareholders that are proposed in accordance with the advance notice procedures in our Bylaws which are described in the section of this Proxy Statement entitled Date of Receipt of Shareholders Proposals.
The Committee identifies director nominees from various sources such as officers, directors, and shareholders and in 2007 did not retain the services of any third party consultants to assist in identifying and evaluating potential nominees. The Committee will consider and evaluate a director candidate recommended by a shareholder in the same manner as a Committee-recommended nominee. The Committee received no nominations from any of the Companys shareholders. A copy of the Companys Nominating Committee Charter, which is reviewed annually, and amended as necessary, may be obtained at no cost by requesting one from the Companys Secretary at Post Office Box 1148, Thomasville, North Carolina 27361.
The Nominating Committee met one time in 2007.
BNCs Executive Committee consists of W. Groome Fulton, Jr. (chairman), W. Swope Montgomery, Jr., Lenin J. Peters, M.D., Thomas R. Smith, CPA, D. Vann Williford and Thomas R. Sloan. The Executive Committee makes recommendations to the full Board and acts on policies adopted by the Board in the absence of a meeting of the entire Board. This Committee generally meets 12 times a year, and during the fiscal year ended December 31, 2007, the Executive Committee met 11 times.
The Companys Board has a standing Audit Committee. BNCs Audit Committee consists of Thomas R. Smith, CPA (chairman), Joseph M. Coltrane, Jr., Richard F. Wood, Colon E. Starrett and Charles T. Hagan III. The BNC Board of Directors has determined that these directors are independent as defined in the NASDAQs listing
standards and the SECs rules and regulations. The Audit Committee meets on an as needed basis (but no less than four times per year) and, among other responsibilities, (i) appoints, compensates and retains BNCs independent auditor; (ii) oversees the independent auditing of BNC; (iii) arranges for, receives and reviews periodic written and verbal reports from the independent auditors, from management and from all internal audit contractors; (iv) reviews corporate policies regarding compliance with laws and regulations, conflicts of interest and employee misconduct and reviews situations related thereto; (v) reviews, develops and implements the Companys internal audit policies and procedures, and appoints, meets with and oversees all internal audit contractors and the management employees who are directly responsible for those activities; (vi) establishes and reviews annually procedures for the receipt, retention, and treatment of complaints regarding accounting, internal auditing controls and auditing matters; (viii) pre-approves all audit and non-audited related services provided by the independent auditor; and (ix) performs other duties as may be assigned to it by the Board.
BNC has adopted a written charter for the Audit Committee. A copy of the Audit Committee Charter, which is reviewed annually, and amended as necessary, may be obtained at no cost by requesting one from the BNC Secretary at Post Office Box 1148, Thomasville, North Carolina 27361.
The Audit Committee met 11 times during the fiscal year ended December 31, 2007.
The BNC Board of Directors has determined that Thomas R. Smith, CPA, is an audit committee financial expert and independent as defined under applicable rules and regulations. The Boards affirmative determination was based upon, among other things, his educational and professional credentials and financial background.
Report of Audit Committee
The Audit Committee reviewed and discussed with the independent auditors all matters required by generally accepted auditing standards, including those described in Statement on Auditing Standards No. 61, as amended, and reviewed and discussed the audited financial statements of BNC, both with and without management present. In addition, the Audit Committee obtained from the independent auditors a formal written statement describing all relationships between the auditors and BNC that might bear on the auditors independence consistent with Independence Standards Board Standard No. 1, Independent Discussions with Audit Committees, and discussed with the auditors any relationships that may impact their objectivity and independence and satisfied itself as to the auditors independence. Based upon the Audit Committees review and discussions with management and the independent auditors referenced above, the Audit Committee recommended to the BNC Board of Directors that BNCs audited financial statements be included in its Annual Report on Form 10-K for the fiscal year ended December 31, 2007 for filing with the SEC. As part of its duties, the Audit Committee also considered whether the provision of services other than audit services during fiscal year 2007 by Cherry, Bekaert & Holland, BNCs independent registered public accounting firm for that period, is compatible with maintaining the accountants independence. The Audit Committee also reappointed the independent auditors and the BNC Board of Directors concurred in such appointment.
Thomas R. Smith, CPA, Chairman
Richard F. Wood
Colon E. Starrett
Joseph M. Coltrane, Jr.
Charles T. Hagan III
Review of the Companys and the Banks salary programs and recommendations to the Companys and the Banks boards of directors regarding compensation of the executive officers are the responsibility of the Compensation Committee. For a discussion of the Companys processes and procedures for consideration and determination of management compensation plans refer to Compensation Discussion and Analysis in this Proxy Statement.
