S.Y. Bancorp DEF 14A 2008
S.Y. Bancorp, Inc.
East Main Street
March 19, 2008
We cordially invite you to attend the 2008 Annual Meeting of Shareholders of S.Y. Bancorp, Inc., which will be held at 10:00 a.m., Eastern Time, on Wednesday, April 23, 2008, at The Olmsted, 3701 Frankfort Avenue, Louisville, Kentucky 40207. The Olmsted is located on the campus of the Masonic Widows and Orphans Home, and there is a map on the back cover for your reference.
The enclosed Notice and Proxy Statement contain complete information about matters to be considered at the Annual Meeting, at which we will also review S.Y. Bancorps business and operations. Only shareholders and their proxies are entitled to vote at the Annual Meeting.
We hope you will attend the meeting. Your vote is important. Whether or not you plan to attend, we urge you to complete, sign and return the enclosed proxy card, so that your shares will be represented and voted at the Annual Meeting.
S.Y. Bancorp, Inc.
East Main Street
March 19, 2008
To our Shareholders:
The Annual Meeting of Shareholders of S.Y. Bancorp, Inc., a Kentucky corporation, will be held on Wednesday, April 23, 2008 at 10:00 a.m., Eastern Time, at The Olmsted, 3701 Frankfort Avenue, Louisville, Kentucky 40207 for the following purposes:
(1) To approve the action of the Board of Directors fixing the number of directors at twelve;
(2) To approve amendments to Article IX of the Companys Articles of Incorporation to declassify the Board of Directors so that each director will stand for re-election on an annual basis and revise provisions relating to the vote required to change provisions of Article IX;
(3) To elect eleven (11) directors to serve until the next Annual Meeting of Shareholders and until their respective successors are duly elected and qualified, in the event the proposal at (2) above is approved;
(4) Alternatively, to elect four (4) directors to serve until their terms expire at the 2011 Annual Meeting of Shareholders and until their respective successors are duly elected and qualified, in the event the proposal at (2) above is not approved; and
(5) To transact such other business as may properly come before the meeting.
The record date for the determination of the shareholders entitled to vote at the meeting or at any adjournment thereof is the close of business on March 7, 2008.
We hope you will be represented at the meeting. Please sign and return the enclosed proxy card in the accompanying envelope as promptly as possible, whether or not you expect to be present in person. Your vote is important. The Board of Directors of Bancorp appreciates the cooperation of shareholders in directing proxies to vote at the meeting.
WE URGE SHAREHOLDERS TO MARK, SIGN AND RETURN
S.Y. Bancorp, Inc.
East Main Street
About the Annual Meeting
Why have I received these materials?
We are mailing the accompanying proxy to shareholders on or about March 19, 2008. The proxy is solicited by the Board of Directors of S.Y. Bancorp, Inc. (referred to throughout this Proxy Statement as S.Y. Bancorp, the Company or we or our) in connection with our Annual Meeting of Shareholders that will take place on Wednesday, April 23, 2008. We cordially invite you to attend the Annual Meeting and request you to vote on the proposals described in this Proxy Statement.
What am I voting on?
· Approving the action of the Board of Directors fixing the number of directors at twelve;
· Approving the amendments to Article IX of the Companys Articles of Incorporation (Articles) to declassify the Board of Directors so that each director will stand for re-election on an annual basis and revise provisions relating to the vote required to change provisions of Article IX;
· Electing eleven (11) directors to serve until the next Annual Meeting of Shareholders and until their respective successors are duly elected and qualified in the event the Articles are amended; and
· Alternatively, if the Articles are not amended, electing four (4) directors to serve until the 2011 Annual Meeting of Shareholders and until their respective successors are elected and qualified.
Where can I find more information about these voting matters?
· Information about the amendments to the Articles of Incorporation is contained in ITEM 2.
· Information about nominees for election or reelection is contained in ITEM 3 and ITEM 4.
What is the relationship of S.Y. Bancorp and Stock Yards Bank & Trust Company?
S.Y. Bancorp is the holding company for Stock Yards Bank & Trust Company (referred to throughout this Proxy Statement as the Bank). S.Y. Bancorp owns 100% of Stock Yards Bank & Trust Company. Because S.Y. Bancorp has no operations of its own, its business and that of Stock Yards Bank & Trust Company are essentially the same.
Who is entitled to vote at the Annual Meeting?
Holders of record of common stock (Common Stock) of S.Y. Bancorp as of the close of business on March 7, 2008 will be entitled to vote at the Annual Meeting. On March 7, 2008, there were 13,405,765 shares of Common Stock outstanding and entitled to one vote on all matters presented for vote at the Annual Meeting.
How do I vote my shares?
If you are a record shareholder of Common Stock (that is, if you hold Common Stock in your own name in S.Y. Bancorps stock records maintained by our transfer agent, Stock Yards Bank & Trust Company), you may complete and sign the accompanying proxy card and return it to S.Y. Bancorp or deliver it in person. Shares will be voted as you instruct. If you return your proxy card and do not mark your voting instructions on your signed card, David Heintzman and Kathy Thompson as proxies named on the proxy card, will vote FOR the proposed amendments to the Articles and, depending upon the outcome of the voting on the proposed amendments to the Articles, FOR the election of the eleven director nominees or four director nominees.
Street name shareholders of Common Stock (that is, shareholders who hold Common Stock through a broker, bank or other nominee) who wish to vote at the Annual Meeting will need to obtain a proxy form from the institution that holds your shares and to follow the voting instructions on such form.
If you are a participant in the Stock Yards Bank & Trust Company 401(k) and Employee Stock Ownership Plan, are still employed by the Bank and have a Bank email address, you will receive an electronic version of the proxy card for the shares that you own through that savings plan. If you are a participant no longer employed by the Bank or for another reason do not have a Bank email address, you will receive a paper version of the proxy card via postal mail. In either case, that proxy card will serve as a voting instruction card for the trustee of the plan. If you own shares through the plan and do not vote, the plan trustees will vote the plan shares in the same proportion as shares for which instructions were received under the plan.
Can I change my vote after I return my proxy card?
Yes. After you have submitted a proxy, you may change your vote at any time before the proxy is exercised by submitting a notice of revocation to the Secretary of S.Y. Bancorp or a replacement proxy bearing a later date. Or you may attend the annual meeting, revoke your proxy and vote in person. In each event, the later submitted vote will be recorded and the earlier vote revoked. Your attendance at the Annual Meeting will not revoke your proxy unless you provide written notice of revocation.
What constitutes a quorum for purposes of the Annual Meeting?
The presence at the Annual Meeting in person or by proxy of the holders of a majority of the voting power of all outstanding shares of Common Stock entitled to vote shall constitute a quorum for the transaction of business. Proxies marked as abstaining (including proxies containing broker non-votes) on any matter to be acted upon by shareholders will be treated as present at the meeting for purposes of determining a quorum but will not be counted as votes cast on such matters.
What vote is required to approve each item?
The proposal to fix the number of directors at twelve will pass if votes cast for it exceed votes cast against it.
The proposal to amend the Articles of Incorporation will pass if holders of 66 2/3% of all outstanding shares vote for the amendments.
