UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
SCHEDULE
14A
Proxy Statement
Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by
the registrant
x
Filed by
a party other than the registrant
o
Check the
appropriate box:
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Preliminary
proxy statement
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¨
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Confidential,
for use of the Commission only (as permitted by Rule
14a-6(c)(2))
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x
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Definitive
proxy statement
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¨
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Definitive
additional materials
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¨
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Soliciting
material pursuant to Rule 14a-12
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SOUTHERN COMMUNITY FINANCIAL
CORPORATION
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(Name
of Registrant as Specified in Its Charter)
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(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment
of filing fee (Check the appropriate box):
¨
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Fee
computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
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(1)
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Title
of each class of securities to which transaction
applies:
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(2)
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Aggregate
number of securities to which transactions
applies:
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(3)
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Per
unit price or other underlying value of transaction computed pursuant to
Exchange Act Rule 0-11:
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(4)
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Proposed
maximum aggregate value of
transaction:
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¨
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Fee
paid previously with preliminary
materials.
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¨
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Check
box if any part of the fee is offset as provided by Exchange Act Rule 0-11
(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its
filing.
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(1)
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Amount
previously paid:
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(2)
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Form,
schedule or registration statement
no.:
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SOUTHERN
COMMUNITY FINANCIAL CORPORATION
4605
Country Club Road
Winston-Salem,
North Carolina 27104
Telephone:
(336) 768-8500
NOTICE
OF ANNUAL MEETING OF SHAREHOLDERS
Wednesday,
May 26, 2010
To the
Shareholders:
The
Annual Meeting of the Shareholders of Southern Community Financial Corporation
(the “Company”) will be held on:
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Wednesday,
May 26, 2010
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Village
Inn Golf & Conference Center
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Exit 184,
Interstate 40
Clemmons
(Forsyth County), North Carolina
or at any
adjournment thereof, for the following purposes:
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To
elect three directors to serve three-year terms, expiring at the Annual
Meeting of Shareholders in 2013 or until their successors have been
elected and qualified.
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To
approve non-binding resolution on the Company’s executive
officers.
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To
consider a shareholder proposal regarding amending the bylaws to eliminate
staggered terms for directors.
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To
transact such other businesses as may properly come before the meeting or
any adjournments thereof.
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Shareholders
of record at the close of business on March 31, 2010, are entitled to notice of,
and to vote, at the meeting and any adjournments thereof. The Company's
stock transfer books will not be closed.
Your vote
is important
.
Whether or not you attend the meeting in person, we encourage you to vote
your shares. You may vote your shares on the internet, or by using a
toll-free telephone number or by completing the enclosed proxy card and
returning it in the pre-paid envelope. Instructions for using these convenient
services are provided on your proxy card. We encourage you to use the
internet to vote. For those shareholders wishing to receive proxy
materials electronically an option is provided to request e-delivery in the
future.
As many
shares as possible should be represented at the meeting, so even if you expect
to attend the meeting, please vote your proxy. By doing so, you will not
give up the right to vote at the meeting. If you vote your proxy and then
attend the meeting, you may notify the Secretary that you wish to vote in
person, and the Company will disregard the proxy you voted, provided you do vote
in person or otherwise validly revoke your proxy. (For more details, see
the attached Proxy Statement.)
By order
of the Board of Directors.
F.
Scott Bauer
Chairman
of the Board and Chief Executive Officer
April 16,
2010
SOUTHERN
COMMUNITY FINANCIAL CORPORATION
4605
Country Club Road
Winston-Salem,
North Carolina 27104
Telephone:
(336) 768-8500
PROXY
STATEMENT
ANNUAL
MEETING
The Board
of Directors (the “Board”) of Southern Community Financial Corporation
(“Southern Community” or the “Company”) hereby solicits your appointment of
proxy, in the form enclosed with this statement, for use at the Annual Meeting
of Shareholders to be held:
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Wednesday,
May 26, 2010
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Village
Inn Golf & Conference
Center
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Exit 184,
Interstate 40
Clemmons
(Forsyth County), North Carolina
or at any
adjournment thereof, for the purposes stated in the accompanying Notice of
Annual Meeting of Shareholders. The Board has fixed the close of business
on March 31, 2010, as the record date for the determination of shareholders
entitled to notice of and to vote at the Annual Meeting. Included with
these proxy materials is the 2009 Annual Report to Shareholders and Form
10-K. The Company anticipated mailing this Proxy Statement on or about
April 19, 2010.
You are
invited to attend the Annual Meeting. Even if you plan to attend the
Annual Meeting, you are requested to vote on the proposals described in this
Proxy Statement by returning the enclosed appointment of proxy or by voting over
the internet or by telephone.
Important Notice Regarding the
Availability of Proxy Materials for the Annual Meeting of Shareholders to be
held on May 26, 2010: the proxy statement, form of proxy and annual
report to shareholders are available on Southern Community’s website at
www.iproxydirect.com/scmf
.
VOTING
OF APPOINTMENTS OF PROXY
Your
vote is important
.
Your shares can be voted at the Annual Meeting only if you attend the
meeting or vote the enclosed appointment of proxy. You do not have to
attend the meeting to vote. To vote the enclosed appointment of proxy, you
may:
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Vote over the
internet
: You may access our internet voting site by
going to:
www.iproxydirect.com/scmf
.
If you have access to the internet, we encourage you to vote in this
manner and also sign up for electronic delivery of future corporate
mailings.
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Vote by
telephone
: You may vote by calling
866-752-8683.
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Vote by mail
:
You may vote by executing and returning the enclosed appointment of proxy
in the pre-addressed pre-paid envelope provided with this proxy
statement.
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The internet and telephone voting
procedures are designed to authenticate shareholders and to allow you to confirm
that your instructions have been properly followed. The internet and
telephone voting facilities for eligible shareholders will close at 5:00 p.m.
Eastern Time on May 25, 2010.
The Board
has named Merle B. Andrews and Robert L. Davis (the “Proxies”) as management
proxies in the enclosed appointment of proxy. When appointments of proxy
in the enclosed form are properly executed and returned in time for the Annual
Meeting (or appointed over the telephone or internet), the shares they represent
will be voted at the meeting in accordance with the directions given. If
no directions are given on how to vote your shares, the appointment of proxy
will be voted FOR the three nominees for director in Proposal 1, FOR approval of
the compensation of the executive officers in Proposal 2 and AGAINST the
shareholder proposal to amend the Company’s bylaws to eliminate staggered board
terms for directors in Proposal 3. If, at or before the time of the Annual
Meeting, any nominee named in Proposal 1 has become unavailable for any reason,
the Proxies will have the discretion to vote for a substitute nominee. On
other matters that properly come before the meeting, the Proxies will be
authorized to vote shares represented by appointments of proxy in accordance
with their best judgment. These matters include, among other matters,
approval of the minutes of the 2009 Annual Meeting, consideration of a motion to
adjourn the Annual Meeting to another time or place, and matters for which the
Company did not receive notice by March 5, 2010. As of the date the
Company printed this Proxy Statement, the Company did not anticipate any other
matters would be raised at the Annual Meeting.
Record Holders.
If you
hold shares in your own name, you are a “record” shareholder. Record
shareholders may complete and sign the accompanying appointment of proxy and
mail it in the business return envelope provided, deliver it in person to the
Company or you may vote your shares over the internet or by
telephone.
Street Name Holders.
If you
hold shares through a broker or other nominee, you are a “street name”
shareholder. Street name shareholders who wish to vote at an annual
meeting need to obtain the proxy materials from the institution that holds their
shares and follow the voting instructions on that form.
REVOCATION
OF APPOINTMENT OF PROXY
The
method by which you vote will not limit in any way your right to vote at the
Annual Meeting if you later decide to attend the Annual Meeting and vote in
person.
If you vote an appointment of
proxy,
you may revoke that appointment at any time before the actual
voting. To revoke the appointment of proxy:
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vote
again over the internet or the telephone prior to 5:00 p.m. Eastern Time
on May 25, 2010,
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notify
the Company’s Secretary in
writing,
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execute
another appointment of proxy bearing a later date and file it with the
Secretary, or
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vote
in person at the meeting as described
below.
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The
address for the Secretary is:
Elizabeth
H. Prince, Secretary
Southern
Community Financial Corporation
4605
Country Club Road
Winston-Salem,
North Carolina 27104
If you return the appointment of
proxy
, you may still attend the meeting and vote in person. When
you arrive at the meeting, first notify the Secretary of your desire to vote in
person. You will then be given a ballot to vote in person, and, provided
you do vote in person or otherwise validly revoke your prior appointment of
proxy as described above, your prior appointment of proxy will be
disregarded.
If you attend the meeting in person,
you may vote your shares without returning the enclosed appointment of
proxy. However, if your plans change and you are not able to attend, your
shares will not be voted. Even if you plan to attend the meeting, the best
way to ensure that your shares will be voted is to return the enclosed
appointment of proxy, vote over the internet or by telephone and, when you get
to the meeting, notify the Secretary that you wish to vote in
person.
QUORUM
The
Company's Bylaws provide that the holders of a majority of the Company's
outstanding common stock, no par value per share (sometimes referred to herein
as the “Shares”), represented in person or by proxy, shall constitute a quorum
at the Annual Meeting, and that if there is no quorum present at the opening of
the meeting, the Annual Meeting may be adjourned by the vote of a majority of
the Shares voting on the motion to adjourn. Abstentions and broker
non-votes will be counted as present and entitled to vote for purposes of
determining whether a quorum is present at the Annual Meeting. A broker
non-vote occurs when an institution holding shares as a nominee does not have
discretionary voting authority with respect to a proposal and has not received
voting instructions from the beneficial owner of the shares.
HOW
YOUR VOTES WILL BE COUNTED
Each
Share is entitled to one vote for each matter submitted for a vote, and, in the
election of directors, for each director to be elected. Appointments of
proxy will be tabulated by one or more inspectors of election designated by the
Board.
Proposal 1 — Election of
directors.
In the election of directors under Proposal 1, the three
nominees receiving the highest number of votes
will be elected.
Shares not voted (including abstentions and broker non-votes) will have no
effect. Shareholders are not authorized to cumulate their votes for
directors.
Proposal 2 — Approval of executive
compensation.
To be approved, the number of votes cast in person
and by proxy at the Annual Meeting in favor of Proposal 2 must exceed the number
of votes cast against it.
Shares not voted
(including abstentions and broker non-votes) will have no effect.
Proposal 3 – Shareholder proposal to
amend the bylaws to eliminate staggered board terms.
To be
approved, the number of votes cast in person and by proxy at the Annual Meeting
in favor of Proposal 3 must exceed the number of votes cast against it.
Shares not voted (including abstentions and broker non-votes) will have no
effect.
EXPENSES
OF SOLICITATION
We will
pay the cost of this proxy solicitation. We have engaged the firm of
Laurel Hill Advisory Group, LLC, New York, NY to act as our proxy solicitor
and have agreed to pay $5,000 plus reasonable expenses for such services.
In addition to solicitation by our proxy solicitor or by mail, the Company’s
directors, officers and regular employees may solicit appointments of proxy in
person or by telephone. None of these employees will receive any
additional or special compensation for this solicitation. We will, on
request, reimburse brokerage houses and other nominees their reasonable expenses
for sending these proxy soliciting materials to the beneficial owners of the
Company’s stock held of record by such persons.
VOTING
SECURITIES
As of the
record date for the Annual Meeting, there were approximately 16,818,125 Shares
issued and outstanding and entitled to vote at the Annual Meeting. The
Company is currently authorized to issue 30,000,000 shares of common stock and
1,000,000 shares of preferred stock. As of and since December 5, 2008,
there were 42,750 shares of the Company’s Fixed Rate Cumulative Perpetual
Preferred Stock, Series A, outstanding, all of which were issued to the United
States Department of the Treasury (“Treasury”) in connection with the Company’s
participation in the Capital Purchase Program (“TARP”) under the Emergency
Economic Stabilization Act of 2008. The shares of preferred stock held by
the Treasury will not be voted at the Annual Meeting. As of the record
date for the Annual Meeting, there were approximately 7,100 holders of record of
the Company's common stock entitled to vote at the Annual Meeting.
ELECTRONIC
ACCESS TO FUTURE DOCUMENTS
If you
would like to receive future shareholder communications over the internet
exclusively, and no longer receive proxy material by mail please visit the
internet voting site,
www.iproxydirect.com/scmf
,
where you will be directed to a site to enroll. Please enter your account
number and tax identification number to log in, then select “Receive Company
Mailings via e-mail” and provide your e-mail address. If you enroll, we
will deliver your proxy material for the 2011 annual meeting of the shareholders
and any future shareholder meetings over the internet to the e-mail address you
provide.
BENEFICIAL
OWNERSHIP OF SECURITIES
The
following table sets forth the beneficial ownership of each person holding more
than five percent of the Shares as of December 31, 2009 (as reported in filings
with the Securities and Exchange Commission on behalf of the shareholder listed
below).