Report of the Compensation Committee. The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management of the Company. Based on these reviews and discussions, the Compensation Committee recommended to the Board including the Compensation Discussion and Analysis in the Companys Proxy Statement.
W. Groome Fulton, Jr.
Lenin J. Peters, M.D.
Thomas R. Smith, CPA
D. Vann Williford
Thomas R. Sloan
A copy of the BNC Compensation Committee Charter, which is reviewed annually, and amended as necessary, may be obtained at no cost by requesting one from the Companys Secretary at Post Office Box 1148, Thomasville, North Carolina 27361.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is now, or formerly was, an officer or employee of the Company or the Bank. None of the named executive officers serves as a member or the board of directors of another entity whose executive officers or directors serve on the Companys Board of Directors.
COMPENSATION DISCUSSION AND ANALYSIS
The following discussion provides an overview and analysis of our compensation program and policies with respect to our named executive officers. It is intended to help in understanding the detailed information provided in the compensation tables beginning on page 19 of this Proxy Statement.
Compensation Committee Members
All of the members of the Compensation Committee are independent as defined in Section 4200(a)(15) of the NASDAQs listing standards. The Board of Directors determines on an annual basis each directors independence. The members of the Compensation Committee in fiscal year 2007 were Directors Fulton, Smith, Peters, Williford and Sloan. The Compensation Committee met one time during the fiscal year ending December 31, 2007. The Compensation Committee is responsible for developing, implementing and maintaining the Companys compensation policies.
The Committee utilized information from SNL Financial LC, a financial institutions resource company (SNL), to provide peer compensation information to help evaluate the Companys compensation design, process and decisions. W. Swope Montgomery, Jr., President and CEO of the Company and the Bank, makes recommendations to the Committee regarding the compensation of the executive officers. Mr. Montgomery participates in the deliberations, but not in the decisions, of the Committee regarding compensation of executive officers other than himself. He does not participate in the Committees discussion or decisions regarding his own compensation.
Objectives of Our Compensation Program
The overall objective of our compensation program is to directly link total compensation paid to the directors and employees, including the named executive officers, to the Companys financial performance. In order to accomplish this overall objective, our compensation program is designed to: (i) attract the qualified executives necessary to meet our needs as defined by the Companys strategic plans, and (ii) retain and motivate executives whose performance supports the achievement of our long-term plans and short-term goals. It is the committees opinion that given todays competitive marketplace, along with our Companys long track record of consistent financial results that have exceeded peers, retaining each of the members of our existing management team is critical to our long-term success and fulfilling our fiduciary responsibilities to our shareholders. Our core belief is that individuals who have incentive will work hard to the benefit of the Companys shareholders.
Compensation Decision Process
To assist in making its compensation decisions, the Committee utilized compensation information from SNL on a group of peer financial institutions in similar markets, with similar growth rates in earnings and assets. SNL provided market data regarding compensation practices for CEOs, including salary and non-cash and cash incentive awards, of the peer financial institutions to ensure that our Chief Executive Officer and other executive officers compensation is competitive in the marketplace. The Company competes for executive talent with national and regional banks of similar scope of operations. As a result, the Committee determined that salary, target annual cash incentive awards and long-term incentive awards for our named executive officers should be comparable to those provided by a peer group of similar sized community banks that have historical track record of financial performance similar to our Company.
The peer groups used for compensation practices and comparisons included:
Elements of Compensation
Our compensation program consists of the following elements: (i) base salary, (ii) bonuses, (iii) long-term equity incentive awards, (iv) supplemental retirement plans, (v) deferred compensation and (vi) other executive benefits.
Base Salary. The salaries of our named executive officers are designed to provide a reasonable level of compensation that is affordable to the Company and fair to the executive. Salaries are reviewed annually, and adjustments, if any, are made based on the review of competitive salaries in our peer group, as well as an evaluation of the individual officers responsibilities, job scope, and individual performance. For example, we assess each officers success in achieving forecasted earnings and return ratios, business conduct and integrity, and leadership and team building skills.
The Committee reviewed salaries of chief executive officers available within the 2007 peer group described above. Based on this review, and the contribution of each executive officer relative to the success of our Company and the contribution of the Chief Executive Officer, the Committee determined that our named executive officers salaries were in-line with comparable financial institutions and the overall contribution each provides to the success of our Company. The 2007 base salaries for each of our named executive officers are reflected in the Summary Compensation table on page 20 of this Proxy Statement.
Base salaries are managed within a range around the median. All salary increases reflect the Committees desire to maintain competitive compensation relative to the peer group.
Bonuses-Annual Cash Incentive Awards.