Directors will be elected by a plurality of the total votes cast at the Annual Meeting for the election of directors. Assuming eleven directors are to be elected, a plurality means that the eleven nominees receiving the highest number of FOR votes will be deemed elected.
Any other item to be voted upon at the Annual Meeting will pass if votes cast for it exceed votes cast against it.
Who counts the votes?
Judges appointed for the meeting will tabulate votes cast in person or by proxy at the Annual Meeting. These judges are independent inspectors who certify the results of the voting and will also determine whether a quorum is present at the meeting.
How are abstentions and broker non-votes treated?
A shareholder entitled to vote for the election of directors may withhold authority to vote for all nominees for directors or may withhold authority to vote for certain nominees for directors. A shareholder may also abstain from voting on the proposals to fix the number of directors and amend the Articles of Incorporation. The judges will treat votes withheld from the election of any nominee for director and abstentions from any other proposal as shares that are present and entitled to vote for purposes of determining the presence of a quorum, but will not be counted in the number of votes cast for or against any matter. If a broker does not receive voting instructions from the beneficial owner of shares on a particular matter and indicates on the proxy that it does not have discretionary authority to vote on that matter, the judges will treat these shares as present at the meeting for purposes of determining a quorum but will not be counted as votes cast on the matter.
What information do I need to attend the Annual Meeting?
We do not use tickets for admission to the Annual Meeting. If you are voting in person, we may ask for photo identification.
How does the Board recommend that I vote my shares?
The Board recommends a vote FOR the Directors proposal to fix the number of directors at twelve, FOR the Directors proposal to amend the Articles of Incorporation to declassify the Board of Directors and change the 66 2/3% voting requirement, and FOR each of the nominees for Director set forth in this document.
With respect to any other matter that properly comes before the Annual Meeting, the proxy holders will vote as recommended by the Board of Directors or, if no recommendation is given, in their own discretion in the best interests of S.Y. Bancorp. At the date this Proxy Statement went to press, the Board of Directors had no knowledge of any business other than that described herein that would be presented for consideration at the Annual Meeting.
Who will bear the expense of soliciting proxies?
S.Y. Bancorp will bear the cost of soliciting proxies in the form enclosed. In addition to the solicitation by mail, proxies may be solicited personally or by telephone, facsimile or electronic transmission by our employees. We reimburse brokers holding Common Stock in their names or in the names of their nominees for their expenses in sending proxy materials to the beneficial owners of such Common Stock.
Is there any information that I should know about future annual meetings?
Any shareholder who intends to present a proposal at the 2009 Annual Meeting of Shareholders (the 2009 Annual Meeting) must deliver the proposal to the Corporate Secretary at 1040 East Main Street, Louisville, Kentucky 40206 not later than November 21, 2008, if the proposal is submitted for inclusion in our proxy materials for that meeting pursuant to Rule 14a-8 under the Securities Exchange Act of 1934. In addition, S.Y. Bancorps Bylaws impose certain advance notice requirements on a shareholder nominating a director or submitting a proposal to an Annual Meeting. Such notice must be submitted to the secretary of S.Y. Bancorp no later than January 25, 2009. The notice must contain information prescribed by the Bylaws, copies of which are available from the secretary. These requirements apply even if the shareholder does not desire to have his or her nomination or proposal included in S.Y. Bancorps proxy statement.
ITEM 1. FIXING THE NUMBER OF DIRECTORS
Directors Proposal to Fix the Number of Directors
The articles of incorporation and bylaws of S.Y. Bancorp provide that the Board of Directors be composed of nine to twenty-five members. Each year the Board of Directors recommends the number for the coming year and presents a resolution to be adopted by the shareholders at the Annual Meeting. The Board of Directors has recommended that the number of directors constituting the Board be fixed at twelve for the ensuing year, subject to approval by shareholders at the Annual Meeting. If the individuals nominated are elected, there will be eleven individuals serving on the Board following the 2008 Annual Meeting. The Board of Directors may appoint individuals to fill vacancies or elect an additional director to serve until elected by shareholders at the next Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE PROPOSAL TO FIX THE NUMBER OF DIRECTORS AT TWELVE
ITEM 2. PROPOSAL TO AMEND ARTICLES OF INCORPORATION
Directors Proposal to Amend the Articles of Incorporation to Declassify the Board of Directors
The Board of Directors has proposed three amendments to Article IX of the Companys Articles of Incorporation. One amendment is to Section 2 and, in accordance with changes to Kentucky law, removes language about cumulative voting with regard to removal of directors. A second change is to Section 1 and will declassify the Board of Directors and provide for the annual election of all directors. The third amendment is to Section 3 so that, as amended, the 66 2/3 % voting requirement to alter, amend or repeal any provision of Article IX will apply only to Section 2.
The Board of Directors deems the amendments to declassify the Board and change the 66 2/3% voting requirement desirable and in the best interests of the Company and its shareholders. If approved by the shareholders, the proposal to amend the Articles of Incorporation will be effective at the Annual Meeting or as soon as practicable following the Annual Meeting, subject to the filing of articles of amendment to the Articles of Incorporation with the Kentucky Secretary of State, which the Company anticipates would be done as soon as practicable following an affirmative vote on this Item 2 at the Annual Meeting.
Article IX of the Articles of Incorporation currently requires the Board of Directors to be divided into three classes as nearly equal in number as possible. Each class of directors serves staggered, three-year terms, with the term of office of one class expiring each year. It also requires the affirmative vote of holders of at least 66 2/3% of the outstanding shares to change any provision of Article IX. Appendix A sets forth Article IX with proposed changes highlighted, and in its entirety as it is proposed to be amended.
Background and Reasons for Declassification Proposal
This proposal to amend the Companys Articles of Incorporation to declassify the Board of Directors is intended to increase director accountability to shareholders and continue to enhance the Companys corporate governance policies and procedures. Classified boards have been widely adopted by companies and have a long history in corporate law. Those supporting classified boards assert that they promote the independence of directors in that directors elected for multi-year terms are less subject to outside influence. Advocates of classified boards also believe that they provide continuity and stability in the management of the business and affairs of a company since a majority of directors will have prior experience as directors of the company. Supporters further assert that classified boards may enhance shareholder value by motivating an entity seeking control of a target company with a classified board to initiate arms-length discussions with the board of the target company because the entity would be unable to replace the entire board in a single election.
Some investors have, however, come to view classified boards as having the effect of insulating directors from being accountable to a corporations shareholders. A classified board of directors, for example, limits the ability of shareholders to elect all directors on an annual basis and exercise influence over a company, and may discourage proxy contests in which shareholders have an opportunity to vote for a competing slate of nominees. The election of directors is the primary means for shareholders to influence the business and affairs of the Company and to hold directors accountable for implementation of policies.
After careful consideration of the various arguments for and against a classified board, the Board of Directors proposes declassifying the Board. This determination by the Board furthers our goal of ensuring that the Companys corporate governance policies establish director accountability to the Companys shareholders and will allow shareholders the opportunity each year to act upon their views on the performance of the Board of Directors by electing all directors annually.