Name and address of
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Shares Currently
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Percent of Shares
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Shareholders
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Beneficially Owned
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Beneficially Owned (1)
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Dimensional
Fund Advisors LP
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871,088
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5.19
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%
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6300
Bee Cave Road
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Building
One
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Austin,
TX 78746
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The
following table shows, as of December 31, 2009, the number of shares of common
stock owned by each director and principal officer and by all directors and
principal officers of the Company as a group:
Beneficial owner (position)
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Shares
Currently
Owned (1)
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Percentage of
common
Stock Owned
(2)
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F.
Scott Bauer (Director, Chairman and CEO)
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245,734
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1.4%
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Edward
T. Brown (Director)
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325,525
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1.9%
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James
G. Chrysson (Vice Chairman and Director)
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133,217
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*
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Jeff
T. Clark (President)
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85,922
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*
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Robert
L. Davis, Jr. (Executive Vice President)
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37,117
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*
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James
O. Frye (Director)
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403,699
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2.4%
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Matthew
G. Gallins (Lead Independent Director)
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102,488
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*
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Beverly
Hubbard Godfrey (Director)
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12,466
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*
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James
Hastings (Executive Vice President and CFO)
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27,474
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*
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Lynn
L. Lane (Director)
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22,735
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*
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H.
Lee Merritt, Jr. (Director)
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20,352
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*
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James
C. Monroe, Jr. (Senior Vice President and Treasurer)
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16,948
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*
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Stephen
L. Robertson (Director)
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3,200
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*
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W.
Samuel Smoak (Director)
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24,000
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*
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William
G. Ward, Sr., M.D. (Director)
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136,323
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*
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Directors
and principal officers as a group (15 persons)
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1,597,200
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9.4%
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* Owns
less than one percent of the outstanding common stock.
(1)
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This
column includes the number of shares of common stock capable of being
issued within 60 days of December 31, 2009, upon the exercise of stock
options held by the named individual. For each director and
principal officer listed above, the beneficial ownership includes the
following number of shares of common stock that are issuable upon exercise
of options that are exercisable within 60 days of December 31, 2009: Mr.
Bauer – 24,000; Mr. Brown – 10,000; Mr. Chrysson – 10,000; Mr. Clark –
31,750; Mr. Davis – 10,000; Mr. Frye – 50,000; Mr. Gallins – 10,000; Ms.
Godfrey – 9,000; Mr. Hastings – 10,000; Ms. Lane – 15,000; Mr. Merritt –
10,000; Mr. Monroe – 6,000; Mr. Robertson – 3,000; Mr. Smoak – 15,000; Dr.
Ward – 10,000; and principal officers and directors as a group –
223,750. To the Company's knowledge, each person has sole voting and
investment power over the securities shown as beneficially owned by such
person, except for the following common stock which the individual
indicates that he or she shares voting and/or investment power: Mr. Bauer
– 135,168; Mr. Brown – 162,209; Mr. Gallins – 33,072; Ms. Godfrey – 3,266;
Ms. Lane – 6,435; Mr. Monroe – 3,624; Dr. Ward – 38,318; and directors and
principal officers as a group –
726,149.
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(2)
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The
ownership percentage of each individual is calculated based on the total
of 16,787,675 shares of common stock issued and outstanding at December
31, 2009, plus the number of shares that can be issued to that individual
within 60 days of December 31, 2009 upon the exercise of stock options
held by the individual. The ownership percentage of the group is
based on the total shares outstanding plus the number of shares that can
be issued to the entire group within 60 days of December 31, 2009 upon the
exercise of all stock options held by the group for an aggregate of
17,011,425 shares then outstanding.
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PROPOSAL
1: ELECTION OF DIRECTORS
Board size and membership.
Under the Company’s Charter and Bylaws, the number of directors shall be
the number the Board determines from time to time prior to each Annual Meeting
of Shareholders at which directors are to be elected. That number cannot
be less than six nor more than fourteen. The Company’s Charter and Bylaws
also provide that the Board shall be divided into three classes, each containing
as nearly an equal number of directors as possible, each elected to staggered
three-year terms. The Board, by resolution, has set the number of director
seats for the year 2010 at eleven.
Director Independence.
Other than F. Scott Bauer, the Company’s Chief Executive Officer, and
James O. Frye, the Company’s Executive Vice President until his retirement on
December 31, 2004, all of the members of the Board satisfy the independence
requirements as stated in the rules of The Nasdaq Stock Market LLC
(“Nasdaq”). Gallins Foods, Inc., for which Matthew G. Gallins, a director
of the Company, serves as Chairman and Secretary, provided beverage supplies to
the Company, but the payments for those services did not exceed the safe harbor
amounts of the independence standards in the rules of Nasdaq. A limited
liability company, owned in part by James G. Chrysson, a director of the
Company, engaged in a related party transaction in 2006 with Southern Community
Bank and Trust, the principal subsidiary of the Company, but the payments made
to the Bank in the transaction did not exceed the safe harbor amounts of the
independence standards in the rules of Nasdaq.
Directors to be elected at this
Annual Meeting.
At this Annual Meeting, three directors will be
elected to the Board to three-year terms that expire at the Annual Meeting of
Shareholders in 2013 or until their successors are elected and qualified, or
until their death, resignation or retirement. These are the Class I
directors.
How votes will be counted.
Unless you give instructions to the contrary, the Proxies will vote for
the election of the nominees listed below by casting the number of votes for
each nominee designated by the appointments of proxy. If, at or before the
meeting time, any of these nominees should become unavailable for any reason,
the Proxies have the discretion to vote for a substitute nominee.
Management currently has no reason to anticipate that any of the nominees will
become unavailable.
Votes needed to elect.
The three nominees receiving the highest number of votes will be
elected.
Nominations.
The
Nominating Committee has nominated the three incumbent Class I Board members for
election.
Nominees.
The following
table shows the names of the nominees for election to the three Board seats,
their ages at December 31, 2009, and their principal occupations during the past
five years.
Name and age
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Year first elected
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Principal occupation over last five years
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Listed
below are the three persons who are nominees for election as Class I
directors for three-year terms expiring in 2013:
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Matthew
G. Gallins, 54
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1996
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Chairman,
Secretary and former President, Gallins Foods, Inc., Winston-Salem, North
Carolina; Secretary, MG Foods, Inc., Winston-Salem, North Carolina; Lead
Independent Director, Southern Community Financial Corporation (since
November 2008).
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Beverly
Hubbard Godfrey, 56
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2007
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President
and CEO, Coldwell Banker Triad Realtors, Winston-Salem, North
Carolina.
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William
G. Ward, Sr., M.D., 56
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1996
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Professor
of Orthopedic Surgery, Bowman Gray School of Medicine of Wake Forest
University, Winston-Salem, North
Carolina.
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The
Board recommends that shareholders vote for the election of each of the nominees
for director listed above. The three nominees receiving the highest number
of votes will be elected.
MANAGEMENT
OF THE COMPANY
Directors
The following table shows the names,
ages at December 31, 2009, and principal occupations during the past five years
of the Company's current Class II and Class III Directors.
Name and age
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Year first elected
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Principal occupation over last five years
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Listed
below are the four persons serving as Class II directors for three-year
terms expiring in 2011:
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James
O. Frye, 70
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2004
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Retired;
former Executive Vice President and Vice Chairman of the Board, Southern
Community Financial Corporation President, The Back Forty, Inc., Sparta,
North Carolina; Board member, Newfound Lake Land & Timber Co., Sparta,
North Carolina.
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Lynn
L. Lane, 58
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2004
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Retired
in August 2004; former Senior Vice President and Treasurer, R.J. Reynolds
Tobacco Holdings, Inc. (now Reynolds American, Inc.), Winston-Salem, North
Carolina.
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H.
Lee Merritt, Jr., 60
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2004
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Attorney
(solo practice), Mount Airy, North Carolina.
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Stephen
L. Robertson, 60
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2008
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President
and Chief Executive Officer, Robertson Airtech International, Inc.
(design-build mechanical contractor), Charlotte, North
Carolina.
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Listed
below are the four persons serving as Class III directors for three-year
terms expiring in 2012:
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F.
Scott Bauer, 55
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1996
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Chairman
and Chief Executive Officer, Southern Community Financial Corporation;
Chairman and Chief Executive Officer (since incorporation), Southern
Community Bank and Trust.
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Edward
T. Brown, 65
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2004
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President
of Brown Farms, LLC, Pinnacle, North Carolina; Board member, Old Belt
Farmers, Inc., Pinnacle, North Carolina.
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James
G. Chrysson, 54
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1996
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Vice
President and Co-owner, C.B. Development Co., Inc. (real estate
development), Winston-Salem, North Carolina; Vice Chairman, Southern
Community Financial Corporation (since January 2009).
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W.
Samuel Smoak, CPA, 59
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2005
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President
(since August 2008), Chief Financial Officer and Director, Cook &
Boardman, Inc. (architectural building products), Charlotte, North
Carolina, since September 2006; prior to that, retired as President,
Treasurer and Chief Financial Officer, the Pleasants Group (building
supplies holding company), Winston-Salem, North
Carolina.
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Director
Qualifications
A community bank’s primary goal is to
foster growth within the community and to serve the local residents’ financial
needs. The Company was created with this objective at the forefront and
today it remains a top priority. Our Board of Directors also holds this
priority as a guiding principle. Since the Bank’s creation in 1996, the
Board has represented a cross section of the local community that the Company
serves. Our management and the Nominating Committee of our Board of
Directors believe that the Board has been assembled with members that bring a
unique set of qualifications, skills and attributes that together best represent
a community bank.
Each current director also brings a
strong and unique background and set of skills to the Board, giving the Board as
a whole competence and experience in a wide variety of areas, including
corporate governance and board service, executive management, finance,
construction, and real estate. Three of our directors have previous experience
in the banking industry. Three of our directors have significant finance
experience and are qualified as audit committee financial experts under the
rules of Nasdaq. Five of our directors have executive management roles in
their companies. Two of our directors have experience in real estate
development, which comprises a material portion of our loan portfolio. One
director is an attorney and another has other public company board
experience. The following discussion of each director’s specific
experience, qualifications, attributions or skills led to the conclusion that he
or she should serve as a director of the Company.
F. Scott Bauer.
Scott
Bauer is the Chairman of the Company’s Board of Directors and has held this
position since January 2002. Mr. Bauer has spent his entire career in the
banking industry
.
He
obtained a Masters Degree in Banking from Stonier National Graduate School of
Banking. Mr. Bauer has extensive experience in bank operations and
in-depth knowledge of banking laws and the regulatory environment.
Following a career concentrated in commercial banking, Mr. Bauer founded
Southern Community Bank and Trust in 1995 and the Bank began operations in
1996. Mr. Bauer has been CEO of the Bank since inception. Mr. Bauer
is very active in local community affairs, serving on the board of various
not-for-profit entities and charitable organizations. In his role as
Chairman of the Board of Directors, Mr. Bauer brings his extensive knowledge of
banking operations, laws, and regulatory requirements to oversee and coordinate
the Board’s deliberations. Mr. Bauer’s presence in the local community
also helps to ensure that the Company’s directors remain informed of local
business trends and the impact of the economic cycle on the Bank’s
customers, its ongoing operations and its strategy.
Edward T. Brown.
Edward
Brown has been involved in the agricultural industry since the early part of his
career and has deep experience in growing and developing a business from its
conception. Today, Mr. Brown is President of an agricultural holding
company that oversees farm related businesses throughout North Carolina.
Mr. Brown is a well-known leader in the local community with extensive personal
and professional contacts. Mr. Brown was one of the founding members of
The Community Bank Board of Directors and served on that Board at the time it
was acquired by the Company in 2004. Following the acquisition, he was
appointed to Southern Community’s Board of Directors, bringing with him the
knowledge of The Community Bank’s operations and ensuring that the transition
following the transaction ran smoothly. Mr. Brown’s extensive knowledge of
community banking as well as general business operations is coupled with his
large network of contacts in the communities in which the Company
operates. As a board member, Mr. Brown is often instrumental in fostering
new business development which benefits the Company.
James G. Chrysson.
James
Chrysson has been a real estate professional for his entire career beginning
with a concentration in real estate during his undergraduate studies.
After several years experience as a real estate appraiser, Mr. Chrysson’s real
estate activities transitioned into multi-family development projects and
commercial real estate development. Today, Mr. Chrysson is co-owner of a
real estate development company headquartered in Winston-Salem, N.C. Mr.
Chrysson was one of the original members of our Board of Directors and was
nominated to the Board because of his extensive knowledge and experience as an
entrepreneur in the local real estate market, specifically his knowledge and
expertise in commercial real estate development. Mr. Chrysson was
appointed Vice Chairman of the Company’s Board of Directors at the beginning of
2009. In this role, Mr. Chrysson promotes and facilitates continued
education for the Board of Directors. Mr. Chrysson also serves as the Chair of
the Company’s Nominating and Compensation Committee.
James O. Frye.
James
Frye is the former Chairman, President, and Chief Executive Officer of The
Community Bank, which was acquired by the Company in 2004. Following the
transaction, Mr. Frye was named a director of the Company. Mr. Frye has
served on the Board of Directors of the Bankers Bank in Atlanta, Georgia as well
as on the Board of Directors of the North Carolina Bankers Association.