The Company has adopted an incentive program, Compensation for Stakeholders, which establishes an overall incentive pool to be distributed to employees bankwide, including executive officers. The purpose of the program is to promote achievement of the Companys annual performance goals. As part of this program, ten key variables that drive profitability are tracked relative to the prior year, and as levels are obtained in each of the key variables above a minimum acceptable growth rate, a percentage of the incremental pretax enhancement is allocated to each of the bankwide and management incentive pools. If the Company does not achieve net income growth of greater than approximately 4% compared to the prior years and the Banks ratings on regulatory examinations are not satisfactory in all categories, no incentive award is made. After the minimum performance goals are met, a portion of every dollar over the minimum is added to the pool to be divided among employees and named executive officers. This program awards improvements in areas such as average loans, average core deposits, net interest income, net interest margin, efficiency ratio, non-interest income, while deducting for unacceptable levels of credit quality, including charge-offs, nonperforming assets, and loans past due. This program has been in place at the Bank and the Company for over seven years, and has allowed our organization to create a culture where our employees
interests and actions are closely aligned with our shareholders interests on a daily basis. The program provides a directors rationale that is evaluated by the Compensation Committee. This report quantifies the correlations between incentive pool totals with expected increases in net income and return on tangible equity levels.
The Chief Executive Officer will provide a recommendation to the Committee on the allocation and distribution of the management incentive pool to specific officers. The Committee will deliberate independent of management, and determine the final allocation of the pool based on overall performance levels and compensation objectives.
Financial Performance Objectives. The financial objectives of the Compensation for Stakeholders program, our Company, the Board of Directors, and the Compensation Committee are all consistent: Provide consistent, long-term earnings growth that result in superior returns to our shareholders. Consistency is a key objective, which dictates maintaining exceptional credit quality, growth in earning assets, efficient deployment of non-interest expenses, and a strong correlation between expansion and profitability.
Long-Term Equity Incentive Awards. The Company maintains the Omnibus Stock Ownership and Long Term Incentive Plan (Omnibus Plan), under which it is permitted to grant incentive stock options, restricted stock grants, stock appreciation rights and performance units. The purpose of the Omnibus Plan is to promote the interests of the Company by attracting and retaining employees of outstanding ability and to provide executives of the Company greater incentive to make material contributions to the success of the Company by providing them with stock-based compensation which will increase in value based upon the market performance of the common stock and/or the corporate achievement of financial and other performance objectives. No awards were granted to any named executive officer in 2007. The Compensation Committee intends to associate the vesting of awards to the achievement of selected financial performance goals.
The Company also maintains two earlier equity incentive awards programs, the Key Employee Stock Option Plan and the Stock Option Plan for Non-Employees/ Directors. Both plans were adopted at the inception of the Bank, and later adopted by the Company at its inception. All eligible awards under these plans have been granted.
Under the terms of the Omnibus Plan, the Key Employee Stock Option Plan and the Stock Option Plan for Non-Employees/Directors, option exercise prices are always based upon the closing trading price of the Companys common stock on the date of grant by the Board of Directors.
Other Executive Benefits - Perquisites. The Company provides the following to our named executive officers:
For 2007, we determined the level of perquisites and benefits to offer based on the Committees review of other financial institutions in our market area. We believe these perquisites serve a dual purpose. They are competitive with companies in our peer group, and they also facilitate the officers ability to work outside our corporate headquarters by assisting with travel and providing an external location to conduct business. See the Summary Compensation Table on page 19 for perquisites received by each named executive officer.
Other Executive Benefits - Retirement Benefits. The Company maintains supplemental executive retirement agreements (SERPs) in the form of salary continuation and split dollar agreements, for the benefit the Companys named executive officers. The Committees goal is to provide competitive retirement benefits given the restrictions on executives within tax-qualified plans. The Committee worked with Clark Consulting and Grady and Associates in analyzing the possible benefits of using SERPs to address the issues of internal and external equity in terms of retirement benefits offered to all employees at the Company as a percentage of final average pay and executives in our peer group. The Committee approved supplemental retirement benefits for all named executive officers at levels deemed competitive with peers and within annual cost parameters established by the Committee. For more information on the SERPs, see page 25 of this Proxy Statement.
Other Executive Benefits - Severance Benefits. The Company has employment agreements with our named executive officers which provide, among other things, for severance benefits upon certain types of employment terminations. We believe employment agreements serve a number of functions, including (i) retention of our executive team; (ii) mitigation of any uncertainty about future employment and continuity of management in the event of a change in control; and (iii) protection of the Company and customers through non-compete and non-solicitation covenants. Additional information regarding the employment agreements, including a description of key terms and a quantification of benefits that would have been received by our named executive officers had they incurred a termination of employment on December 31, 2007, may be found beginning on page 20 of this Proxy Statement.