The Board of Directors has unanimously approved the proposed amendment declassifying the organization of the Board of Directors and, if approved by the requisite vote of the shareholders as set forth below, the Articles of Incorporation will be amended to declassify the Board of Directors.
Effect of Voting Outcomes
If this proposal is approved and the amendments to Article IX of the Articles of Incorporation become effective at the 2008 Annual Meeting of Shareholders, the annual election of all directors would begin with the 2008 annual meeting. Consequently, all directors would stand for re-election in 2008 pursuant to Item 2 and each would be elected to a one-year term. Directors who would normally be subject to re-election in 2009 and 2010 have agreed to
resign and to stand for reelection in 2008 if this Item 2 is approved and the amendment to Article IX of the Articles of Incorporation becomes effective at the 2008 annual meeting.
If this Item 2 is not approved, pursuant to the Companys current Articles of Incorporation, the Board of Directors will remain classified and approximately one-third of the Board will stand for election in any given year. In such a case, the four directors standing for election in 2008 pursuant to Item 4 would be elected to three-year terms, and the current staggered terms of directors would continue.
The proposal to amend the Articles of Incorporation will pass if holders of 66 2/3% of all outstanding shares vote FOR the amendments.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE AMENDMENTS TO THE ARTICLES OF INCORPORATION.
ITEM 3. ELECTION OF ELEVEN DIRECTORS
The Board of Directors presently consists of eleven (11) members and, prior to the adoption of the proposed amendment to the Companys Articles of Incorporation, is divided into three (3) classes as equal in size as possible. The term of each class is three years, with terms staggered so that the term of one class expires at such annual meeting. Directors hold office until the annual meeting for the year in which his or her term expires and until his or her successor is elect and a qualified, subject to his or her prior death, resignation, retirement, removal or disqualification.
If the shareholders approve the proposed amendment to the Companys Articles of Incorporation to declassify the Board of Directors and such amendment becomes effective at the 2008 annual meeting, all eleven (11) members of the Board will be up for election at the 2008 annual meeting. However, if the shareholders do not approve the proposed amendment or the amendment does not become effective at the 2008 annual meeting, then the term of office of the current directors whose term expire at the 2008 annual meeting will stand for re-election, and directors with terms expiring in 2009 and 2010 will continue.
If the shareholders approve the proposed amendment pursuant to Item 2 above and the amendment becomes effective at the 2008 annual meeting, the eleven (11) directors nominated by the Nominating and Governance Committee of the Board of Directors for election this year to hold office until the 2009 annual meeting and until their respective successors are elected and qualified are:
(1) Ages listed are as of December 31, 2007. Mr. Lechleiter was elected as a director of Bancorp and the Bank at the meetings of the respective Board of Directors held in May, 2007.
(2) Each director and nominee has been engaged in his or her chief occupation for five years or more with the exception of Messrs Brooks and Heintzman. In 2005 Mr. Brooks retired from the position of Chairman and CEO of Stock Yards Bank & Trust Company and S.Y. Bancorp, Inc. Also in 2005 Mr. Heintzman was appointed Chairman and CEO of Stock Yards Bank & Trust Company and S.Y. Bancorp, Inc.
(3) No director or nominee holds any directorship in a company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934 or subject to the requirements of Section 15(d) of such act or any company registered as an investment company under the Investment Company Act of 1940.
Our Board of Directors has determined that Messrs. Carrico, Edinger, Herde, Lechleiter, Madison, Simon and Tasman and Dr. Taylor satisfy the independence requirements of the NASDAQ. As a recently retired Chairman and CEO, Mr. Brooks does not satisfy these requirements nor do Mr. Heintzman and Ms. Thompson who are employees of the Bank.
If elected, we expect that all of the aforementioned nominees will serve as directors and hold office until the 2009 annual meeting of shareholders and until their respective successors have been elected and qualified. Based on the recommendation of the Nominating and Governance Committee, all of the aforementioned nominees are standing for reelection except for Mr. Lechleiter who is standing for election by shareholders for the first time.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF THESE NOMINEES
ITEM 4. ELECTION OF FOUR DIRECTORS
If the shareholders do not approve the proposed amendment to the Companys Articles of Incorporation pursuant to Item 2 above, the four (4) director nominees for a term expiring at the 2011 annual meeting are:
· Charles R. Edinger, III,
· David P. Heintzman,
· Richard A. Lechleiter, and
· Norman Tasman
Set forth previously is the biographical information with respect to each of the director nominees listed above, and all of the aforementioned nominees are standing for reelection.
If the shareholders do not approve the proposed amendment to the Companys Articles of Incorporation pursuant to Item 2 above, we expect that the four aforementioned nominees, if elected, will serve as directors and hold office until the 2011 annual meeting of shareholders and until their respective successors have been elected and qualified. Messrs. Carrico, Herde, Madison and Dr. Taylor will remain as directors with terms expiring at the 2009 annual meeting and Messrs. Brooks and Simon and Ms. Thompson will remain as directors with terms expiring at the 2010 annual meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR THE ELECTION OF
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Set forth in the following table is the beneficial ownership of our Common Stock as of January 31, 2008 for each person or entity known by us to beneficially own more than five percent of the outstanding shares of our Common Stock; all our Directors and executive officers as a group; and Directors, executive officers and employees as a group. Executive Officer means the chairman, president, any vice president in charge of a principal business unit, division or function, or other officer who performs a policy making function or any other person who performs similar policy making functions and is so designated by the Board of Directors. For a description of the voting and investment power with respect to the shares beneficially owned by the directors and nominees for election as directors of S.Y. Bancorp, see the table under the heading, Election of Directors.
(1) Shares of S.Y. Bancorp Common Stock subject to stock options that are currently exercisable or may become exercisable within the following 60 days under S.Y. Bancorps Stock Incentive Plans are deemed outstanding for purposes of computing the percentage of S.Y. Bancorp Common Stock beneficially owned by the person and group holding such options but are not deemed outstanding for purposes of computing the percentage of S.Y. Bancorp Common Stock beneficially owned by any other person or group.
(2) Held by the Bank as agent, trustee, personal representative and in other fiduciary capacities.
(3) Based upon a Schedule 13(G) filed with the SEC as of December 31, 2007.
(4) Includes 521,995 shares subject to stock options outstanding stock options that are currently exercisable or may become exercisable within the following 60 days and 66,443 shares held in ESOP and 401(k) accounts.
(5) The shares held by the group include 190,259 shares held by non-executive officers and employees of the Bank. In addition, 290,605 shares are subject to currently exercisable stock options held by non-executive officers of the Bank and 353,511 shares are held by non-executive officers and employees of the Bank in their ESOP and 401(k) accounts, with sole voting power and no current investment power. S.Y. Bancorp has not undertaken the expense and effort of compiling the number of shares certain officers and employees of the Bank may hold other than directly in their own name.
The following table shows the beneficial ownership of S.Y. Bancorp, Inc.s common stock as of January 31, 2008 by each nominee for election as directors (and/or continuing directors depending upon voting result regarding declassification of the Board of Directors).
(1) Includes, where noted, shares in which members of the nominees or directors immediate family have a beneficial interest. The column does not, however, include the interest of certain of the listed nominees or directors in shares held by other non-dependent family members in their own right. In each case, the principal disclaims beneficial ownership of any such shares, and declares that the listing in this Proxy Statement should not be construed as an admission that the principal is the beneficial owner of any such securities.