Mr. Frye currently serves, by appointment of the Governor of North Carolina, as
a member of the State Banking Commission, which supervises and regulates the
financial services industry. Mr. Frye has extensive knowledge of banking
laws, regulatory issues, and risk management and brings this set of skills and
qualifications to his role as director of the Company.
Matthew G. Gallins.
Matthew Gallins is a long standing local entrepreneur with a varied
experience of investing in and helping to create and operate various
business ventures. Drawing on both his personal and professional
experience, Mr. Gallins has the ability to mediate group discussions and provide
oversight and long-term perspective on business development and strategic
initiatives. Mr. Gallins was one of the original members of our Board of
Directors. Mr. Gallins is well-known in the local community and his
knowledge of business trends and the economic cycle of the area that the Company
serves is one of his key contributions to the Board. Mr. Gallins was
appointed Lead Independent Director of the Board of Directors in 2008. In
addition, Mr. Gallins is Chair of the Company’s Loan Committee, which is
integral to the Bank’s loan review and approval process.
Beverly Hubbard Godfrey.
Beverly Godfrey is a second generation leader in the residential real
estate business, working in the local communities in which the Company
operates. The Board recruited Ms. Godfrey because of her in-depth
knowledge of the residential real estate industry and local real estate trends,
including a special interest and expertise in technological innovations relevant
to that industry. Ms. Godfrey provides the Board of Directors with
strategic information regarding the current and future local real estate market,
which allows the Board insight into a sector that has significantly impacted the
Bank’s business during the current economic cycle.
Lynn L. Lane.
Lynn Lane
is a finance professional with over thirty years experience in senior finance
roles for a major U.S. publicly held corporation ranked in the top U.S. “Fortune
500” company classification in terms of revenue. During her career, Ms.
Lane managed all treasury functions for this company in addition to corporate
finance, banking and credit agency relationships, pension fund management,
financial risk management, insurance, credit, receivables and cash
management. These responsibilities provided Ms. Lane with the analytical
ability to understand how a bank functions in addition to the strategic insight
gained from her in-depth experience leading the finance strategy of a major
public corporation. These skills were a major consideration in her
appointment to the Company’s Board of Directors. Based on her finance
skills, the Board recruited Ms. Lane specifically to serve as the Company’s
Audit Committee Chair. She currently serves in that role and as one of
three Audit Committee Financial Experts.
Ms. Lane
was a director of Charles & Colvard, Ltd. (Nasdaq: CTHR) from May 2005
through May 2009.
H. Lee Merritt, Jr.
Lee
Merritt has practiced law in the Company’s geographical area for over thirty
years. Mr. Merritt’s private law practice includes real estate, corporate
law, estate law and litigation. Mr. Merritt served on The Community Bank Board
of Directors at the time it was acquired by the Company in 2004. As a
result, he was appointed to the Company’s Board of Directors, bringing with him
knowledge of The Community Bank and acted to ensure a smooth transition
following the transaction. Through his local presence and close
relationship with many of our customers, Mr. Merritt is in a position to provide
the Board of Directors insight on local economic issues, business trends, and
growth opportunities for the Company. Mr. Merritt’s legal background and
past experience in a broad range of business and legal situations gives him the
ability to evaluate and apply his oversight capability to the Board of
Directors, particularly where legal issues arise. Further, given his legal
training, Mr. Merritt brings an in-depth understanding of corporate governance
best practices and applies this knowledge and expertise to the Company’s
boardroom dynamics. Mr. Merritt serves as Chair of the Company’s Trust
Committee.
Stephen L. Robertson.
Stephen Robertson is President and CEO of a major industrial company
headquartered in North Carolina. He also spent eighteen years in the
telecommunications and broadcast industries, giving him significant experience
in the operational and financial aspects of running large corporations.
The Board of Directors recruited Mr. Robertson in 2008 to gain from his
corporate background and management experience. Mr. Robertson is very
active in the local community, serving on the board of directors for many
not-for-profit entities and charitable organizations, including membership on
the board of Winston Salem’s largest employer, WFU Baptist
Hospital As a local business and community leader, Mr. Robertson’s
insight on local business trends and economic conditions is valuable to the
Company. As a result of his extensive financial experience, Mr. Robertson
serves as an Audit Committee Financial Expert.
W. Samuel Smoak.
Sam
Smoak is a Certified Public Accountant and has held this certification for over
35 years. He is currently President of an architectural building supply
company with operations in several southeastern cities and has participated in
building two separate commercial construction products companies through a
series of acquisitions. Over his career, Mr. Smoak has served as Chief
Financial Officer of both privately and publicly held corporations and practiced
as a CPA with one of the nation’s largest public accounting firms. He
brings technical knowledge of bank operations and related financial metrics and
analysis to the Company’s Board of Directors. Mr. Smoak’s experience in public
company finance and related capital market relationships and regulatory filings
allows him to advise and offer guidance as the Company’s senior management and
its Board of Directors review financial results and prepare external
communication for the investment community. Mr. Smoak serves as an Audit
Committee Financial Expert.
William G. Ward, Sr., M.D.
William Ward is an established physician and long standing member of the
local community served by the Company. Dr. Ward was one of the original
founders of the Bank and was a member of Southern Community’s initial Board of
Directors assembled in 1996 following the creation of the Bank. As a
founding board member, Dr. Ward was extensively involved in the founding and
creation of another community bank in 1982. He was recruited to the
Company’s Board of Directors at the time the Bank was being formed because of
his knowledge and expertise in “start-up” banking structure and processes.
As a local physician and member of the community, Dr. Ward is able to provide
the Company’s Board of Directors with insight into local community trends and
economic issues. Dr. Ward is Chair of the Company’s Investment Committee
which coordinates and provides policy oversight on the Company’s investment
strategy and operations and the Company’s capital structure.
Director
relationships
Board relationships.
No
director or principal officer is related to another director or principal
officer.
Other directorships:
Other
than director Lynn L. Lane, no director is or has been during the preceding 5
years a director of any company with a class of securities registered pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended (“Exchange
Act”).
Board
Attendance and Fees
The Board of the Company held thirteen
meetings during 2009. All directors attended at least seventy-five percent
of the meetings. During 2009, non-employee directors received $1,000 for
each Board meeting attended, $500 for each committee meeting attended and $100
for participation in an Audit Committee telephone conference call. In
addition to these fees, the Chair of the Audit Committee is paid a $15,000
annual retainer. Director fees are expected to remain the same for
2010. It is the policy of the Board that all directors attend shareholder
meetings. All directors attended the 2009 Annual Meeting.
Director Compensation.
This table sets forth certain information regarding the compensation paid
by the Bank to our directors during the fiscal year ended December 31,
2009.
2009 DIRECTOR COMPENSATION
(1)
|
|
Fees Earned or
|
|
|
Option
|
|
|
All Other
|
|
|
|
|
|
|
Paid in Cash
|
|
|
Awards
|
|
|
Comp
|
|
|
Total
|
|
Name
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Edward
T. Brown
|
|
|
23,800
|
|
|
|
-
|
|
|
|
-
|
|
|
|
23,800
|
|
James
G. Chrysson
|
|
|
20,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
20,500
|
|
James
O. Frye (2)
|
|
|
23,000
|
|
|
|
-
|
|
|
|
398,222
|
|
|
|
421,222
|
|
Matthew
G. Gallins
|
|
|
24,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
24,000
|
|
Beverly
Hubbard Godfrey
|
|
|
17,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,500
|
|
Lynn
L. Lane
|
|
|
33,100
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,100
|
|
H.
Lee Merritt, Jr.
|
|
|
15,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
15,500
|
|
Stephen
L. Robertson
|
|
|
13,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
13,500
|
|
W.
Samuel Smoak
|
|
|
19,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
19,000
|
|
William
G. Ward, Sr., M.D.
|
|
|
17,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,500
|
|
(1) For
each director listed above, the following number of shares of common stock are
capable of being issued upon the vesting of all stock options held by the named
individual: Mr. Brown – 10,000; Mr. Chrysson – 10,000; Mr. Frye – 50,000; Mr.
Gallins – 10,000; Ms. Godfrey – 9,000; Ms. Lane – 15,000; Mr. Merritt – 10,000;
Mr. Robertson – 3,000; Mr. Smoak – 15,000; and Dr. Ward – 10,000.
(2) Mr.
Frye received $91,250 from his consulting agreement with the Company, $91,250
under his non-compete agreement with the Company, and $100,647, $20,218 and
$94,857 in distributions under his deferred compensation agreement, pension and
supplemental retirement benefit, respectively, during 2009.
Committees
of the Board of Directors
The Board has established the
committees described below.
|
·
|
Executive Committee.
The Executive Committee, between Board meetings and subject to such
limitations as may be required by law or imposed by Board resolution, may
exercise all of the Board's authority. No Executive Committee
meetings were held in 2009. During 2009, the members of the
Executive Committee were directors F. Scott Bauer (Chair), Edward T.
Brown, James G. Chrysson, Matthew G. Gallins, and Dr. William G. Ward,
Sr.
|
|
·
|
Audit Committee
.
As outlined in the Audit Committee Charter (which is available on the
Company’s corporate website located at
www.smallenoughtocare.com
),
the Audit Committee is responsible for insuring that the Board receives
objective information regarding Company policies, procedures, and
activities with respect to auditing, accounting, internal accounting
controls, financial reporting, and such other Company activities as the
Board may direct. All of the members of the Audit Committee satisfy
the audit committee independence requirements stated in the rules of
Nasdaq. The Audit Committee held four meetings and seven conference
calls during 2009. Please refer to the Audit Committee report
below. During 2009, the members of the Audit Committee were
directors Edward T. Brown, Matthew G. Gallins, Lynn L. Lane (Chair),
Stephen L. Robertson and W. Samuel Smoak (Vice Chair). Directors
Lynn L. Lane, Stephen L. Robertson and W. Samuel Smoak currently serve as
the Audit Committee Financial Experts. The qualifications of each to
serve as Audit Committee Financial Experts are listed above under
“Directors” and “Nominees”.
|
|
·
|
Nominating and
Compensation
Committee
. The Nominating and Compensation Committee performs
the dual roles of: (i) identifying individuals qualified to become Board
members; and (ii) determining the compensation of the executive officers
of the Company and providing oversight to the employee benefit plans for
the Company.
The Committee’s
nominating functions include, among other things, identifying the names of
persons to be considered for nomination and election by the Company’s
shareholders and, as necessary, recommending to the Board the names of
persons to be appointed to the Board to fill vacancies as they occur
between annual shareholder meetings. In identifying prospects for
the Board, the Committee will consider individuals recommended by
shareholders. Names and resumes of nominees should be forwarded to
the Corporate Secretary who will submit them to the Committee for
consideration. See “Director Nominations” below. The
Committee’s compensation functions include establishing the annual
compensation, including salary, stock option plans, incentive compensation
and other benefits, for senior management and providing oversight for the
employee benefit plans for the Company’s other employees. The
charter for the Nominating and Compensation Committee is available on the
Company’s corporate website at http://www.smallenoughtocare.com. As
required by its Charter, each member of the Committee satisfies the
independence requirements for serving on a nominating or compensation
committee as established by the rules of Nasdaq. The Nominating and
Compensation Committee held four meetings during 2009. During 2009,
the members of the Nominating and Compensation Committee were directors
Edward T. Brown, James G. Chrysson (Chair), Lynn L. Lane (Vice Chair), H.
Lee Merritt, Jr., Stephen L. Robertson and Dr. William G. Ward,
Sr.
|
|
·
|
Other standing
committees.
The Board has approved three additional standing
committees to which certain responsibilities have been delegated.
They are the Investment Committee, the Board Loan Committee and the Trust
Committee.
|
Corporate
Governance: Board Leadership and Risk Oversight
Chairman
of the Board and Chief Executive Officer
F. Scott Bauer serves as the Company’s
Chairman of the Board and its Chief Executive Officer. The
Company has determined that combining the role of Chairman and Chief Executive
Officer is appropriate for the Company because as Chief Executive Officer, Mr.
Bauer is responsible for its day-to-day operations and implementing the
Company’s strategies developed by the Board. This places him in the best
position to determine what issues are most pressing for consideration at Board
meetings. The combination of the Chairman and Chief Executive Officer
roles also has the advantage of providing a single voice of the Company, which
the Board feels is important.
The Board
believes that the combined role of Chairman and Chief Executive Officer for a
company of our size is appropriate in promoting unity of vision for our
leadership and avoiding any potential conflict among our directors. The
Board is aware that there are potential conflicts when an insider chairs the
Board, but believes that there are safeguards that mitigate these potential
conflicts, such as the designation of an independent Vice Chairman and an
independent Lead Director, regular meetings of the independent directors in
executive session without the presence of the insiders, the fact that management
compensation is determined by a compensation committee composed of independent
directors and the fact that our operations are highly regulated by governmental
banking agencies. In addition, the Board has created several standing
committees that supervise various operations of the Company. These
committees allow regular monitoring and deeper analysis of the Company.