The following table reports all forms of compensation paid to or accrued for the benefit of each director during the 2007 fiscal year.
Directors Fees. For the fiscal year ended December 31, 2007, the Chairman of BNCs Board of Directors received an annual retainer of $14,000 for his service, each Committee Chairman received an annual retainer of $10,000 for his service, and each other board member received an annual retainer of $6,000 for his service. In addition, members of the BNC Board received $550 and the Chairman of the Board received $950 per meeting of the Board of Directors. Members of the Executive Committee received $700 and the Chairman of the Executive Committee received $700 per Executive Committee meeting. Members of other committees (including the Bank committees) received $550 and Chairmen of other Committees received $700 per Committee meeting (except for the Chairman of the Audit Committee, who received $950 per meeting of the Audit Committee). Mr. Montgomery, Mr. Strayhorn and Mr. Callicutt do not receive compensation for attendance at these meetings.
During 2007, directors fees totaled $329,650 in the aggregate. Except for $49,500, these fees were not paid in cash to the directors, but were placed into a Directors Deferred Compensation Plan which was approved by the BNC Board of Directors in January 1994. MAGNER Network LLC, in Atlanta, Georgia, administers this plan at an annual cost of $3,610 to the Company. Effective April 2, 2003, BNC established a Rabbi Trust to hold the directors accrued benefits under the plan.
Director Stock Option Plan. See Executive Compensation - Stock Option Plans, for a discussion of the directors benefits under the Stock Option Plan for Non-Employees/Directors.
The following table sets forth certain information with respect to the persons who are executive officers of either BNC or the Bank or both.
The executive officers of the Company are not paid any cash compensation by the Company. However, the executive officers of the Company also are executive officers of the Bank and receive compensation from the Bank.
The table on the following page shows, for the fiscal year ended December 31, 2007, the cash compensation received by, as well as certain other compensation paid or accrued for those years, the Chief Executive Officer and the Banks executive officers whose total annual salary and bonus exceeded $100,000.
Summary Compensation Table
On December 18, 2007 BNC and the Bank entered into employment agreements with Messrs. Montgomery, Callicutt, Spencer, and Strayhorn which have been amended for 409A compliance. The agreements have three-year terms, extending annually for one additional year at each anniversary unless the board of directors determines not to extend the term. Establishing the terms and conditions of the employment relationship and the executives initial base salary, the employment agreements also grant miscellaneous fringe benefits such as use of an automobile, reimbursement of club dues, and reimbursement of reasonable business expenses. The agreements also provide for indemnification against liabilities to which the executive may become subject because of his service to BNC and the Bank. Base salary for 2008 is $334,000 for Mr. Montgomery, $248,000 for Mr. Callicutt, $242,000 for Mr. Spencer, and $229,000 for Mr. Strayhorn.
The agreements are terminable by BNC or the Bank with or without cause and terminate automatically when the executive attains age 65. The executives employment may be terminated for cause if and only if 75% or more of the directors, excluding the executive, vote to terminate the executives employment with cause at a special board meeting held for that purpose, with advance notice and the opportunity to oppose the boards action given to the executive. The agreements provide explicitly for severance benefits after involuntary termination without cause and after voluntary termination with good reason, as well as benefits that become payable because of the occurrence of a change in control. Severance benefits are not payable for involuntary termination with cause or for voluntary termination without good reason. For termination because of death BNC and the Bank would provide without cost continued health care coverage to the executives family for one year, and for termination because of disability the executive would receive (x) base salary and other employee benefits until he becomes eligible for disability benefits under company plans and (y) continued insurance coverage for up to three years. Good reason for voluntary termination will exist if specified adverse changes in the executives employment circumstances occur without the executives consent, such as a material reduction in pay, benefits, or responsibilities or relocation of BNCs executive offices. If the executives employment involuntarily terminates without cause or if he voluntarily terminates employment for good reason, he will receive in a single lump sum an amount equal to his undiscounted base salary for the unexpired term of the agreement, he will be paid in cash for the intrinsic value of his unvested stock options, he will continue to receive life and medical insurance benefits for a period that may be as long as the remaining term of the employment agreement, and he will be entitled to outplacement support of up to $25,000 and use of office facilities for one year. For this purpose the intrinsic value of unvested stock options means, for each share acquirable by exercise of the unvested option, the positive difference between the fair market value per share of BNC stock and the exercise price per share of the unvested option. Severance benefits payable after termination are conditional on the executive first entering into an agreement not to compete with BNC and the Bank. The duration of the provision not to compete with BNC and the Bank after termination of employment is 15 months in Mr. Montgomerys and Mr. Callicutts case, 24 months in Mr. Strayhorns, and six months for Mr. Spencer. Benefits payable after a change in control are not conditional on the executive first entering into an agreement not to compete.