(2) Includes shares subject to outstanding stock options that are currently exercisable or may become exercisable within the following 60 days issued under S.Y. Bancorps Stock Incentive Plan(s) as follows:
(3) Includes shares held in Directors Deferred Compensation Plan as follows:
(4) Includes shares held in the Companys 401(k)ESOP as follows:
(5) Less than one percent of outstanding S.Y. Bancorp Common Stock.
(6) Includes 52,867 shares owned by Mr. Brooks wife.
(7) Includes 51,925 shares owned by Mr. Edingers wife and 157,810 shares owned by a family partnership for which Mr. Edinger shares voting control and derives approximately 9% economic benefit.
(8) Includes 4,583 shares owned by Mr. Heintzmans wife and 2,532 shares held by Mr. Heintzman as custodian for his minor daughter;
(9) Includes 1,859 shares owned by Mr. Madisons wife.
(10) Includes 37,805 shares held by Publishers Printing Company, LLC.
(11) Includes 193,200 shares owned by Mr. Tasmans mother for which Mr. Tasman shares voting control but from which he derives no economic benefit; 59,599 shares held jointly by Mr. Tasman and his wife; 4,685 shares held as custodian for their son.
Mr. Heintzman and Ms. Thompson are among S.Y. Bancorps executive officers. S.Y. Bancorps executive officers serve at the pleasure of S.Y. Bancorps Board of Directors, and there are no arrangements or understandings regarding their selection or appointment as officers of S.Y. Bancorp.
CORPORATE GOVERNANCE AND RELATED MATTERS
The S.Y. Bancorps Board of Directors represents shareholders interests in perpetuating a successful business including optimizing shareholder returns. The Directors are responsible for determining that the Company is managed in such a way as to ensure this result. This is an active responsibility, and the Board monitors the effectiveness of policies and decisions including the execution of the Companys business strategies. Strong corporate governance guidelines form the foundation for Board practices. As a part of this foundation, the Board believes that high ethical standards in all Company matters are essential to earning the confidence of investors, customers, employees and vendors. Accordingly, S.Y. Bancorp has established a framework that exercises appropriate measures of oversight at all levels of the Company and clearly communicates that the Board expects all actions be consistent with its fundamental principles of business ethics and other corporate governance guidelines. The Companys governance guidelines and other related matters are published on the Company website: www.syb.com under the Investor Relations tab.
BOARD OF DIRECTORS MEETINGS AND COMMITTEES
During 2007, the Board of Directors of S.Y. Bancorp held twelve regularly scheduled and special meetings. All directors of S.Y. Bancorp are also directors of the Bank. During 2007 the Banks Board of Directors held thirteen regularly scheduled and special meetings.
All directors attended at least 75% of the number of meetings of the Board and committees of the Board on which they served. All directors are encouraged to attend annual meetings of shareholders, and all attended the 2007 Annual Meeting.
S.Y. Bancorp has an Audit Committee, Compensation Committee and a Nominating and Corporate Governance Committee of the Board of Directors. The Bank has a Loan Committee and a Trust Committee of the Board of Directors.
The Board of Directors of S.Y. Bancorp, Inc. maintains an Audit Committee comprised of five directors who are not officers of S.Y. Bancorp. The Audit Committee is comprised of Messrs. Carrico, Herde, Lechleiter, Madison and Simon. Each of these individuals meets the NASDAQ independence requirements for membership on an audit committee. The Board of Directors has adopted a written charter for the Audit Committee, and this charter is available on S.Y. Bancorps website: www.syb.com.
The Audit Committee oversees S.Y. Bancorps financial reporting process on behalf of the Board of Directors. Management has primary responsibility for the financial statements and the reporting process including the systems of internal controls. In fulfilling its oversight responsibilities, the Committee, among other things, considers the appointment of the independent auditors for S.Y. Bancorp, reviews with the auditors the plan and scope of the audit and audit fees, monitors the adequacy of reporting and internal controls, meets regularly with internal and independent auditors, reviews the independence of the independent auditors, reviews S.Y. Bancorps financial results as reported in Securities and Exchange Commission filings, and approves all auditing and permitted non auditing services performed by its independent auditors. The Audit Committee meets with our management at least quarterly to consider the adequacy of our internal controls and the objectivity of our financial reporting. This Committee also meets with the independent auditors and with our own appropriate financial personnel and internal auditors regarding these matters. Both the independent auditors and the internal auditors regularly meet privately with this Committee and have unrestricted access to this Committee. The Audit Committee held five meetings during 2007.
The Board of Directors has determined that Mr. Herde is an audit committee financial expert for S.Y. Bancorp and is independent as described in the paragraph above. See CORPORATE GOVERNANCE AND RELATED MATTERS REPORT OF THE AUDIT COMMITTEE for more information.
Nominating and Corporate Governance Committee
The Board of Directors of S.Y. Bancorp, Inc. maintains a Nominating and Corporate Governance Committee. Members of this committee are Messrs. Edinger, Madison, Simon and Tasman, all of whom are non-employee directors meeting the NASDAQ independence requirements for membership on a nominating and governance committee. Responsibilities of the committee are set forth in a written charter satisfying the NASDAQs corporate governance standards, requirements of federal securities law, and incorporating other best practices. The Board of Directors adopted the charter for the Nominating and Corporate Governance Committee, and this charter is available on S.Y. Bancorps website: www.syb.com.
Among the committees duties are identifying and evaluating candidates for election to the board of directors, including consideration of candidates suggested by shareholders. To submit a candidate for consideration by the committee, a shareholder must provide written communication to the committee. Board membership criteria are set forth in the committees guidelines and include broad-based business skills and experience, commitment to high ethical standards, personal integrity, sound judgment and time available to devote to Board activities.
This committee held three meetings during 2007.
The Board of Directors of S.Y. Bancorp, Inc. maintains a Compensation Committee. Members of this committee are Messrs. Carrico, Edinger and Tasman and Dr. Taylor, all of whom are independent non-employee Directors. The Board of Directors has adopted a written charter for the Compensation Committee, and this charter is available on S.Y. Bancorps website: www.syb.com. The functions of this committee include making recommendations to our Board of Directors establishing the compensation of executive officers and reviewing the compensation of Directors. The Compensation Committee held four meetings during 2007. See EXECUTIVE COMPENSATION AND OTHER INFORMATION REPORT ON EXECUTIVE COMPENSATION for more information.
The members of the Banks Loan Committee are Messrs. Brooks, Carrico, Herde and Tasman. This committee held twelve meetings in 2007. The Loan Committee is primarily responsible for oversight of the Banks lending function including loan quality matters and approval of large credit facilities.
The members of the Banks Trust Committee are Messrs Brooks, Edinger and Simon and Dr. Taylor. This committee held six meetings in 2007. The Trust Committee oversees the operations of the trust department of the Bank to ensure it operates in accordance with sound fiduciary principles and is in compliance with pertinent laws and regulations.