Two of these committees, the Audit Committee and the Nominating and Compensation
Committee, are composed exclusively of independent directors. All of the
Board Committees are chaired by independent directors.
Vice Chairman of the Board
As mentioned above, Mr. Chrysson is the
Vice Chairman of the Board and has held this position since November 2008.
The Vice Chairman’s specific role is to preside at all meetings of the Board in
which the Chairman is absent.
Lead
Independent Director
The Company’s Corporate Governance
Guidelines provide that when the Chairman is not independent, the Board will
appoint a “Lead Director,” who is required to be an independent director.
The role of the Lead Director is to assist the Chairman and the remainder of the
Board in assuring effective governance in overseeing the direction and
management of the Company. The Lead Director’s primary responsibilities
are to:
·
|
Establish
the agenda for, and preside over, executive sessions of the Board (in
which the Chairman of the Board is not permitted to
participate) and confer with the Chairman promptly following those
executive sessions to convey the substance of the discussions, subject to
any limitations specified during the sessions;
and
|
·
|
Suggest
matters for inclusion on the Board
agenda.
|
The Board
believes that the Lead Director serves an important corporate governance
function by providing separate leadership for the non-management and independent
directors. In November 2008, the Board designated and appointed Matthew G.
Gallins as the Lead Director. The independent directors meet as a group,
led by the Lead Independent Director, on a quarterly basis to underscore the
Board’s independence and to address any concerns that may need to be brought to
the Chairman and CEO’s attention. The Board of Directors believe that the
Board’s current structure of combined Chairman and CEO is the best one for the
Company at this point in time. The Board’s composition and operational
structure assures the directors’ independence and appropriate oversight of the
Company’s risk management.
The Board of Directors, excluding the
Chairman and Mr. Frye, a former officer of the Company, are all independent
directors as defined by the independence requirements established by the rules
of Nasdaq. Responsibility for risk oversight for the Company ultimately
rests with the Board of Directors. The officers of the Company are
responsible for managing the Company’s risks on a day to day basis; however,
there are formal processes in place at the Board level with the objective of
overseeing and mitigating risks. For example, the Company’s internal audit
function has a reporting line to the Chair of the Audit Committee who reviews
the Company’s financial situation independent of the CEO. The Company also
has an official “whistleblower” policy. The Chair of the Audit Committee
oversees this process utilizing an outsourced third party firm and is the direct
contact for any employee in the Company who wishes to communicate any
concerns. The Nominating and Compensation, Investment and Loan Committees,
chaired by independent directors, also monitor and provide risk management
oversight regarding the operations of the Company.
Director Nominations
The charter for the Nominating and
Compensation Committee is available on the Company’s corporate website located
at
http://www.smallenoughtocare.com
.
At such time as there is a need for nominations to the Board, the Company’s
bylaws currently require that nominations for election to the Board shall be
made by the Nominating Committee appointed by the Board. All members of
the Board also serve on the Board of Directors of our subsidiary bank. The
banking laws of the State of North Carolina require directors of a bank to own
shares of common stock having at least $1,000 in book value as of the last
business day immediately prior to the election of such director. The
nomination of any person for election to the Board may also be made by a
shareholder entitled to vote on such election if written notice of the
nomination of such person is made in writing and delivered or mailed to one of
the officers of the Company not less than seven days nor more than sixty days
prior to any meeting of shareholders called for the election of directors.
See “DATE FOR RECEIPT OF SHAREHOLDER PROPOSALS - Nominations of directors” in
this Proxy Statement for further details. For both nominees submitted by
the Company or a shareholder for election to the Board, the Nominating Committee
considers several factors beyond those set forth above in determining whether to
nominate a candidate for election to the Board. These additional factors
include the nominee’s personal and professional integrity, ability and judgment
and his or her ability to be effective, in conjunction with the other Board
members and nominees, in collectively serving the long-term interest of the
Company’s shareholders. The Committee also considers the overall
composition of the Board taking into consideration such factors as business
experience and the specific areas of expertise of each Board
member.
The Nominating Committee of the
Company’s Board of Directors has targeted specific and diverse experience for
the Board since its inception in 1996 and this practice continues today.
In considering diversity, there are several overriding qualifications that can
be applied to a community bank board, and by association, the composition of the
Company’s Board of Directors:
|
·
|
An
understanding of banking regulations and community bank
practices;
|
|
·
|
An
understanding of local community business trends and economic
conditions;
|
|
·
|
Connections
within the local community to foster business
development;
|
|
·
|
Financial
expertise to understand the intricacies of the financial operations that
impact the Company’s financial condition;
and
|
|
·
|
Awareness
of the dynamics in industries and their cycles that directly affect the
Company’s short-term and long-term financial stability and
strategies.
|
The Nominating Committee considers
“diversity” to be a range of experiences and expertise that fit the above
description and selects nominees to the Board based on these
characteristics. This practice is evaluated regularly and applied when a
new opening exists on the Board of Directors. A good case in point was the
nomination and election of a residential real estate expert in 2007 at the
beginning of the current economic cycle. Residential real estate is, in
part, considered one of the causes of the current economic situation adversely
affecting the banking sector. The nomination and election of a residential
real estate expert facilitated the Board of Directors’ access to current trends
and cycles of the local real estate market that have a direct impact on the
Company’s operations.
The Nominating Committee regularly
assesses the qualifications of its directors and ensures that the composition of
the Board reflects the local and industry market conditions in which the Company
operates. The Company does not have a specific policy on gender diversity;
however, two of its Board members are female. The overall sentiment of the
Nominating Committee and the Board of Directors is that this gender diversity is
a positive influence and representative of the constituency which the Company
serves.
Shareholder
Communications with Directors
The Company encourages all shareholders
who wish to communicate with any of the directors to do so electronically by
sending an email to the following address:
directors@smallenoughtocare.com
or by sending such inquiries by mail to the Chair of the Audit Committee.
The Company will forward all communications to the named director or, if no
particular director is named, to the appropriate committee of the Board for
consideration.
Code
of Ethics
The Company has adopted a Code of
Ethics for Senior Officers to resolve ethical issues in an increasingly complex
business environment. The Code of Ethics applies to all senior officers,
including the Chief Executive Officer, the President, the Chief Financial
Officer, and the Treasurer and any other employee with any responsibility for
the preparation and filing of documents with the Securities and Exchange
Commission. The Code of Ethics covers topics including, but not limited
to, conflicts of interest, confidentiality of information, and compliance with
laws and regulations. The Code of Ethics is available on the Company’s
corporate website located at
http://www.smallenoughtocare.com
.
The Company may post amendments to or waivers of the provisions of the Code of
Ethics, if any, made with respect to any of our executive officers on that
website. Please note, however, that the information contained on the
website is not incorporated by reference in, or considered to be a part of, this
Proxy Statement. The Audit Committee has also adopted a policy pursuant to
the Company’s Audit Committee Charter that establishes procedures for employees
to communicate concerns about questionable accounting or auditing matters or
other improper activities directly to the Audit Committee through its
designee.
Company Transactions with Directors
and Officers
In 2009, the Company’s principal
subsidiary, Southern Community Bank and Trust, has had, and expects to have in
the future, transactions in the ordinary course of the Bank’s business with
directors, principal officers and their associates. All transactions with
directors, principal officers and their associates were made in the ordinary
course of the Bank’s business, on substantially the same terms, including (in
the case of loans) interest rates, collateral, and repayment terms, as those
prevailing at the same time for other comparable transactions, and have not
involved more than normal risks of collectability or presented other unfavorable
features.
James O. Frye, the Company’s Executive
Vice President until his retirement on December 31, 2004, was party to a
consulting agreement with the Company in which he agreed to assist the Company
in furthering the development and marketing of its banking relationships in
Forsyth, Surry, Stokes, Rockingham and Yadkin Counties, North Carolina, during
the term of the agreement for a payment of $91,250 annually. The agreement
also provided that Mr. Frye would not compete with the Company during the term
of the agreement for an additional payment of $91,2500 annually. The
agreement terminated on December 31, 2009.
In 2006, a limited liability company,
which is owned 24% by James G. Chrysson, a director of the Company, purchased a
building from Southern Community Bank and Trust for approximately $1.25
million. The Bank made a loan to the company in the amount of
approximately $1.1 million, which has since been repaid.
As
required by the rules of Nasdaq, the Company conducts an appropriate review of
all related party transactions for potential conflict of interest situations on
an ongoing basis and all such transactions must be approved by the Company’s
Audit Committee. For purposes of this review, related party transactions
include all transactions that are required to be disclosed pursuant to SEC
regulations. In addition to the rules of Nasdaq and the related SEC
regulations, the Company’s ethics policy prohibits executive officers and
directors from engaging in transactions when there is a conflict with their duty
to protect the Company’s interest that will lead to any personal gain or
benefit.
Section
16(a) Beneficial Ownership Reporting Compliance
Directors
and principal officers of the Company are required by federal law to file
reports with the Securities and Exchange Commission regarding the amount of and
changes in their beneficial ownership of the Shares. Based solely on a
review of reports filed by the Company on these individuals’ behalf, all such
required reports were timely filed, except that Dr. William G. Ward, Sr. and
James Hastings, Chief Financial Officer, each filed one transaction
late.
Report
of the Audit Committee
In accordance with its written Charter
(which is available on the Company’s corporate website located at
http://www.smallenoughtocare.com
),
the Audit Committee supervises the quality and integrity of the accounting,
auditing and financial reporting practices of the Company on behalf of the
Board. Management has the primary responsibility for preparing the
consolidated financial statements and managing the reporting process, including
the system of internal controls. As required by the Audit Committee
Charter, each Audit Committee member satisfies the independence and financial
literacy requirements for serving on the Audit Committee, and at least one
member has accounting or related financial management expertise, all as stated
in the rules of Nasdaq. In fulfilling its oversight responsibilities, the
Audit Committee discussed and reviewed the audited consolidated financial
statements in the Annual Report with management, including a discussion of the
quality, not just the acceptability, of the accounting principles, the
reasonableness of significant judgments, and the clarity of disclosures in the
financial statements of the Company.
The Audit Committee discussed and
reviewed with the independent auditors, who are responsible for expressing an
opinion on the conformity of the audited consolidated financial statements with
accounting principles generally accepted in the United States of America, their
judgments as to the quality, not just the acceptability, of the Company’s
accounting principles and such other matters as are required to be discussed
with the Audit Committee by Statement on Auditing Standards No. 61, as amended
by Statement on Auditing Standards No. 90 (Communication with Audit
Committees).
In discharging its responsibility for
the audit process, the Audit Committee obtained from the independent auditors a
letter describing all relationships between the auditors and the Company that
might bear on the auditors’ independence required by the applicable requirements
of the Public Company Accounting Oversight Board regarding the independent
accountant’s communications with the audit committee concerning
independence. The Audit Committee also discussed with the auditors any
relationships that might impact their objectivity and independence and satisfied
itself as to the auditors’ independence, and considered the compatibility of
nonaudit services with the auditor’s independence.
The Audit Committee reviewed with both
the independent and the internal auditors their audit plans, audit scope, and
identification of audit risks. The Audit Committee met with the internal
auditors and the independent auditors, with and without management present, to
discuss the results of their examinations, their evaluations of the Company’s
internal controls, the overall quality of the Company’s financial reporting, and
the internal audit function’s organization, responsibilities, budget and
staffing.
Based on the above-mentioned review and
discussions with management and the independent auditors, the Audit Committee
recommended to the Board (and the Board has approved) that the Company’s audited
consolidated financial statements be included in its Annual Report on Form 10-K
for the fiscal year ended December 31, 2009, for filing with the Securities and
Exchange Commission.
This report is submitted by the Audit
Committee: Edward T. Brown, Matthew G. Gallins, Lynn L. Lane (Chair), Stephen L.
Robertson and W. Samuel Smoak (Vice Chair).
Compensation
Committee Interlocks and Insider Participation
During 2009, no director serving on the
Nominating and Compensation Committee was an officer or former officer of the
Company or participated in any transaction required to be disclosed under the
Securities Act. Further, during 2009, no executive officer of the Company
served as a director or on the compensation committee of another entity of which
one of its executives served as a director of the Company or on the Company’s
Compensation Committee.
Principal
Executive Officers
F. Scott
Bauer, age 55, is the Chairman of the Board and Chief Executive Officer of the
Company. He also served as President of the Company from its incorporation
until December 2004. Mr. Bauer became the President and Chief Executive
Officer of Southern Community Bank and Trust when the Bank was incorporated and
served as its President until December 2001. Prior to his service with the
Bank, Mr. Bauer served as City Executive for Southern National Bank in
Winston-Salem, North Carolina, the largest city in the Southern National Bank
system, from 1994 until Southern National Bank merged with Branch Banking and
Trust Company (“BB&T”) in May 1995, whereupon he continued as City Executive
until he resigned to form the Bank in November 1995.
Jeff T.