If a change in control occurs each executive will be entitled to an undiscounted lump-sum cash payment equal to his annual compensation multiplied by three. For this purpose annual compensation means the sum of (x) the executives base salary when the change in control occurred plus (y) the most recent cash bonus or cash incentive compensation earned. The benefit is payable regardless of whether the executives employment terminates after the change in control, but it is payable on no more than one occasion. If the executives receives the change-in-control benefit he would not later be entitled at employment termination to cash severance equal to his base salary for the unexpired contract term. Each executive will also become fully vested after a change in control in benefit arrangements in which he participates, and if the aggregate benefits payable to him after a change in control are subject to excise taxes under Internal Revenue Code sections 280G and 4999 he will also be entitled to an excise tax gross-up benefit to compensate for the excise taxes imposed. If an executives total change-in-control benefits including severance benefits under employment agreements, change-in-control benefits payable under employment or salary continuation or other agreements, accelerated vesting of stock options or other equity-based awards, and any other form of change-in-control benefit equal or exceed three times his five-year average taxable compensation, a 20% excise tax is imposed on the executive under Internal Revenue Code section 4999 and the employer forfeits its compensation deduction because of the related section 280G of the Internal Revenue Code. If the 20% excise tax is imposed, it is imposed on all change-in-control benefits exceeding the executives five-year average taxable compensation, and the employer forfeits the compensation deduction for those same benefit amounts. The gross-up benefit stated in the employment agreements and in the Salary Continuation Agreements
would compensate the executives for excise taxes imposed so that the executives benefits after payment of excise taxes would equal their benefits had no excise taxes been imposed. However, the gross-up benefit would increase the amount BNCs non-deductible compensation under section 280G. Lastly, BNC and the Bank have agreed to pay legal fees incurred by the executive if his employment agreement is challenged after a change in control, up to a maximum of $500,000.
If there had been a change in control of the Company, or Mr. Montgomery had terminated his employment after a change in control, that was effective as of December 31, 2007, Mr. Montgomery would have been entitled to receive $1,416,000 under the terms of his employment agreement and an acceleration payment of $2,038,030 under the terms of his continuation agreement.
If there had been a change in control, or other voluntary termination of employment following a change in control, that was effective as of December 31, 2007, under the terms of their respective employment agreements and salary continuation agreements, Mr. Callicutt would have been entitled to receive $1,047,000 and $1,732,928; Mr. Spencer, $1,028,400 and $1,324,786; and Mr. Strayhorn, $915,000 and $600,000.
All of the above named executive officers are each entitled to receive under their respective employment agreements outplacement services and office support with an estimated value of $32,000. In addition, the employment agreements provide for continued insurance coverage. This value of this benefit is estimated to be $52,938 for Messrs. Montgomery and Callicutt and $46,132 for Messrs. Spencer and Strayhorn.
The employment agreements provide that the named executive officers may be entitled to a gross-up to the extent that their severance packages exceed the limitations prescribed in section 280G of the Code.
Stock Option Plans
As part of the Banks initial offering in 1994, the Board of Directors and the shareholders approved a nonqualified stock option plan for certain initial incorporators and directors (the Stock Option Plan for Non-Employees/Directors) and a qualified incentive stock option plan for key employees (the Key Employee Option Plan). The Stock Option Plans for Non-Employees/Directors and the Key Employee Option Plans are referred to collectively as the Plans. As part of the Banks reorganization to holding company form, BNC assumed the Banks obligations under the Plans.
The purpose of the Plans is to provide an incentive to attract and retain qualified personnel in key positions, to provide directors and key employees with a proprietary interest in BNC, and to reward directors and key employees for outstanding performance. Under the Plans, the option price per share cannot be less than the greater of $3.72 or the fair market value of a share at the time the option is granted. The period for exercising the option is no more than ten years from the date of grant. Options may be granted under the Plans which are either incentive stock options (ISOs) within the meaning of Section 422 of the Code, or nonqualified stock options (NSOs) in the discretion of the Personnel Committee of BNC.
Omnibus Stock Ownership and Long Term Incentive Plan
In 2004, BNC shareholders approved the Omnibus Stock Ownership and Long Term Incentive Plan (the Omnibus Plan), which is administered by the Compensation Committee of the BNC Board of Directors (Committee). The purposes of the Omnibus Plan are to encourage and motivate key employees to contribute to the successful performance of BNC, the Bank and its subsidiaries and the growth of the market value of the BNC Common Stock; to achieve a unity of purpose among the key employees and BNCs shareholders by providing ownership opportunities, and a unity of interest in the achievement of BNCs primary long term performance objectives; and to retain key employees by rewarding them with potentially tax-advantageous future compensation.