Shareholder Communications with the Board of Directors
Shareholders may communicate directly to the Board of Directors in writing by sending a letter to the Board at: S.Y. Bancorp Board of Directors, P.O. Box 32890, Louisville, KY 40232-2890. All communications directed to the Board of Directors will be received and processed by the Nominating and Corporate Governance Committee without any editing or screening.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers, our Directors and persons who own more than 10% of a registered class of S.Y. Bancorps common stock to file initial reports of ownership and changes in ownership with the SEC and the NASDAQ. Such executive officers, Directors and shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to us and written representations from the applicable executive officers and our Directors, all persons subject to the reporting requirements of Section 16(a) filed the required reports on a timely basis for the year ended December 31, 2007 with the exception of the seven directors participating in a deferred compensation plan and electing the deferral to be invested in Bancorp stock. Due to a
delay in reporting by a third party record keeper, shares so purchased in September 2007 were not reported timely as follows: Mr. Edinger, 57.7 shares, Mr. Herde, 38.4 shares, Mr. Lechleiter, 57.7 shares; Mr. Madison, 57.7 shares, Mr. Simon, 28.8 shares, Mr. Tasman, 76.9 shares and Dr. Taylor, 57.7 shares. Also the report regarding Mr. Poindexters February 20, 2007 restricted stock grant reached the SEC on February 23, 2007 due to a delay involving an expired password.
EXECUTIVE COMPENSATION AND OTHER
Compensation Discussion and Analysis
The members of the Compensation Committee are Messrs. Carrico, Edinger and Tasman and Dr. Taylor, all of whom are independent non-employee Directors. Dr. Taylor chairs the Committee. The Board of Directors has adopted a written charter for the Compensation Committee. The functions of this committee include establishing the compensation amounts and programs for the executive officers. The Compensation Committee held four meetings during 2007, and its actions included discussion of and amendments to compensation philosophy, review and selection of peer group institutions, review of Compensation Discussion and Analysis requirements, review of current and adoption of a restated deferred compensation program for executive officers, recommendations to the Board regarding executive salaries and administration of employee equity awards.
For 2007, the Committee contracted with Clark Consultings compensation group to study the Banks executive pay practices and, thereby, provide resources to the Committee. The Committee engaged the independent consultant to provide an assessment of the Banks overall executive compensation program. The consultant concluded the Committees current practices to be consistent with its objectives and with sound governance principles and the Committee used the consultants findings as a foundation for its decisions regarding 2007 compensation. The Committee also employed a William M. Mercer, Inc. during 2006 to provide guidance on design and prevalence of executive nonqualified deferred compensation programs. Both consultants presented their findings to the Compensation Committee.
The CEOs compensation is determined by the Committee. Compensation for all executive officers other than the CEO is based on recommendations by the CEO to the Committee, and the Committee either approves or adjusts to ensure consistency with Company philosophy and external competitive dynamics.
Objectives of Compensation Programs
The pay-for-performance compensation philosophy of the Compensation Committee supports S.Y. Bancorps primary objective of creating value for its shareholders. The Committee strives to ensure the compensation of S.Y. Bancorps executive officers is adequate to attract and retain talented individuals with proven abilities to lead S.Y. Bancorp and the Bank so growth and profitability are realized while maintaining stability and capital strength. The Bank competes with many other financial institutions in the markets where it operates metropolitan Louisville, Indianapolis and, most recently, Cincinnati for the most outstanding individuals available. Competing financial institutions range in size from start up organizations to established community banks to significantly larger super-regional and money center banks. All are vying for capable leaders, and accordingly, are willing to attractively compensate individuals to join and/or stay with their respective organization.
As a point of reference and comparison in its analysis, the Committee uses compensation information compiled for a group of peer banks. This peer group is comprised of publicly traded banks from $1.5 billion to $3 billion in total assets. The larger banks are included because the Committee considers the Banks Investment Management and Trust Department to provide an element of sophistication resulting in the overall Bank being more comparable to larger community banks. The peer group is comprised of banks in metropolitan areas of at least 250,000 people so as to more closely reflect the operating conditions of Stock Yards Bank both from the standpoint of competing for business and for talented people. The peer group is generally comprised of banks with common stock widely held and not family controlled. Peers are included regardless of operating results, again to provide a more representative sample. The goal of the Committee is to compensate management with base pay between the 50th and 75th percentile while having incentive compensation for performance track a higher percentile as the Companys performance exceeds these levels.
The Committee believes the following compensation strategies for S.Y. Bancorps executive officers, including the Chief Executive Officer (the CEO), achieve its objective. The philosophy of the Compensation Committee reflects a pay-for-performance culture while being competitive with other employers with which it competes for executive talent.
The General Design of S.Y. Bancorps Compensation Programs
As the business of banking evolves and Stock Yards Bank & Trust Company continues to distinguish itself as an exceptional performer, it has become increasingly apparent that the Companys success is highly dependent upon the continuity realized by retaining very capable key officers. It is these individuals who execute the strategic plans of the Company. They deliver the Banks hallmark high quality services and carry forward the Banks century-old exceptional reputation. With the primary reason for customer dissatisfaction being disruption caused by banking officer turnover, management and the Compensation Committee have designed compensation programs to respond to the high priority of appropriately compensating officers critical to its customer service mission.
The Committee believes that a structure focusing on base salary, annual cash incentives and long term equity incentives is appropriate to achieve its objectives of attracting, motivating and retaining key executives, and paying them based on the performance they produce for shareholders. In addition to these elements of compensation, the Committee monitors and periodically modifies post-employment types of compensation (nonqualified or supplemental retirement and severance pay programs), each designed to retain valuable executive talent. The Company has no employment contracts with any of its officers.
Specific Elements of Compensation, and How Performance Impacts Each
The Companys in-service compensation program consists of three key components:
· Base pay
· Annual cash and stock incentive compensation
· Long term incentives
The elements of post-employment compensation and benefits for executives (in addition to the retirement programs provided to employees generally) include:
· Nonqualified deferred compensation
· A nonqualified supplemental pension program for two executives
· Change-in-control severance agreements with three executives
Base Salary. Executive officers base pay is determined by evaluating the most recent comparative peer data relative to their roles and responsibilities designated in their positions. Individual salary increases are reviewed annually and are based on the Bancorps comparative performance to the peer group and the executives individual performance during the preceding year. The Committee has set a range between the 50th and 75th percentile for base salary relative to peers. In consideration of this range, the Committee increased the CEOs salary $22,500 or 5% for 2006. For 2007 the CEO requested that he not receive an increase in base pay due to the difficult operating environment at that time coupled with his desire to be personally involved in cost containment measures expected of all employees. The Committee affirmed that the absence of a base pay increase was not a reflection of the CEOs performance.
Annual Cash Incentives. The objective of annual cash incentive compensation is to deliver levels of compensation competitive to the peer group, conditioned on the attainment of annual financial objectives and operating results. The Committee believes these to be primary drivers of stock price performance over time. Therefore, the Committee established an incentive program based upon the achievement of certain earnings per share goals as well as line of business goals applicable to specific officers duties. For 2007 the determination as to whether cash incentives would be paid to the CEO and non-line of business EVPs was based upon the achievement of earnings per share (EPS) growth of at least 4%. The formula has increasingly higher payout percentages for corresponding EPS increases, reinforcing the Committees pay-for-performance philosophy. The payout scale for the CEOs annual cash bonus is as follows:
For 2007, the Company achieved an 8% increase in EPS, and accordingly, the CEO received a cash bonus of 30% of his base pay.