Clark, age 46, became President of the Company in December 2004. Prior to
that, he served as Executive Vice President of the Company. Mr. Clark
joined the Bank in August 1996 prior to its incorporation and, before becoming
President of the Bank on December 31, 2001, served as Executive Vice President
of the Bank and was responsible for commercial and retail banking.
Robert L.
Davis, Jr., age 47, became Executive Vice President – Commercial Banking
Executive in August 2003. Prior to that he served as the Bank’s Vice
President of Commercial Banking. Mr. Davis joined the Bank in 1996.
Mr. Davis has more than 20 years experience in banking and began his career as a
commercial lender with Southern National Bank in Winston-Salem, North
Carolina.
James
Hastings, age 57, became Executive Vice President and Chief Financial Officer in
January 2008. After beginning his career in Boston with Arthur Andersen,
Mr. Hastings progressed through a number of accounting and financial positions
with Seafirst Corporation and its subsidiary, Seattle-First National Bank.
In 1985, he joined Heritage Bank and served as its Chief Financial Officer for
14 years. Mr. Hastings has held executive operating roles as the Director
of Mortgage Banking at Cape Cod Five Cents Savings Bank and as President and CEO
with Federal Savings Bank in New Hampshire.
James C.
Monroe, Jr., age 61, became Treasurer of the Company in May 2007 and served as
interim Chief Financial Officer from September 2007 until January 2008.
Mr. Monroe has over 35 years of experience in finance in the banking
industry. Prior to his employment with the Bank in April 2007, he served
for seven years as an Executive Vice President and Treasurer for two subsidiary
banks of The South Financial Group, Greenville, South Carolina - Carolina First
Bank in South Carolina and Mercantile Bank in Florida. He began his
banking career in 1970 with the former Wachovia Bank, Winston-Salem, North
Carolina and was later employed by BankOne and its predecessor banks in Dallas,
Texas.
Compensation
Discussion and Analysis
Compensation Philosophy.
Particularly during this challenging environment for banking services and
the depressed market for bank stocks, our compensation committee and management
believe that shareholder value must drive executive compensation
decisions. While our compensation philosophy has been to maintain a
competitive compensation package to attract qualified executive officers, we
have a pay-for-performance program that bases compensation decisions on the
financial performance of the Company. Due to economic conditions, our
Company’s return to shareholders during 2009 was not what management or our
Board of Directors expected. Even though our performance was favorable
when compared to our peer banks, management recommended and the compensation
committee agreed that our executive officers’ interests should be aligned with
those of our shareholders. Our core compensation philosophy is that senior
management will sacrifice first so that line employees are rewarded for
performance. Our executive officers and senior managers did not receive
any bonuses for 2009 performance. In addition, there were no salary
increases for our executive officers and our senior managers during 2009.
Effective August 1, 2009, our executive officers voluntarily reduced their
salaries.
Since our
Company is not the largest or oldest bank in our market, our growth to date has
been dependent on our ability to attract executive officers with the appropriate
experience from other financial institutions to join our Company. To
ensure that the Company can continue to attract the appropriate experienced
officers to the Bank, the Compensation Committee has maintained an executive
compensation package competitive with the Bank's peer group. The Company’s
2009 executive compensation program was based upon the following
principles:
|
·
|
Base
salaries for executive officers for 2009 were targeted to a range of
salaries paid to executive officers of similarly sized banks nationwide
and North Carolina peer group
banks.
|
|
·
|
Long-term
compensation consists only of equity awards where the executive is
financially rewarded when there is price appreciation in the Company’s
common stock.
|
The
annual performance review for determining executive officer base salaries and
long-term equity awards follows a principled, structured framework for
analysis. This analysis focuses on financial performance measures that the
Compensation Committee believes best indicate successful management of our
business. We provide our long-term compensation opportunity in stock
options and restricted stock, because stock ownership is the simplest, most
direct way to align our executive officers’ interests with those of our
stockholders. The qualifications for vesting and other design features of
these awards are intended to encourage long-term stock ownership by our
executive officers to further motivate them to create long-term stockholder
value.
Our
commitment to our pay-for-performance mandate is demonstrated by the
following:
|
·
|
No
executive officers or senior managers received a salary increase during
2009.
|
|
·
|
Our
executive officers volunteered to a reduction in their base salaries,
effective August 1, 2009, due to the expected impact of the economy on the
Company’s profitability.
|
|
·
|
Effective
August 1, 2009, we reduced our 401(k) plan match from 100% to 50% on the
first 6% of compensation that is
deferred.
|
|
·
|
We
require that the performance targets of our incentive compensation
programs be attained and, as a result, the senior executive officers of
the Company were paid no annual cash bonuses for performance during years
2003, 2004, 2006, 2008 and 2009.
|
|
·
|
Our
restricted stock awards do not vest until the fifth anniversary of the
grant and stock option awards vest pro-rata annually over a five-year
period, thus encouraging long-term stock
ownership.
|
|
·
|
Mr. Bauer
refused a salary increase for compensation year
2005.
|
During compensation deliberations by
the Compensation Committee, F. Scott Bauer, our CEO, recommends base salaries
other than his own as well as other benefits. He is also permitted to
discuss the targets for incentive compensation where pertinent; however, all
final targets are determined by the Compensation Committee. Mr. Bauer is
not permitted to be present while his compensation is being debated or approved
by the Compensation Committee. During deliberations regarding 2009
compensation, Mr. Bauer participated in the discussion of executive compensation
other than his own.
While the
Compensation Committee believes executive compensation must be attractive enough
to encourage executives to join the Company, the Committee also intends to
maintain compensation practices that reflect the conservative economic culture
in which the Company operates. The Company does not provide executive
officers with reserved parking spaces, separate dining or other facilities, nor
does it defray the cost of personal entertainment or family travel. The
health care and other employee benefit programs of the Company are the same for
all eligible employees, including the executive officers.
The
Compensation Committee annually reviews the elements of executive compensation
to determine if they are serving the needs of the Company. Neither the
Compensation Committee or the Company’s management engaged a compensation
consultant during the last fiscal year to provide advice or recommendations on
the amount or form of executive and director compensation. After
discussing various proposals to provide long-term incentive compensation during
2007, the Compensation Committee adopted a Restricted Stock Plan at the end of
2007 and approved grants of restricted stock to certain employees under that
Plan in 2008, 2009 and 2010 for performance during 2007 through 2009. The
Compensation Committee will continue to monitor the components of executive
compensation and make changes as appropriate to position the Company to be able
to attract and retain the best management possible.
Elements of Executive
Compensation.
During
2009, the Company's compensation program for executive officers consisted of the
following elements: annual salary, periodic grants of stock options and
restricted shares of the Company’s common stock under the Company’s stock option
and restricted stock plans; employment agreements with the executive officers;
retirement benefits; and perquisites established by the Compensation
Committee. The following is a description of the compensation program for
the executive officers of the Company during 2009:
Base
Salary
.
Base salaries for executive officers are annually reviewed and approved
by the Compensation Committee. In years prior to 2009, the Compensation
Committee’s preference was to maintain the targeted level of annual compensation
for executive officers at just below the mid-point of the salary range for those
executive officers at peer institutions. The Compensation Committee
approves salaries based upon a review of the range of salaries earned by
executive officers with financial institutions of similar asset size in North
Carolina and an analysis of other similarly situated public banking companies
nationally. This data was obtained from third party North Carolina and
national surveys of compensation prepared by SNL Securities and America’s
Community Bankers and from staff summaries of compensation information as
disclosed in the proxy statements of peer North Carolina financial
institutions. In making its final determinations of base salaries for
2009, the Compensation Committee did not use performance thresholds or other
measures that directly relate base salaries to operating performance. It
did discuss and consider overall performance of the Company and personal
performance when establishing 2009 base salaries. Based upon their
performance during 2008, the 2009 base salaries of the executive officers were
initially maintained at their 2008 level but the officers voluntarily
reduced their salaries beginning in August 2009.
Annual Cash
Incentive Compensation
.
In years prior to
2009, annual cash incentive compensation awards for executive officers were
approved by the Compensation Committee based on each executive officer's base
salary provided the Company achieved 95% of its budgeted net income. For
2009, the Company eliminated its annual cash incentive compensation plan as a
component of executive officers’ compensation program because the Company is
prohibited under Treasury regulations as a TARP recipient from paying a cash
performance bonus to its executive officers.
Stock
Options.
The Compensation Committee believes that long-term
incentives, such as stock options, align the executive officers' interests with
those of other shareholders and encourage significant stock ownership. The
option recipients, including the executive officers, will receive value from
option grants only to the extent that the price of the Company’s stock exceeds
the per share price of the option on the date of grant. Under the
Company’s incentive stock option plans (“ISO Plans”), the Compensation Committee
grants to selected key employees options to purchase the Company’s common stock
at a price equal to the fair market value of the shares on the date of
grant. Eligible employees under the ISO Plans are those key employees who,
in the judgment of the Compensation Committee, are in a position to materially
affect the overall success of the Company by reason of the nature and extent of
their duties. There were no stock option awards to any of the Company’s
executive officers in 2009.
Restricted Stock
Grants
.
The
Compensation Committee adopted a Restricted Stock Plan in 2007 in order to
provide another long-term incentive plan and reduce the Company’s reliance on
stock options to reward executive officers and employees. Restricted stock
awards have a vesting period of five years. The stock is “restricted”
because it cannot be sold or transferred until the vesting period (or
restriction period) has lapsed. That means any grant of restricted stock
will be forfeited if the officer or employee leaves the employment of the
Company prior to the end of the vesting period. The Compensation Committee
made grants under this Plan in 2009 for performance during 2008 and made grants
under the Plan in 2010 for performance during 2009. None of the
executive officers received restricted stock grants for their 2009
performance.
The Compensation Committee adopted the
Long Term Incentive Plan (“LTIP”) in 2008 to replace a three year cash incentive
plan the Company formerly employed. Under the LTIP, executive officers are
eligible for annual awards of restricted stock if the Company achieves a 5%
increase in earnings per share annually. Because there was a decrease in
the Company’s earnings per share for 2009, no executive officers were awarded
restricted stock grants under the LTIP.
Employment
Agreements.
Since its beginnings,
the Company has maintained that its growth is dependent on the stability of its
executive management team. The Compensation Committee believes that
employment agreements are an important tool for maintaining that stability,
specifically the covenants preventing the officers from competing with the
Bank. Non-competition covenants reduce the risks to the Bank that an
officer might terminate employment and begin employment with one of the
Bank’s competitors. Therefore, from its incorporation, the Bank has been a
party to written employment agreements with its executive officers. A
description of the material terms of the employment agreements with the
executive officers is described below under “
Executive
Compensation
.” The Compensation Committee believes that
employment agreements have aided the Company in retaining key executives and
have contributed to the success of the Company.
These employment agreements include
severance provisions and restrictive covenants. However, due to the
Treasury’s Interim Final Rules for TARP recipients released in June 2009, the
Company is prohibited from paying any “golden parachute” payment to the Senior
Executive Officers, or “SEOs”, and the next five most highly compensated
employees, which includes the Company’s executive officers. A “golden
parachute” payment is defined as any payment due to the departure of the
employee for any reason, except a payment for services performed or benefits
accrued. The Company may not defer the payment until after the TARP
investment has been repaid by the Company.
Appropriate severance allows the
Company to cleanly separate the executive officer and avoid prolonged contact
with the Company’s employees. In addition, the employment agreements
contain restrictive covenants for the Bank’s benefit following terminations of
employment prohibiting the executive from:
|
·
|
Competing
with the Bank following employment termination except under certain
circumstances;
|
|
·
|
From
soliciting Bank employees and customers;
and
|
|
·
|
From
divulging confidential information obtained while employed with the
Bank.
|
These provisions are intended to
protect the Bank by preventing an executive from competing against the Bank
during his or her compensation continuance period and by preventing disclosure
of confidential or proprietary Bank information.
The employment agreements also provide
change of control payments under certain circumstances to reward the Bank’s
executive officers for their efforts in building the Company while reducing the
reluctance of the executive officers to pursue potential transactions that might
benefit the long-term interests of shareholders but involve a change of control
of the Company. For executive officers other than the Company’s two most
senior executive officers, the employment agreements do not provide for change
of control payments solely because of a change of control of the Bank. An
additional triggering event must occur following the change of control in order
for the Bank to make any change of control payments to these officers. The
defined triggering events were selected to provide the Company with protection
from executive competition and to avoid unwarranted terminations of employment
that could harm the Company’s business or financial condition. However, as
noted above, Treasury regulations prohibit the Company from making any of these
payments while the Company holds a TARP investment.
Because Federal tax rules limit the
amounts that each executive officer may receive in the event of a change of
control, the Compensation Committee previously agreed to provide its two most
senior executive officers, Mr. Bauer and Mr. Clark, with a gross-up payment
equal to the amount of excise taxes (plus the applicable federal and state
income, FICA and excise taxes due on such gross-up payment) payable by the
executive in connection with a change in control that are deemed to be “excess
parachute payments” for Federal tax purposes. However, the Company is
prohibited from making any tax gross-up payments on compensation to the SEOs and
the next twenty most highly compensated employees until the TARP investment has
been repaid by the Company.