The employees of BNC and its subsidiaries, who are designated as eligible participants by the BNC Board of Directors, may receive awards of Rights (as defined below) under the Omnibus Plan. The value of the benefits to be received by participants under the Omnibus Plan are not determinable. On March 21, 2008, the closing price of the common stock on the Nasdaq Capital Market was $14.00.
Under the Omnibus Plan, the Committee may grant or award eligible participants (employees of the Company and its subsidiaries) options, rights to receive restricted shares of common stock (Restricted Stock), and/or stock appreciation rights (SARs). These grants or awards of options, Restricted Stock and/or SARs are referred to as Rights. The number of shares of common stock available under the Omnibus Plan for grants of Rights is 150,000 (206,250, as adjusted for stock splits occurring since establishment of the Omnibus Plan), subject to appropriate adjustment for stock splits, stock combinations, reclassifications and similar changes. All Rights must be granted or awarded within ten (10) years of the date of the BNC Boards adoption of the Omnibus Plan.
If any shares of common stock allocated to Rights granted under the Omnibus Plan are subsequently cancelled or forfeited, those Rights will be available for further allocation upon such cancellation or forfeiture.
BNC may at any time alter, suspend, terminate or discontinue the Omnibus Plan, subject to any applicable regulatory requirements and any required shareholder approval or any shareholder approval which BNC Board may deem advisable for any reason, such as for the purpose of obtaining or retaining any statutory or regulatory benefits under tax, securities or other laws or satisfying applicable stock exchange or quotation system listing requirements. The BNC Board may not, without the consent of a participant, make any alteration which would deprive the participant of his rights with respect to any previously granted Rights. Termination of the Omnibus Plan would not affect any previously granted Rights.
During the fiscal year ended December 31, 2005, BNC granted 65,000 options under the Omnibus Plan at a strike price of $18.75. Currently, as adjusted for stock splits, these shares under option are equal to 89,375 shares at a strike price of $13.64. The following table provides certain information with respect to those option grants made to W. Swope Montgomery, Jr. Richard D. Callicutt II and David B. Spencer during fiscal year ended December 31, 2007.
These options were granted for a ten year term, with the options eligible for vesting from the date of grant until February 1, 2009. Vesting is eligible based on the market price of the Companys common stock attaining certain levels during the vesting period. Below is a table which provides vesting targets.
Incentive Compensation Plans
Bonuses-Annual Cash Incentive Awards.
The Company has adopted a program named Compensation for Stakeholders which determines the overall incentive pool to be distributed to employees bankwide, including executive officers. The purpose of the program is to promote achievement of the Companys annual performance goals. As part of this program, ten key variables that drive profitability are tracked relative to the prior year, and as levels are obtained in each of the key variables above a minimum acceptable growth rate, a percentage of the incremental pretax enhancement is allocated to each of the bankwide and management incentive pools. If the Company does not achieve at least net income growth of greater than 4% of the prior years and the Banks regulatory ratings are no more than 2 in all categories, no incentive award is made. After the minimum performance goals are met, a portion of every dollar over the minimum is added to the pool to be divided among employees and named executive officers. This program awards improvements in areas such as average loans, average core deposits, net interest income, net interest margin, efficiency ratio, non-interest income, while deducting for unacceptable levels of credit quality, including charge-offs, nonperforming assets, and loans past due. This program has been in place at the Bank and the Company for over six years, and has allowed our organization to create a culture where our employees interests and actions are closely aligned with our shareholders interest on a daily basis. The program provides a directors rationale that is evaluated by the Compensation Committee. This report quantifies the correlations between incentive pool totals with expected increases in net income and return on tangible equity levels.
In 2007, Mr. Montgomery received an award of $138,000 under the Compensation for Stakeholders program; Mr. Callicutt, $101,000; Mr. Spencer, $100,800; and Mr. Strayhorn, $76,000.
Grants of Plan-Based Awards. The following table gives information related to grants of plan-based awards made by the Company to the named executive officers during the 2007 fiscal year.