Ms. Davis, who does not have line of business responsibility, receives an annual cash incentive at a percentage of her base salary determined based on one half the percentage applicable to the CEO. She also received a discretionary award of 5% of base pay. Each Executive with responsibility for a line of business has a weighted incentive goalbased partly of the overall performance of the Company (using earnings per share and a percentage relative to the CEOs award as the performance measure) and also on attainment of line of business objectives. Any of these criteria or the resulting bonus amounts may be adjusted at the discretion of the Committee based upon their overall evaluation of an individuals performance and competitive positioning.
The main component of Ms. Thompsons annual cash incentive is based upon the net income before allocated expenses of the Investment Management and Trust Department which she has responsibility for leading. The Investment Management and Trust Department contributes approximately 40% of the Banks total non-interest income, distinguishing the Bank from many peers. Growth in departmental net income therefore directly impacts the profitability of the Bank and makes a significant contribution to enhancement of shareholder value. For that portion of her annual incentive to be earned, departmental net income must increase by at least 10%, and the amount of the incentive increases as net income growth increases as follows:
For 2007 the departments income increased 12% so Ms. Thompson received a 24% bonus.
Ms. Thompson also has primary responsibility for the sales, service and marketing initiatives and execution at the Bank. Sales and service are two key components of the Banks strategic plan and directly impact the Banks continued success. According, she also has a component of her annual cash incentive based on overall performance of the Company. This component of her incentive is 1/3 of the CEOs award percentage. The additional 10% of her base pay resulted in a total cash award of 34% of base pay.
For Messrs. Hillebrand and Poindexter, incentives related to the line of business success are as follows. The Private Banking and Commercial Lending Departments are the source of significant loan and deposit growth. Net interest income comprises approximately 65% of the Banks total revenues. Growth directly impacts the profitability of the Company making a significant contribution to enhancement of shareholder value. Various attributes including loan and deposit growth, loan fees and service charges, customer satisfaction and retention are weighted. Net loan and deposit growth receive the top weightings, and the net growth measurement considers customer retention along with acquisition of new business. The matrix used to compute this incentive is structured such that achievement of target performance in all categories results in a 20% of base pay bonus. Once certain minimums have been met, achievement under the target results in a prorated bonus and performance exceeding targets results in a bonus proportionately higher than 20% of base pay.
A key component of the Banks business strategy is to acquire and retain full customer relationships. In their roles as leaders of their departments, inter and intra departmental referrals and cross sales are critical and directly impact the Banks continued success. Accordingly, Messrs. Hillebrand and Poindexter also have a component of their annual cash incentive based on overall performance of the Company. This component of their incentive is 1/3 of the CEOs award percentage. Additionally, reflecting his successful planning and execution of the Banks expansion goals into new markets, Mr. Hillebrand received a discretionary award of $35,000.
Annual Stock Incentives. While EPS has historically been the sole driver as to the level of cash bonuses, in 2006 the Committee introduced two additional performance measures to be used in determining additional annual awards return on average assets (ROAA) and return on average equity (ROAE). The Committee recognizes and rewards management for stellar performance and realizes these achievements set the Bank apart from competitors and add value to its shareholders. Therefore, each objective has a target set at the 90th percentile of the peer group three year average return. If the Company performs at the 90th percentile level, executive incentives will be awarded as follows:
ROAA CEO receives 5% of base pay, and EVPs receive 2.5% of base pay
ROAE CEO receives 5% of base pay, and EVPs receive 2.5% of base pay
Awards as determined above will be made annually in the form of restricted stock, rather than cash, with a three year vesting schedule. Awards for excellent ROAA and ROAE begin to shift dependency of incentives away from the single EPS growth objective by providing rewards for maintaining high performance for other key metrics. The three year vesting is designed to enhance retention. Awards made in 2007 are based upon 2006 performance. With a three year average of 1.68% the benchmark of 1.42% for ROAA was met; with a three year average of 17.48% the benchmark 17.65% for ROAE was not. These awards are reflected in the Grant of Plan-Based Awards Table under the All Other Stock Awards heading.
Long Term Incentives. The Committee believes the long term incentive of granting of stock options to executives best serves the interests of shareholders by providing those persons having responsibility for the management and growth of S.Y. Bancorp and the Bank with an opportunity to increase their ownership of S.Y. Bancorp Common Stock and to have a stake in the future of the Company. By increasing executive officer ownership, these individuals will have an added incentive to maximize shareholder value. Additionally these equity awards further the Companys competitive advantage against significantly larger institutions in attracting and retaining talented individuals critical to the Companys success. Equity awards also provide an advantage over smaller community banks where equity compensation is not available. Executive officers are granted options, normally annually, giving them the right to purchase S.Y. Bancorp Common Stock at the price fixed at the Common Stocks trading value as of the date of grant, exercisable for a specified future period. The exercise period of the grants has historically been ten years. Therefore, as the common Stock market price increases, executives have an incentive to purchase that stock at the lower grant-date price.
The number of stock options granted each executive is based upon individual performance, contribution to the companys overall performance, and comparative practices. The number of options granted each executive is set to target an award with a value determined in the same fashion as options are valued for accounting purposes that ranged from 18% to 22% of each executives base salary and was 30% for the CEO. Awards granted in February 2007 relate to 2006 performance. Awards related to 2007 performance are scheduled be granted in February 2008.
Post-Employment Compensation and Benefits. To enhance the objective of retaining key executives, the Company previously established Senior Executive Severance Agreements (the Severance Agreement) for Mr. Heintzman, Ms. Davis and Ms. Thompson, concluding it to be in the best interests of S.Y. Bancorp, its Shareholders and the Bank to take reasonable steps to help assure these key executives of the Bank that they will be treated fairly in the event of a tender offer or takeover bid, or an actual Change in Control. With these agreements in place, if S.Y. Bancorp should receive takeover or acquisition proposals from third parties, S.Y. Bancorp will be able to call upon the key executives of the Bank for their advice and assessment of whether such proposals are in the best interests of shareholders, free of the influences of their personal employment situations. These severance agreements have been in place since the mid-1990s and were updated in 2005, and were not entered into because of any belief by management that a Change in Control of S.Y. Bancorp was imminent.
The Committees current philosophy for other post-employment programs is to ensure parity for key executives in their ability to save for their own retirement, and in the amount the Bank contributions toward
retirement savings. In 2006, the Committee took steps consistent with this philosophy by studying the adequacy of its retirement programs for key executives, and modified certain programs to provide that parity.
The Bank has a nonqualified deferred compensation plan, which, until 2006, merely provided executives with the ability to defer a portion of their cash compensation and related taxes, and instead receive that compensation and an investment market rate of return on the deferred portion, after their employment with the Bank ends or, in the case of certain events, in service distributions. Amendments in 2006 provided executives with Bank contributions for the amount of match and ESOP contributions they do not receive under the Banks qualified retirement plan on annual cash incentives and base salary above an annual tax-qualified plan cap under the Internal Revenue Code.