The Compensation Committee believes
that our senior executive officers should not be required to incur the expenses
associated with the enforcement of their rights under the employment agreements,
whether by litigation or other legal action, because the cost and expense
thereof would substantially detract from the benefits intended to be granted to
the executive officers under the employment agreements. The employment
agreements therefore also provide Mr. Bauer, Mr. Clark, Mr. Davis and Mr.
Hastings legal fee reimbursement up to certain limits so that they will not be
forced to negotiate settlement of their rights under the employment agreements
following a change of control under threat of incurring expenses. However,
Mr. Bauer, Mr. Clark, Mr. Davis, Mr. Hastings and Mr. Monroe have executed
documents under which each executive has agreed to waive any of their rights and
benefits under either their employment agreement or their salary continuation
agreement that would put the Company out of compliance with any of the laws or
regulations restricting the payment of executive compensation to a TARP
recipient.
Retirement
Payments.
The
Compensation Committee strongly believes that comprehensive post-retirement
benefits for all employees who reach retirement age is part of a competitive
compensation program. The Bank’s retirement benefits program, available to
all employees generally, consists of the 401(k) Plan and the Bank’s
participation in the federal Social Security program. In addition, for
highly compensated employees, including the executive officers, the Bank has
executed supplemental executive retirement agreements and maintains a
non-qualified supplemental 401(k) savings plan that matches contributions of
plan participants that exceed the federal limit of income for participation in
the 401(k) Plan. The components of the Company executive retirement
program are:
Matching Contributions to 401(k)
Plan
. The 401(k) Plan is a voluntary defined contribution benefit
plan under the Internal Revenue Code, designed to provide additional incentive
and retirement security for eligible employees of the Bank. All Bank
employees over the age of 21 are eligible to participate in the 401(k)
Plan. The executive officers participate in the 401(k) Plan on the same
basis as all other eligible employees of the Bank. Under the 401(k) Plan,
each eligible employee of the Bank may elect to contribute on a pre-tax basis to
the 401(k) Plan, subject to certain limitations that lower the maximum
contributions of more highly compensated participants. Prior to August
2009, the Bank matched 100% of an employee’s contributions to the 401(k) Plan up
to a maximum limit of 6% of the employee’s compensation. Effective August
1, 2009, the Bank reduced its match up to 50% of the first six percent of
compensation that is deferred under the 401(k) Plan. In keeping with the
Compensation Committee’s belief in tying the financial interests of the
employees to those of the shareholders, employees may direct the Bank match to
be invested in common stock of the Company purchased on the open market and
employees may elect to have their 401(k) Plan funds used to purchase additional
common stock of the Company on the open market. Accounts under the 401(k)
Plan are adjusted for investment gains and losses based on the performance of
the investment choices selected by the participant.
Supplemental non-qualified 401(k)
deferrals.
Due
to the Internal Revenue Code limitations that lower the maximum contributions of
highly compensated participants (all employees with salaries in excess of
$110,000), the Compensation Committee approved a supplemental non-qualified
401(k) deferral plan that permits the Bank’s highly compensated employees to
defer additional income. The Bank matches the officers’ contributions up
to the maximum amount permitted under the qualified 401(k) plan.
Contributions to both the qualified and non-qualified plan count against the
maximum Bank match. A description of the material terms of the
supplemental deferrals is included below under “
Executive
Compensation
.” While this is a benefit to the executive
officers, it was primarily intended to benefit the highly compensated employees
of the Company who are not parties to salary continuation
agreements.
Supplemental Executive Retirement
Agreements.
The Company maintains non-tax qualified supplemental
executive retirement agreements with certain senior executive officers to
supplement the amount that these officers can defer under the Bank’s 401(k) Plan
because of the Internal Revenue Code limitations on the amount of compensation
that may be deferred under the 401(k) Plan. These Salary Continuation
Agreements and, for certain officers, Split Dollar Agreements are designed to
provide additional retirement benefits to these senior executive officers at
their normal retirement dates. Such agreements are a common component of
the compensation packages of the peer companies with which the Bank competes,
and of the financial institution industry generally. The Compensation
Committee believes that these agreements should be a part of the Bank’s
compensation system because they are necessary to:
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Retain
the existing officers of the Bank with a compensation package that is
competitive in our industry; and
|
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·
|
Match
the compensation packages of officers the Bank wishes to
recruit.
|
The goal of the Salary Continuation
Agreements is to provide a defined benefit so that at retirement, each executive
officer’s total benefits, including Social Security benefits, will equal 60% of
his or her estimated final base pay. Each agreement’s defined benefit is
intended to fill the gap between the 60% of final base pay target versus the sum
of Social Security benefits, the 401(k) Plan deferrals, and the Salary
Continuation Agreement payments. The Bank owns life insurance policies on
the lives of certain of the participating executive officers in order to offset
the cost of future funding of the retirement benefit payments under the Salary
Continuation Agreements. The Compensation Committee periodically reviews
the defined benefit stated in each officer’s Salary Continuation Agreement to
ensure that target benefits are being maintained at 60% of final base pay and
that the life insurance accruals will offset the cost to the Company of the
retirement benefits. Material provisions of the Salary Continuation
Agreements are described below under “
Executive
Compensation.”
Provided the Bank only pays the
executive officers the vested accrued benefits under the salary continuation
agreements upon attainment of their retirement dates, these benefits would
qualify as accrued compensation under the Treasury’s TARP regulations and would
be payable while the Bank holds a TARP investment.
Perquisites and
other benefits.
In addition to the benefits described above, the
Company provides its executive officers with certain perquisites that the
Compensation Committee considers usual and customary within the Company’s peer
group to assist the Company in remaining competitive in the market for
experienced management. For instance, the Bank provides the CEO with use
of an automobile, long-term health care insurance, personal term life insurance,
reimbursement of the officer’s cost for disability insurance and
payment of his country club expenses. The President is provided with the
use of an automobile, payment of his country club expenses, and reimbursement of
his cost for disability insurance. For additional information regarding
the perquisites made available to the Company’s executive officers during 2009,
please see the description of the employment agreements under “
Executive Compensation”
and
the footnotes to the “All Other Comp.” column of the Summary Compensation
Table.
Executive management also participates
in the Bank’s employee benefit plans, including medical and dental plans and
other insurance programs, on the same basis as all eligible employees.
Banking regulations prohibit executive management from participating in employee
discount programs for certain Bank products. In accordance with Treasury
regulations, the Company adopted a policy prohibiting the payment of excessive
or luxury expenditures.
Limitations on Executive Compensation
by
Federal Law and Treasury
Regulations.
On December 5, 2008, the Company sold preferred stock
and a warrant to purchase common stock to the Treasury under TARP. As a
condition to the purchase of the Company’s preferred stock by the Treasury, the
Company agreed to certain restrictions on executive compensation, including
limitations on amounts payable to certain executives under severance
arrangements and change in control provisions of employment contracts and
clawback provisions in compensation plans. In June 2009, the
Treasury adopted new
rules to implement the requirements of the American Recovery and Reinvestment
Act of 2009, which imposed a number of restrictions on executive compensation in
addition to those agreed to by the Company at the time of the Treasury
investment. Among other things, these rules have affected the compensation
policies of the Company by:
|
·
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Requiring
that the Compensation Committee of the Board to meet at least every six
months and to undertake various reviews of the risks presented to the
Company by its compensation
practices;
|
|
·
|
Increasing
the number of employees subject to clawback of incentive compensation in
the event of
inaccurate
financial
statements by the Company;
|
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·
|
Prohibiting
the Company from paying any severance compensation to certain executives
even where the Company has a contractual obligation to make those
payments;
|
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·
|
Limiting
the amount of incentive compensation payments to certain executives and
only permitting those payments in the form of restricted stock or
units;
|
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·
|
Limiting
the maximum monetary value of any restricted stock grant to no more than
one-third of the executive’s total annual
compensation;
|
|
·
|
Requiring
the Company to permit a non-binding shareholder vote on the Company’s
executive compensation;
|
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·
|
Requiring
the Company to adopt an excessive or luxury expenditures
policy;
|
|
·
|
Prohibiting
the Company from paying any tax gross-ups on compensation for certain
executives; and
|
|
·
|
Requiring
the Company to identify a number of its most highly compensated
employees.
|
During the period that the Company
holds a TARP investment by the Treasury, these laws and regulations will have an
effect on the relative proportion of different types of compensation that we may
pay to our executive officers. The proportion of salary to total direct
compensation will likely increase as a result of the elimination of the annual
cash incentive and stock options, and the limits on the amount of restricted
stock that may be granted. The impact of these limits is summarized
below:
Compensation Element
|
No TARP Investment
|
During TARP Investment
|
Salary
|
*
cash only
|
*
cash
|
|
|
*
2/3rds of total direct
|
|
|
compensation
|
Annual
Incentive
|
*
cash
|
*
not allowed
|
Long-Term
Incentive
|
*stock
options
|
*
limited to long-term
|
|
*
restricted stock
|
restricted
stock
|
|
|
*
limited in amount to 1/3rd
|
|
|
total
direct
compensation
|
Other
Regulations
On October 22, 2009, the Federal
Reserve issued proposed guidance on incentive compensation. The guidance
includes three principles:
|
·
|
Incentive
compensation arrangements should balance risk and financial results in a
manner that does not provide employees incentives to take excessive risks
on behalf of the banking
organization.
|
|
·
|
A
banking organization’s risk-management processes and internal controls
should reinforce and support the development and maintenance of balanced
incentive compensation
arrangements.
|
|
·
|
Banking
organizations should have strong and effective corporate governance to
help ensure sound compensation
practices.
|
The
guidance is immediately effective under the Federal Reserve’s power to regulate
the safety and soundness of financial institutions. The Federal Reserve
will apply the guidance to all U.S. financial institutions. We expect to
better understand how this guidance will affect us in the coming
months.
Compensation Policies that Affect Risk
Management
In years prior to 2009, the Company’s
compensation program for executive officers included annual cash incentive
compensation awards. For 2009, the Company eliminated this component of
its executive compensation program as the Company is prohibited from paying a
cash performance bonus to its executive officers as a TARP
recipient.
In addition to our executive officers,
we utilize incentive compensation plans for a certain group of employees whose
primary function is to generate production volumes, particularly in mortgage
origination and investment brokerage. We structure these compensation
plans to drive behaviors that directly affect revenue. Most of these plans
are either commission plans, fully or partially, or incentive plans.
Commission plans pay based on production less a monthly draw. Incentive
plans pay based on formulas tied to new sales and revenue growth above a
threshold.
We manage risks that may arise from our
incentive compensation in the following ways:
|
·
|
Balanced Risk-Taking
Incentives
. We balance incentive compensation arrangements
with our financial results. We review our incentive plans regularly
to ensure that they do not provide incentives to take excessive or
unnecessary risks.
|
|
·
|
Controls and Risk
Management.
We use risk management processes and internal
controls to reinforce and support the development and maintenance of our
incentive compensation arrangements. For example, commission-based
mortgage loan officers do not have loan approval
authority.
|
|
·
|
Strong Corporate
Governance
. Our senior leaders regularly review the
effectiveness of our incentive
plans.
|
|
¾
|
Clawbacks and
Forfeitures
. We expanded our clawback and forfeiture
provisions for all applicable incentive compensation
plans.
|
|
¾
|
Qualified
Production
. Our incentive plans include language that
reinforces our compliance and control policies. Examples include the
exclusion of certain types of transactions or sales from commission
calculations due to exceptions and the potential to forfeit awards as a
result of realized losses.
|
Compensation
Committee Report
In
fulfilling its oversight responsibilities, the Nominating and Compensation
Committee discussed and reviewed the Compensation Discussion and Analysis with
management. Based on this discussion and review, the Committee recommended
to the Board that the Compensation Discussion and Analysis be included in this
proxy statement.
The
Compensation Committee certifies that:
(1) It
has reviewed with senior risk officers the senior executive officer (“SEO”)
compensation plans and has made all reasonable efforts to ensure that these
plans do not encourage SEOs to take unnecessary and excessive risks that
threaten the value of the Company;
(2) It
has reviewed with senior risk officers the employee compensation plans and has
made all reasonable efforts to limit any unnecessary risks these plans pose to
the Company;
(3) It
has reviewed the employee compensation plans to eliminate any features of these
plans that would encourage the manipulation of reported earnings of the Company
to enhance the compensation of any employee.
This report is submitted by the
Nominating and Compensation Committee: Edward T. Brown, James G. Chrysson
(Chair), Lynn L. Lane (Vice Chair), H. Lee Merritt, Jr., Stephen L. Robertson
and Dr. William G Ward, Sr.