GRANTS OF PLAN-BASED AWARDS
Outstanding Equity Awards at Fiscal Year End. The table below gives information related to equity awards held by the Companys named executive officers at the end of fiscal year 2007
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
OPTION EXERCISES AND STOCK VESTED
Salary Continuation and Endorsement Split Dollar Agreements. The Bank also entered into amended Salary Continuation Agreements and associated Endorsement Split Dollar Agreements with the executives on December 18, 2007. Also referred to as SERPs, the Salary Continuation Agreements promise a specified annual retirement benefit to each executive when he attains the normal retirement age age 65 or a reduced annual benefit if the executives employment terminates before age 65, whether termination occurs because of involuntary termination without cause, voluntary termination for any reason, or termination because of disability. Benefits for termination before age 65 are determined solely by the amount of the liability accrual balance maintained by the Bank. Consistent with generally accepted accounting principles the Banks liability accrual balance increases incrementally each month so that the final liability accrual balance at the executives normal retirement age equals the present value of the specified normal retirement benefit. If an executives employment terminates before age 65, instead of the specified normal retirement benefit he will receive a reduced annual benefit that is based on the amount of the Banks liability accrual balance when employment termination occurs. The reduced benefit would not be payable until the executive finally attains age 65. Annual SERP benefits are payable for life, and in the case of Messrs. Montgomery, Callicutt, and Spencer only the benefit increases annually by 3%. Mr. Strayhorns benefit amount is fixed and does not increase annually. Like the employment agreements, the SERPs also provide for a lump-sum cash benefit payable immediately after a change in control, regardless of whether the executives employment also terminates. For Messrs. Montgomery, Callicutt, and Spencer the lump-sum benefit would consist of cash in an amount equal to the present value of the executives specified normal retirement age benefit, meaning the liability accrual balance projected to exist when the executive attains age 65. In Mr. Strayhorns case the lump-sum benefit would be the greater of (x) the SERP liability accrual balance when the change in control occurs or (y) $600,000. Like the employment agreements, the SERPs make clear that this lump-sum change-in-control benefit is payable on no more than one occasion. If the change-in-control benefit is paid under the SERPs the executives would be entitled to no other SERP benefits, except for a potential tax gross-up benefit and potential reimbursement of their legal expenses. The excise tax gross-up benefit potentially payable under the SERPs is not in addition to the excise tax gross-up benefit potentially payable under the executives employment agreements. Instead it is a single benefit affirmed in two separate agreements. If a change in control occurs while the executive is receiving or is entitled at age 65 to receive retirement benefits under the SERP, the executive would instead receive an immediate lump-sum payment consisting of the liability accrual balance. The Bank has assured each executive that it will reimburse the executives legal expenses if his SERP is challenged after a change in control, up to $500,000. This promise is in addition to the similar legal fee reimbursement promise contained in the employment agreements.
The amended Endorsement Split Dollar Agreements associated with the SERPs assure the executives designated beneficiaries of a death benefit after the executives death, whether death occurs before or after employment termination, but if the executive is terminated for cause he would forfeit all benefits under his SERP and
the associated Endorsement Split Dollar Agreement. At the executives death the executives designated beneficiaries would be entitled to (x) an amount equal to the liability accrual balance existing at the executives death, payable under the SERPs in a single lump 90 days after the executives death, and (y) under the Endorsement Split Dollar Agreements associated with the SERPs, 100% of the net death benefit payable under Bank-owned insurance policies on the executives lives, payable directly by the insurer to the designated beneficiary, or in Mr. Strayhorns case only the lesser of 100% of the net death benefit or $2 million. The term net death benefit means the total life insurance policy death proceeds minus the policy cash surrender value. The policy cash surrender value is payable in its entirety to the Bank. The Financial Accounting Standards Board clarified in late 2006 that a split dollar arrangement providing post-retirement death benefits requires the employer to recognize compensation expense during an employees working years to account for the split dollar insurance obligation, even though the split dollar benefit will ultimately be paid by the insurance company and not the employer. Accordingly, the Bank recognizes compensation expense associated with this post-retirement split dollar insurance arrangement.
Profit Sharing Plan and 401(k) Plan
The Bank maintains a Profit Sharing Plan and Trust with a qualified cash or deferred feature (the Retirement Plan) under Section 401(k) of the Code of 1986, as amended (the Code). All full-time employees as of the beginning of the plan year are eligible to participate in the Retirement Plan. A participating employee may contribute, through payroll deduction, from 1% to 15% of his/her salary on a tax deferred basis subject to the requirements of Section 401(k) of the Code. The Bank has agreed to contribute to the Retirement Plan an amount equal to 100% of such payroll deductions, but no more than 6% of total compensation. The Bank can, in its discretion, make additional contributions to the Plan. Any contributions by the Bank will be fully vested in the participant if he/she has six years of service with the Bank and will be reduced by 20% for each lesser number of years.