In the 1990s the Bank created a plan (called the Senior Officer Security Plan, or SOSP) to enhance the retirement security of key executives by granting them a fixed annual benefit per year after retirement. This fixed amount was originally designed to supplement broader-based retirement programs and bring the executives retirement income from combined sources of the tax-qualified employer retirement programs, social security and this plan to a level of approximately 70% of their pre-retirement income. The Committee studied this program in 2006, concluded that the fixed amounts would no longer assure executives of that level of income during retirement (compensation having grown in the interim with no adjustment to the fixed benefit amounts), but also concluded that expansion of this type of program was not consistent with its compensation objectives.
The Committee also recognized that an increasingly higher percentage of total compensation for its key executives would be derived from performance-based annual incentives, but the Banks current broad-based employee retirement program did not recognize pay above base salary in computing annual contribution amounts. Therefore, rather than allow its broad-based retirement program to become increasingly less meaningful to executives whose incentive-based compensation is a larger percentage of total compensation, and rather than expanding the SOSP to include a other key executives, or increasing the fixed annual income it will provide to Mr. Heintzman and Ms. Thompson, the Committee decided to add a feature to its executive nonqualified deferred compensation plan to give certain key executives (including Messrs. Heintzman, Hillebrand and Poindexter and Mss. Thompson and Davis) a deferred compensation credit each year on annual incentive compensation, equal to that they would have received had the all-employee retirement plan included annual incentive compensation in its contribution formula. The Committee also transitioned a prior supplemental retirement program for Ms. Davis, that was based on the cash value increases in life insurance owned by the Bank, into the nonqualified deferred compensation program in 2006 by providing a one-time transition credit, after concluding that the prior program had a higher cost to the Bank than benefit to Ms. Davis. After these changes, the Committee believes its post-employment programs for executives to will enable executives to accumulate adequate savings to supplement Social Security and tax-qualified plan benefits and enjoy an adequate percentage of pre-retirement pay as income during retirement.
Stock Ownership/Retention Guidelines
As noted above, equity compensation is awarded to have executives and shareholders interest merge in the long-term performance of the Company; therefore, management and the Committee expect executives to own stock. While retention or disposition of shares acquired upon option exercise is at the discretion of the option holder, to further the ownership objectives of the option grants there are Company minimum ownership guidelines based upon salary multiples. The CEO is expected to own stock, exclusive of value in unexercised options, at a multiple three times his base pay. For Executive Vice Presidents, that multiple is two times base pay. These guidelines encourage the option holder not to sell shares acquired upon exercise of options, other than to pay related taxes, at least until the guideline level of ownership is attained. For the officers in the Summary Compensation Table, all have exceeded the applicable guideline level with the exception of Mr. Poindexter who, having joined the Bank in 2004, has not yet reached the guideline level.
In summary, the Committee believes the total compensation program for S.Y. Bancorps executive officers is competitive with programs offered by similar institutions, and executive compensation is appropriate to further the goals and objectives of S.Y. Bancorp and the Bank.
COMPENSATION COMMITTEE REPORT
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based upon this review and discussion, the Committee has recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy statement.
The Compensation Committee of the Board of Directors of S.Y. Bancorp, Inc.
The report of the Compensation Committee shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section, nor shall it be deemed soliciting material or subject to Regulation 14A of the Exchange Act or incorporated by reference in any filing under the Exchange Act or the Securities Act of 1933, except as shall be expressly set forth by specific reference in such filing.
Executive Compensation Tables and Narrative Disclosure
The following table sets forth information concerning the compensation of our Chief Executive Officer (CEO), Chief Financial Officer (CFO), and the three most highly compensated executive officers other than the CEO and CFO. Throughout this section, we refer to executives named in this table (individually, as the Executive and collectively as he Executives).
Summary Compensation Table
(1) Of this total, the officers deferred the following amounts of 2007 and 2006 salary, and for Mr. Heintzman, director fees:
(2) Stock Awards represent restricted stock that was granted February 20, 2007 based on achievement of an ROAA performance objective and which vests 33% annually beginning one year after grant. The value of the grant measured at the grant date value per share of $26.83 is recorded as stock compensation expense over the 36 month vesting term. Therefore, the expense recorded in 2007 for these grants was 10.3/36ths of the total grant date value based on SFAS No. 123R. For information pertinent to SFAS No. 123R please refer to Note 1 to the 2007 consolidated statements in Bancorps annual report on Form 10-K.
(3) Options were granted February 20, 2007 with an exercise price equal to the closing price of the common stock on that date, or $26.83. The fair value of each option pursuant to SFAS No. 123R was $6.14. Options were granted January, 17, 2006 with an exercise price equal to the closing price of the common stock on that date, or $24.067. The fair value of each option pursuant to SFAS No. 123R was $5.81. For assumptions used to estimate fair value of options please refer to Note 1 to the 2007 consolidated statements in Bancorps annual report on Form 10-K. These options vest 20% annually beginning one year after grant with the exception of those granted to Mr. Heintzman and Mss. Davis and Thompson, which fully vest six months after the grant date.
(4) All cash incentives and bonuses granted to the Executives for 2007 and 2006 were fully vested when granted. The amounts were determined in accordance with the process and using the performance criteria described in Compensation Discussion and Analysis.
(5) Totals include the following:
Assumptions used in calculating the change in actuarial value of the defined benefit above are a discount rate of 5.75% for December 31, 2005, 2006 and 2007, a retirement age of 65, with Mr. Heintzmans current
age being 48, and Ms. Thompson s being 46; payments occurring for 15 years, and assuming no pre-or post retirement mortality.
All earnings on the Executives nonqualified deferred compensation balance are included in the totals, because the earnings are not determined by either a market rate of interest, nor based on investment options that are identical to those available under the broad-based employee 401(k) plan. Rather, earnings are based on the actual performance of investment funds that the Bank designated and the allocation of the nonqualified plan account balance by the executives as among those funds.
(6) All Other Compensation consists of the following:
(1) Mr. Heintzman deferred receipt and taxation of his Board fees.
(2) Includes an amount of 401(k) match and ESOP contribution not received under the Banks tax-qualified 401(k) and Employee Stock Ownership Plan because the eligible compensation taken into account under the 401(k) and Employee Stock Ownership Plan does not include either (i) any pay in excess of base salary, or (ii) any base salary above an annual tax-qualified plan cap under the Internal Revenue Code.
(3) Includes in 2006 for Ms. Davis a one-time $38,074 credit to her account (in excess of prior year accrued benefits) to replace a prior nonqualified defined contribution arrangement that the Bank and Ms. Davis agreed to end in 2006.
(7) Perquisites totaled less than $10,000 for each Executive and are therefore not included in the table.
The following table sets forth information concerning plan-based awards made to the Executives during the last fiscal year. No Executive was granted an equity or non-equity incentive plan awards in 2007 for potential payment in a future year.
Grants of Plan-Based Awards Table
The following table sets forth information concerning equity stock options held by the Executives as of the end of the last fiscal year.