PERFORMANCE
GRAPH
The
following graph provides an indicator of the cumulative total shareholder
returns for the Company as compared with the Nasdaq Composite Index and SNL
Securities’ Southeast Bank Index. Historical price performance during
this period may not be indicative of future stock performance.
|
|
Period Ending
|
|
Index
|
|
12/31/04
|
|
|
12/31/05
|
|
|
12/31/06
|
|
|
12/31/07
|
|
|
12/31/08
|
|
|
12/31/09
|
|
Southern
Community Financial Corporation
|
|
|
100.00
|
|
|
|
88.87
|
|
|
|
100.92
|
|
|
|
66.60
|
|
|
|
36.86
|
|
|
|
24.10
|
|
NASDAQ
Composite
|
|
|
100.00
|
|
|
|
101.37
|
|
|
|
111.03
|
|
|
|
121.92
|
|
|
|
72.49
|
|
|
|
104.31
|
|
SNL
Southeast Bank
|
|
|
100.00
|
|
|
|
102.36
|
|
|
|
120.03
|
|
|
|
90.42
|
|
|
|
36.60
|
|
|
|
36.75
|
|
Source:
SNL Financial LC, Charlottesville, VA
©
2010
Executive
Compensation
Cash
Compensation.
During 2009, all employees were compensated by
the Bank, the principal subsidiary of the Company. This table sets
forth certain information regarding the compensation paid by the Bank to or for
(i) our current Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), and (ii) the other three executive officers who were serving as
such at December 31, 2009 (our “named executive
officers”).
|
SUMMARY COMPENSATION
TABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
|
|
|
Non-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
qualified
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
|
|
|
Option
|
|
|
Incentive
|
|
|
Deferred
|
|
|
All
Other
|
|
|
|
|
Name
|
|
|
|
|
Salary
|
|
|
Awards
|
|
|
Award
|
|
|
Comp.
|
|
|
Comp.
|
|
|
Comp.
|
|
|
Total
|
|
and Position
|
|
Year
|
|
|
($) (1)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
F.
Scott Bauer,
|
|
2009
|
|
|
|
367,188
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
149,340
|
|
|
|
51,582
|
(2)
|
|
|
568,110
|
|
Chairman
and CEO
|
|
2008
|
|
|
|
375,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
135,315
|
|
|
|
40,442
|
(3)
|
|
|
550,757
|
|
|
|
2007
|
|
|
|
355,008
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108,000
|
|
|
|
122,595
|
|
|
|
63,258
|
(4)
|
|
|
648,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jeff
T. Clark,
|
|
2009
|
|
|
|
271,563
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
33,255
|
|
|
|
31,929
|
(5)
|
|
|
336,747
|
|
President
|
|
2008
|
|
|
|
275,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,865
|
|
|
|
25,943
|
(6)
|
|
|
330,808
|
|
|
|
2007
|
|
|
|
255,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
75,000
|
|
|
|
26,791
|
|
|
|
51,411
|
(7)
|
|
|
408,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Robert
L. Davis, Jr.,
|
|
2009
|
|
|
|
215,754
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
31,024
|
|
|
|
29,695
|
(8)
|
|
|
276,473
|
|
EVP
|
|
2008
|
|
|
|
218,280
|
|
|
|
13,960
|
|
|
|
-
|
|
|
|
-
|
|
|
|
27,879
|
|
|
|
23,361
|
(9)
|
|
|
283,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
Hastings,
|
|
2009
|
(10)
|
|
|
221,520
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
25,175
|
|
|
|
19,505
|
(11)
|
|
|
266,200
|
|
EVP
and CFO
|
|
2008
|
(12)
|
|
|
190,760
|
|
|
|
-
|
|
|
|
16,332
|
|
|
|
-
|
|
|
|
11,392
|
|
|
|
8,222
|
(13)
|
|
|
226,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
James
C. Monroe, Jr.,
|
|
2009
|
(14)
|
|
|
196,833
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
41,779
|
|
|
|
19,543
|
(15)
|
|
|
258,155
|
|
Treasurer
|
|
2008
|
|
|
|
200,000
|
|
|
|
6,980
|
|
|
|
-
|
|
|
|
-
|
|
|
|
45,261
|
|
|
|
16,111
|
(16)
|
|
|
268,352
|
|
|
|
2007
|
(17)
|
|
|
128,056
|
|
|
|
|
|
|
|
5,331
|
|
|
|
30,000
|
|
|
|
20,890
|
|
|
|
7,450
|
(18)
|
|
|
191,727
|
|
(1)
|
Effective
August 1, 2009, the senior executive officers agreed to a reduction in
their annual base salaries of 5% for Mr. Bauer and 3% for the other SEOs
for one year until July 31, 2010.
|
(2)
|
Includes
the Bank’s contribution of $13,233 on behalf of the officer under the
Bank’s salary deferral plan under Section 401(k) of the Internal Revenue
Code of 1986, as amended (“401(k) Plan”), the Bank’s payment of $10,433
for long term health care coverage, the Bank’s accrued cost of $5,950 for
providing an automobile, the Bank’s contribution on behalf of the officer
under the Bank’s supplemental 401(k) Plan, the Bank’s cost to provide
$500,000 in personal term life insurance, the Bank’s reimbursement of the
cost of disability insurance, and the Bank’s reimbursement of country club
fees. Mr. Bauer is capable of being issued 24,000 shares of
common stock upon the vesting of all stock options held by
him.
|
(3)
|
Includes
the Bank’s contribution of $13,860 on behalf of the officer under the
Bank’s 401(k) Plan, the Bank’s payment of $10,433 for long term health
care coverage, the Bank’s accrued cost of $6,238 for providing an
automobile, the Bank’s contribution on behalf of the officer under the
Bank’s supplemental 401(k) Plan, the Bank’s cost to provide $500,000 in
personal term life insurance, the Bank’s reimbursement of the cost of
disability insurance and payment of the tax liability for the same, and
the Bank’s reimbursement of country club
fees.
|
(4)
|
Includes
the Bank’s contribution of $14,950 on behalf of the officer under the
Bank’s 401(k) Plan, the Bank’s accrued cost of $15,321 for providing an
automobile, the Bank’s payment of $10,433 for long term health care
coverage, the Bank’s contribution on behalf of the officer under the
Bank’s supplemental 401(k) plan, the Bank’s cost to provide $500,000 in
personal term life insurance, the Bank’s reimbursement of the cost of
disability insurance and payment of the tax liability for same, and the
Bank’s reimbursement of country club
fees.
|
(5)
|
Includes
the Bank’s contribution of $4,542 on behalf of the officer under the
Bank’s 401(k) Plan, the Bank’s accrued cost of $6,393 for providing an
automobile, the Bank’s reimbursement of the cost of disability insurance
and the Bank’s reimbursement of country club
fees.
|
(6)
|
Includes
the Bank’s contribution of $2,750 on behalf of the officer under the
Bank’s 401(k) Plan, the Bank’s accrued cost of $15,125 for providing an
automobile, the Bank’s reimbursement of the cost of disability insurance
and payment of the tax liability for same, and the Bank’s reimbursement of
country club fees.
|
(7)
|
Includes
the Bank’s contribution of $15,300 on behalf of the officer under the
Bank’s 401(k) Plan, the Bank’s accrued cost of $15,114 for providing an
automobile, the Bank’s contribution on behalf of the officer under the
Bank’s supplemental 401(k) plan, the Bank’s reimbursement of the cost of
disability insurance and payment of the tax liability for the same, and
the Bank’s reimbursement of country club
fees.
|
(8)
|
Includes
the Bank’s contribution of $10,619 on behalf of the officer under the
Bank’s 401(k) Plan, the Bank’s reimbursement of country club fees of
$10,340, and the Bank’s reimbursement of the cost of disability
insurance.
|
(9)
|
Includes
the Bank’s contribution of $15,500 on behalf of the officer under the
Bank’s 401(k) Plan and the Bank’s reimbursement of country club
fees.
|
(10)
|
Includes
$6,202 from workmen’s compensation insurance from the Company’s carrier to
the executive in lieu of a portion of regular
salary.
|
(11)
|
Includes
the Bank’s contribution of $10,727 on behalf of the officer under the
Bank’s 401(k) Plan and the Bank’s reimbursement of the cost of disability
insurance.
|
(12)
|
Employment
began effective January 28,
2008.
|
(13)
|
Includes
the Bank’s contribution of $6,756 on behalf of the officer under the
Bank’s 401(k) Plan.
|
(14)
|
Includes
$6,202 from workmen’s compensation insurance from the Company’s carrier to
the executive in lieu of a portion of regular
salary.
|
(15)
|
Includes
the Bank’s contribution of $9,704 on behalf of the officer under the
Bank’s 401(k) Plan and the Bank’s reimbursement of the cost of disability
insurance.
|
(16)
|
Includes
the Bank’s contribution of $13,656 on behalf of the officer under the
Bank’s 401(k) Plan.
|
(17)
|
Employment
began effective April 16, 2007.
|
(18)
|
The
Bank’s contribution on behalf of the officer under the Bank’s 401(k) Plan
and the Bank’s contribution on behalf of the officer under the Bank’s
supplemental 401(k) plan.
|
Employment
Agreements.
The Bank and the Company are parties to employment
agreements with F. Scott Bauer, Chairman of the Board and Chief Executive
Officer of the Company, Jeff T. Clark, President of the Company, James Hastings,
Chief Financial Officer of the Company, and Robert L. Davis, Jr., Executive Vice
President of the Bank. As previously mentioned, we became subject to
certain executive compensation restrictions under federal law and Treasury
regulations because we participated in TARP in December 2008 and the Treasury’s
preferred stock investment in the Company is still outstanding. Under
these rules, while the Bank holds a TARP investment, it is prohibited from
paying certain officers, including our named executive officers, any
compensation other than for accrued benefits or current services, even if there
was a contractual obligation of the Company to make those payments that existed
prior to the TARP investment. The following description of the
benefits due to the named executive officers includes payments for other than
accrued benefits or current services, so those payments are prohibited while the
Company holds a TARP investment.
The agreements with Mr. Bauer, Mr.
Clark, Mr. Hastings and Mr. Davis are similar (“Officer
Agreements”). The term of each Officer Agreement is for three
years. On each anniversary of the effective date of the Officer
Agreements, the terms are automatically extended for an additional one-year
period beyond the then effective expiration date unless written notice from the
employer or the officer is received 90 days prior to the anniversary date
advising the other that the agreement shall not be further
extended. The Officer Agreements automatically terminate when the
officers attain age 65. In addition, each officer has the option to
terminate his respective agreement upon sixty days' written notice to the
employer. While each officer is employed and for two years following
termination of employment, the Officer Agreements prohibit the officer from
competing with the employer.
Under the Officer Agreements, each
officer receives an annual cash salary, with annual adjustments and
discretionary bonuses as determined by the employer.
Under the Officer
Agreements, each officer is entitled to all fringe benefits that are generally
provided by the employer for its employees, to payment of his country club
expenses, to reimbursement of the officer’s cost for disability insurance
(including compensation for the federal and state income taxes imposed as a
result of the reimbursement), and to contractual indemnification against
liabilities arising out of service as an officer of the employer. In
addition, Mr. Bauer’s agreement provides that he shall be nominated to serve as
a director of the Bank and the Company and that he be provided long-term care
insurance paid up at age 60 (owned exclusively by Mr. Bauer) and life insurance
providing a death benefit of no less than $500,000. Under their
employment agreements, Mr. Bauer and Mr. Clark are provided with the use of an
automobile pursuant to the policies of the employer.
Under the Officer Agreements, each
officer may terminate employment for Good Reason, which includes any reduction
in base pay, any assignment of duties or responsibilities which are not
commensurate with the officer’s status (including failure to elect Mr. Bauer to
the Board of Directors of the Bank and the Company), any material breach of
their employment agreement by the employer, or a transfer of the officer’s
principal work location more than fifteen (15) miles (thirty miles for Mr.
Hastings) from his then current principal work location. Following
such Good Reason Termination (which occurs after the repayment of the TARP
investment), the employer is required to pay the officer’s base salary for the
remaining term of the employment agreement and to continue all insurance and
medical benefits for the remaining term of the employment agreement or until the
officer is reemployed or dies.
The Officer Agreements also grant each
officer the contractual right to negotiate Salary Continuation Agreements that
provide annual benefits upon separation from service on or after age 62 for Mr.
Bauer, Mr. Clark and Mr. Davis, on or after age 64 for Mr. Monroe and on or
after age 65 for Mr. Hastings. See “
Retirement Benefits
” below
for a further discussion of the payments under their Salary Continuation
Agreements.