Indebtedness of and Transactions with Management and Directors
The Bank leases its loan production office in Winston-Salem, North Carolina from 1400 Westgate Associates, LLC (Westgate). Director Robert A. Team, Jr. owns 100% of Westgate. Pursuant to the terms of the lease for the one facility leased by the Bank, during 2007 the Bank paid a total of $46,072 to Westgate in lease payments for the facility. The facility is subject to a two year lease between the Bank and Westgate. The Board of Directors routinely, and no less than annually, reviews all transactions, direct and indirect, between the Company or the Bank and any employee or director, or any of such persons immediate family members. Transactions are reviewed as to comparable market values for similar transactions. All material facts of the transactions and the directors interest are discussed by all disinterested directors and a decision made about whether the transaction is fair to the Company and the Bank. A majority vote of all disinterested directors is required to approve the transaction. The transaction with Robert Team was reviewed by the disinterested Board members according to BNCs normal practices and an affirmative determination was made that this lease transaction did not affect Mr. Teams independence as a director of the Company.
The Board of Directors also evaluates the influence family relationships may have on the independence of directors who are related by blood or marriage. There are no such relationships on the BNC Board of Directors.
The following graph compares BNCs cumulative stockholder return on BNC Common Stock with a NASDAQ index and with a southeastern bank index. The graph was prepared by SNL Financial LC using data as of December 31, 2007.
Source : SNL Financial LC, Charlottescille, VA
RATIFICATION OF APPOINTMENT OF INDEPENDENT REGISTERED PUBLIC
The Audit Committee of the BNC Board of Directors has appointed Cherry, Bekaert & Holland (CBH) as the independent registered public accounting firm to audit the financial statements of BNC for the fiscal year ending December 31, 2008, subject to ratification by BNCs shareholders. Representatives of CBH are expected to attend the BNC Annual Meeting and will be afforded an opportunity to make a statement, if they so desire, and to respond to appropriate questions from shareholders.
Audit Fees Paid to Independent Registered Public Accounting Firm
Audit Fees. Fees paid or expected to be paid to CBH for professional services rendered for audit of BNCs annual consolidated financial statements for the year ended December 31, 2007 and 2006 amounted to $154,392 and $65,000. The Company paid CBH $17,000 during 2007 for assurance services related to the performance of the financial statements of the 401(k) Plan. No other fees for any other services were paid to CBH during the fiscal year ended December 31, 2007.
The fees billed by CBH are pre-approved by the Audit Committee of the Company in accordance with the policies and procedures for the Audit Committee set forth in the committees charter. The Audit Committee typically pre-approves all audit and non-audit services provided by the Companys independent auditors and may not engage the independent auditors to perform any prohibited non-audit services. For 2007 and 2006, one hundred percent of the total fees paid for audit, audit related and tax services were pre-approved. The Audit Committee has determined that the rendering of non-audit professional services by CBH, as identified above, is compatible with maintaining CBHs independence.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR RATIFICATION OF THE APPOINTMENT OF CBH AS INDEPENDENT AUDITOR FOR THE COMPANY AND THE BANK FOR THE FISCAL YEAR ENDING DECEMBER 31, 2008.
DATE FOR RECEIPT OF SHAREHOLDER PROPOSALS
It is presently anticipated that the 2009 Annual Meeting of Shareholders of the Company will be held in 2009. In order for shareholder proposals to be included in the Companys proxy materials for that meeting, such proposals must be received by the Secretary of the Company at the Companys principal executive office no later than January 20, 2009 and meet all other applicable requirements for inclusion in the proxy statement.
In the alternative, a shareholder may commence his or her own proxy solicitation and present a proposal from the floor at the 2008 Annual Meeting of Shareholders of the Company. In order to do so, the shareholder must notify the Secretary of the Company in writing, at the Companys principal executive office no later than March 5, 2009, of his or her proposal. If the Secretary of the Company is not notified of the shareholders proposal by March 5, 2009, the Board of Directors may vote on the proposal pursuant to the discretionary authority granted by the proxies solicited by the Board of Directors for the 2009 Annual Meeting.
Management knows of no other matters to be presented for consideration at the Meeting or any adjournments thereof. If any other matters shall properly come before the Meeting, it is intended that the proxyholders named in the enclosed form of proxy will vote the shares represented thereby in accordance with their judgment, pursuant to the discretionary authority granted therein.
The Form 10-K of the Company for the year ended December 31, 2007, which includes financial statements audited and reported upon by the Companys independent auditor, is being mailed as with this Proxy Statement and filed with the SEC; however it is not intended that the Form 10-K be deemed a part of this Proxy Statement or a solicitation of proxies.
Thomasville, North Carolina
April 22, 2008
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