Outstanding Equity Awards at Fiscal Year End Table
(1) The unvested options held by Mr. Hillebrand and Mr. Poindexter vest 20% each year beginning one year after the grant date and each anniversary thereafter.
The following table sets forth the stock options exercised by or stock awards vested for the Executives during the last fiscal year:
Option Exercises and Stock Vested Table
The 2005 Restated Senior Officer Security Plan (the SOSP) promises benefits, beginning at age 65, of $136,500 per year for 15 years for Mr. Heintzman and $82,000 per year for 15 years for Ms. Thompson, as a means to help them attain reasonable levels of income replacement during retirement, after also considering expected Social Security benefits and the broad-based retirement plan applicable to Bank employees generally. The total potential benefit vests gradually at 4% per year of service so that is 100% vested if the Executive works for the Bank for a total of 25 years. As of the end of 2007, Mr. Heintzman was 88% vested, and Ms. Thompson was 60% vested
in their respective benefits. The retirement benefit also becomes fully vested in the event of the Executives disability or a change of control of the Bank or the Bancorp while the Executive is employed by the Bank.
If the Executive terminates employment before age 55, benefit payments can begin as early as age 55 (or such later age as the Executive has elected), but the annual payment amount is adjusted to the same present value as the benefit if paid at age 65. If the Executive leaves the Bank after age 55, the benefits do not begin until age 65.
Death benefits are provided in lieu of these retirement payments if the participant dies while in the employ of the Bank before age 65 or after leaving the Bank due to disability. The death benefits are provided by the Bank endorsing over to the Executive via a split dollar agreement a right to payment of a portion of the death benefits due under several insurance policies purchased by the Bank on the Executives. As of the end of 2007, the SOSP provided for a $3,065,173 death benefit for Mr. Heintzman and a $1,762,805 death benefit for Ms. Thompson.
If an executive dies after employment termination (other than on account of disability) but before retirement payments begin, the Executives selected beneficiary is paid a death benefit equal to the retirement payments to which the Executive would have been entitled, at the same time and in the same amounts those payments would have even paid to the Executive. The following table illustrates these pension benefits:
Pension Benefits Table
The Executive Nonqualified Deferred Compensation Plan (the NQ Plan) allows the Executive to defer base salary by a dollar amount or any whole percentage of up to 10%. Beginning with incentive compensation paid (if any) with respect to 2007, participants are also allowed to defer receipt and income taxation on up to 50% of annual incentive compensation. Beginning in 2006, Executives are credited with the amount of match and basic ESOP contribution that those officers do not receive under the Banks tax-qualified 401(k) and Employee Stock Ownership Plan applicable to employees generally, because the eligible compensation taken into account under the 401(k) and Employee Stock Ownership Plan does not include either (i) any pay in excess of base salary, or (ii) any base salary above an annual tax-qualified plan cap under the Internal Revenue Code (which cap is $225,000 in 2007 and is indexed each year). This Bank credit to the Executives plan accounts is vested in accordance with the vesting schedule in the tax-qualified 401(k) and Employee Stock Ownership Plan, so all Executives except Mr. Poindexter are 100% vested in this amount upon its credit to the NQ Plan.
Once amounts are credited to the NQ Plan, they increase or decrease based on the actual investment performance of certain investments funds selected by the Company from time to time, among which investment funds the Executives can designate (and re-designate as often as they wish) how their account balances should be allocated.
The Executives have elected between a lump sum distribution or annual installments over no more than 10 years from the NQ Plan, but that election applies only if they leave the Banks employ due to death or after age 55. If the Executives termination of employment occurs other than on account of death and prior to age 55, benefits are automatically paid in a lump sum.
The Executive also may elect (prior to the year in which credits are to be made) to have some or all of their own deferrals paid to them in a lump sum or installments over up to six years, while still employed by the Bank, provided they timely designate the amount and time for that payment, and subject to Internal Revenue Code restrictions on later accelerating the payment or delaying it. Executives may also apply to receive a distribution in the event of an unforeseeable emergency.
Nonqualified Deferred Compensation Table
(1) For Mr. Heintzman includes first an employee account then a director fee deferral account.
(2) Includes an amount for each officer equal to the 401(k) match and ESOP contribution not received under the Banks tax-qualified 401(k) and Employee Stock Ownership Plan because of plan limits, as described above.
Other Potential Post-Employment Payments
Various benefit plans of the Bank have special terms that apply if a change in control occurs:
· The SOSP, described above, provides that a change in control of the Bank during the Executives employment will trigger the Executive becoming fully vested in the SOSP benefit.
· The NQ Plan discussed above provides that at a change in control while the Executive is still employed, any Bank credits to this plan that are then unvested will be 100% vested.
· The Executives ability to exercise stock options is fully accelerated upon a change in control and any unvested restricted stock becomes 100% vested at change in control.
· Three of the Executives have Severance Agreements that generally only apply in the event of a change in control.
The Bank has entered into 2005 Restated Senior Executive Severance Agreements (Severance Agreements) with Mr. Heintzman, Ms. Davis and Ms. Thompson. Each Severance Agreement provides that, in the event (A) the Executive is forced to resign during negotiations or following a change in control of Bank or Bancorp or (B) the Executive voluntarily terminates employment within 24 months following a change in control, the Bank will pay the Executive a severance payment equal to 299 percent of the Executives average gross taxable income for the previous five years (Full Payment). Should voluntary termination occur between 24 and 36 months following the change in control, the Executive will receive 2/3 of the Full Payment. Payments under the Severance Agreements are paid in a lump sum six months following termination of employment.
No payments are made under the Severance Agreements if (i) the Executive fails to comply with the Banks confidentiality policies, (ii) termination occurs because the Bank has determined there is cause as defined in the Severance Agreement, (iii) the Executive terminates due to death or disability, or (iv) the Executive announced before the event an intention to voluntarily cease working with no intention to seek other employment at a date that happens to correspond to a change in control. The Severance Agreement also requires that the Executive not compete, directly or indirectly, by soliciting customers or business of the Bank in Kentucky or a 50 mile radius of Louisville, Kentucky, or by soliciting for employment any employee of the Bank, for a period of 18 months following the receipt of any severance payment.
The Severance Agreements provide that the Bank will indemnify the Executive for legal fees and expenses incurred in contesting any termination or enforcing the Severance Agreement. In addition, the Severance Agreement requires that the Bank pay any excise taxes payable due the compensation paid under this and other agreements, and gross up that payment to cover the income taxes on the excise tax payment. Excise taxes would be due if the total of the payments under the Severance Agreement, plus other payments that are triggered by or enhanced due to a change in control, amount to more than 300 percent of the Executives gross taxable income for the previous five years; if this occurs, then all amounts paid in excess of 100% of that five-year average taxable income is an excess parachute payment under Code Section 280G.
Because awards under the Companys Stock Incentive Plan become fully exercisable or vest upon a change in control, and the SOSP benefits promised Mr. Heintzman and Ms. Thompson also accelerate in that event, it is likely that the Bank would have to reimburse for some excise taxes under these agreements.
The following table estimates the amount that would have been payable under the Severance Agreements if their terms had been triggered as of December 31, 2007 and other amounts that vest or accelerate if there is a change in control.