The Bauer and Clark Officer Agreements
also provide that in the event of a change of control, certain payments must be
made to each officer, which will be payable if the change of control occurs
after the TARP investment has been repaid. If these payments would
cause the imposition of excise taxes under Section 280G and Section 4999 of the
Internal Revenue Code of 1986, as amended (the “Code”), the employer must
reimburse the officer an amount necessary to compensate the officer for any
applicable excise tax payments, net of all income, payroll, and excise
taxes. The Davis and Hastings Officer Agreements provide for certain
payments to each officer upon the occurrence of certain events following a
change of control of the Company which occurs after the TARP investment has been
repaid. See “
Potential Payments Upon Change in
Control
” below for a further discussion of these payments. The
Officer Agreements also provide for reimbursement of legal fees up to $500,000
for Mr. Bauer and Mr. Clark and up to $200,000 for Mr. Davis and Mr. Hastings,
if the officer is required to seek legal advice to enforce his employment
agreement following a change of control. A "change of control" is
defined, under both the Officer Agreements and the Salary Continuation
Agreements discussed below, to mean any of the following events:
|
·
|
Any
person or group acquires beneficial ownership representing more than fifty
percent (50%) of the fair market value or voting power of the Company’s
securities; or
|
|
·
|
During
any period of twelve consecutive months, any person or group acquires
beneficial ownership representing thirty-five percent (35%) or more of any
class of voting securities of the Company, or a majority of the Company’s
Board is replaced by individuals who were not appointed, or whose election
was not endorsed in advance, by a majority of the Company’s Board;
or
|
|
·
|
During
any period of twelve consecutive months, any person or group acquires more
than forty percent (40%) of the assets of the Company
.
|
The Bank is party to an employment
agreement with James C. Monroe, Jr., Treasurer of the Company. The
term of the Monroe agreement is for two years. On each anniversary of
the effective date of his employment agreement, the term is automatically
extended for an additional one-year period beyond the then effective expiration
date unless written notice from the Bank or Mr. Monroe is received advising the
other that the agreement shall not be further extended. Mr. Monroe
has the option to terminate his employment agreement upon sixty days' written
notice to the Bank. While employed by the Bank and for two years
following termination of employment, his employment agreement prohibits Mr.
Monroe from competing with the Bank. Under his employment agreement,
Mr. Monroe receives an annual cash salary, with annual adjustments and
discretionary bonuses as determined by the Board of Directors of the Bank, and
is entitled to all fringe benefits that are generally provided by the Bank for
its employees and executive officers. His employment agreement also
provides for certain payments to Mr. Monroe upon the occurrence of certain
events following a change of control of the Company which occurs after the TARP
investment has been repaid.
Plan-Based
Awards.
There were no incentive compensation plan-based
awards, either in stock options or in restricted stock or under an annual
cash-based incentive compensation plan, made to the executive officers during
2009.
Annual incentive
compensation plan.
These awards are earned
during each fiscal year based on the Company’s net income as a percentage of the
budgeted amount for the year. All awards earned are paid in cash,
provided the participants continue to be actively employed by the
Bank. The target opportunity is 70% of base salary for Mr. Bauer, 60%
of base salary for Mr. Clark, and 50% of base salary for the other participating
officers. The payouts of the target bonus are as
follows:
Percentage
of budgeted net income:
|
|
|
95
|
%
|
|
|
100
|
%
|
|
|
105
|
%
|
|
|
110
|
%
|
|
|
115
|
%
|
|
|
120
|
%
|
or
more
|
Payout
percentage of target bonus:
|
|
|
50
|
%
|
|
|
100
|
%
|
|
|
125
|
%
|
|
|
150
|
%
|
|
|
175
|
%
|
|
|
200
|
%
|
|
No awards
are made if the Company does not achieve at least 95% of the budgeted amount of
net income for the year. There were no awards made under this plan
for 2009 performance. There were no awards made under this plan for
2008 performance. Awards made under this plan for 2007 performance
are included under Non-Equity Incentive Plan Compensation in the “
Summary Compensation Table
”
above. Treasury regulations prohibit the payment of any cash
incentive awards for performance in 2009.
Outstanding
Equity Awards at Fiscal Year-End.
The following tables
contain information with respect to outstanding equity awards of the Company
held by the named executive officers at December 31, 2009.
Outstanding Equity Awards at
Fiscal Year-End
|
|
Option Awards
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Shares
|
|
|
Shares or
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
of Stock
|
|
|
Units of
|
|
|
|
Underlying Unexercised
|
|
|
Option
|
|
|
Option
|
|
|
That
|
|
|
Stock That
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Expiration
|
|
|
Have Not
|
|
|
Have Not
|
|
|
|
(#)
|
|
|
Price
|
|
|
Date
|
|
|
Vested
|
|
|
Vested
|
|
Name
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
($)
|
|
|
(#)
|
|
|
(#)
|
|
|
($) (1)
|
|
F.
Scott Bauer
|
|
|
24,000
|
|
|
|
-0-
|
|
|
|
10.04
|
|
|
10/23/2013
|
|
|
|
-
|
|
|
|
-
|
|
Jeff
T. Clark
|
|
|
15,750
|
|
|
|
-0-
|
|
|
|
6.51
|
|
|
8/22/2012
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
16,000
|
|
|
|
-0-
|
|
|
|
10.04
|
|
|
10/23/2013
|
|
|
|
-
|
|
|
|
-
|
|
Robert
L. Davis
|
|
|
10,000
|
|
|
|
-0-
|
|
|
|
10.04
|
|
|
10/23/2013
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,000
|
|
|
|
4,540
|
|
James
Hastings
|
|
|
10,000
|
|
|
|
-0-
|
|
|
|
7.08
|
|
|
5/28/2018
|
|
|
|
-
|
|
|
|
-
|
|
James
C. Monroe
|
|
|
6,000
|
|
|
|
4,000
|
|
|
|
10.13
|
|
|
4/16/2017
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
2,270
|
|
(1)
Market value based on the per share price of the Company’s common stock on
December 31, 2009 of $2.27.
Option
Exercises.
There were no stock
options exercised by the executive officers during 2009.
Retirement
Benefits.
Supplemental
401(k) Plan.
During 2007, the Bank adopted a supplemental
non-qualified 401(k) plan for highly compensated employees whose ability to
defer income until retirement is limited due to Code restrictions applicable to
tax-qualified plans. This supplemental plan allows highly compensated
employees to contribute to the plan up to 50% of their annual compensation after
reaching the 401(k) Plan’s deferral limits. Prior to August 2009, the
Bank matched the first six percent of compensation that is deferred into the
supplemental plan, which vests twenty percent per year over five
years. Effective August 1, 2009, the Bank reduced its match to 50% of
the first six percent of compensation that is deferred in either 401(k)
plan. All amounts deferred under the non-qualified 401(k) plan,
including the Bank’s match, are held in trust and are subject to the claims of
creditors of the Bank. Participants in the supplemental non-qualified
401(k) plan are not subject to income tax on the amounts contributed, and the
Bank does not receive an expense deduction, until the deferred amounts are paid
to the participants.
As under
the 401(k) Plan, accounts under the non-qualified 401(k) plan are adjusted for
investment gains and losses based on the performance of the investment choices
selected by the participant. These investment choices are similar in
type and asset class to the investment choices available under the 401(k)
Plan. Participants may change their investment elections at any time
under the same rules that apply under the 401(k) Plan.
Supplemental 401(k)
Plan
|
|
Executive
|
|
|
Bank
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
Aggregate
|
|
|
|
Contributions
|
|
|
Contributions
|
|
|
Earnings
|
|
|
Withdrawals/
|
|
|
Balance
|
|
Name
|
|
in 2009 ($)
|
|
|
in 2009 ($)
|
|
|
in 2009 ($)
|
|
|
Distributions
|
|
|
in 2009 ($)
|
|
F.
Scott Bauer
|
|
|
-
|
|
|
|
-
|
|
|
|
6,965
|
|
|
|
-
|
|
|
|
17,270
|
|
Jeff
T. Clark
|
|
|
-
|
|
|
|
-
|
|
|
|
2,286
|
|
|
|
-
|
|
|
|
8,904
|
|
James
C. Monroe, Jr.
|
|
|
-
|
|
|
|
-
|
|
|
|
(646
|
)
|
|
|
-
|
|
|
|
1,218
|
|
Salary
Continuation Agreements.
The following table
contains information with respect to unfunded nonqualified retirement
benefits due to the named
executive officers pursuant to certain Salary Continuation Agreements between
the Bank and the named executive officers:
Salary Continuation
Agreement
|
|
|
|
|
|
|
|
Payments
|
|
|
|
Number of Years of
|
|
|
Present Value of
|
|
|
During Last
|
|
Name
|
|
Credited Service (#)
|
|
|
Accumlated Benefit ($) (1)
|
|
|
Fiscal Year ($)
|
|
F.
Scott Bauer
|
|
|
13
|
|
|
|
609,612
|
|
|
|
-0-
|
|
Jeff
T. Clark
|
|
|
13
|
|
|
|
144,001
|
|
|
|
-0-
|
|
Robert
L. Davis, Jr.
|
|
|
13
|
|
|
|
135,128
|
|
|
|
-0-
|
|
James
Hastings
|
|
|
2
|
|
|
|
36,560
|
|
|
|
-0-
|
|
James
C. Monroe, Jr.
|
|
|
3
|
|
|
|
107,930
|
|
|
|
-0-
|
|
|
(1)
|
The
present value shown is calculated using the benefit accrual balance
discounted at the rate of 7.00%.
|
Pursuant to the terms of the Officers
Agreements, the Bank is a party to Salary Continuation Agreements with Mr.
Bauer, Mr. Clark, Mr. Davis, Mr. Hastings and Mr. Monroe. The Bank
has purchased, and is the primary beneficiary, of life insurance policies on
certain officers which are intended to offset the cost of these retirement
benefits. These benefits are unfunded and are not intended to
constitute a tax-qualified retirement plan under Section 401(a) of the
Code. Upon attainment of age 62 for Mr. Bauer, Mr. Clark and Mr.
Davis, the Salary Continuation Agreements provide each of these executive
officers with an annual retirement benefit for the life of each
officer. The annual benefit for Mr. Bauer is currently
$188,504. The annual benefit for Mr. Clark is currently
$150,490. The annual benefit for Mr. Davis is currently $112,683. On
August 1, 2017, the Salary Continuation Agreement for Mr. Hastings provides an
annual retirement benefit of $40,000 for life. On June 1, 2012, the
Salary Continuation Agreement for Mr. Monroe provides an annual retirement
benefit of $25,000 for life. Mr. Bauer, Mr. Clark and Mr. Davis are
fully vested in the accrued benefits under these agreements. Mr.
Hastings and Mr. Monroe have not vested in any accrued benefit under these
agreements and will become fully vested under these agreements following five
years of employment with the Bank.
The Bank is also a party to Split
Dollar Agreements with Mr. Bauer, Mr. Clark, and Mr. Davis which provide for the
payment of certain death benefits if the officer dies prior to termination of
employment. The death benefit for Mr. Bauer is 85% of the net death
proceeds (which is the amount remaining after deduction of the cash surrender
value of the policies). Amounts not paid to the officers are retained
by the Bank to fund its salary continuation obligations. The death
benefit for Mr. Clark is 87% of the net death proceeds. The death
benefit for Mr. Davis is 61% of the net death proceeds. While the
officers remain employed by the Bank, these policies may be transferred or sold
by the Bank only if the Bank gives the officers the opportunity to purchase the
policies from the Bank. The purchase price is an amount equal to the
cash surrender value of the policies.
In the case of disability prior to
normal retirement or termination prior to retirement, other than for Cause, as
defined in the Salary Continuation Agreements, the retirement benefit is reduced
to the amount accrued by the Bank at the date of the event. Under
these circumstances, the retirement benefit will begin the later of (i) seven
months following termination of employment, or (ii) the month after the
officer’s attainment of the retirement date noted above.
If Mr. Bauer, Mr. Clark or Mr. Davis
dies while employed by the Bank, the Salary Continuation Agreements require the
Bank to pay the officer’s beneficiary the accrued value of the retirement
benefit plus the death benefit payable under the Split Dollar Agreements in a
lump sum within 90 days of the officer’s death. If Mr. Hastings or
Mr. Monroe dies while employed by the Bank, the Salary Continuation Agreements
require the Bank to pay the officer’s beneficiary the accrued value of the
retirement benefit in a lump sum within 90 days of the officer’s
death. If an officer dies while receiving benefits under a Salary
Continuation Agreement, the Bank is required to pay the present value of any
remaining benefit to the officer’s beneficiary in a lump sum within 90 days of
the officer’s death.
No benefit will be payable under the
agreements if: (i) the officer is terminated for Cause; (ii) the
officer dies as a result of suicide or if the officer provides misstatements in
any policy of insurance purchased by the Bank; (iii) the officer is removed, or
the Bank is in default or is subject to regulatory restrictions, pursuant to
Federal banking law; or (iv) the officer competes with the Bank during the two
year period following termination of employment, other than following a change
of control. The present value of the accumulated benefit under the
Salary Continuation Agreements and the death benefit under the Split Dollar
Agreements qualify as accrued compensation under Treasury regulations and would
be payable while the Bank holds a TARP investment.
The definition of a change of control
under the Salary Continuation Agreements is the same as discussed above under
“Employment Agreements.” If a change in control occurs while the
executive is employed by the Bank (and assuming the Company repaid the TARP
investment in the prior calendar year), the Bank would be required to pay a
retirement benefit under the Salary Continuation Agreement in one lump sum
within ten days following a change of control of the Company. Under
these assumptions, the present value of the full retirement benefit would be
payable to Mr. Bauer. For Mr. Clark, the retirement benefit would be
the sum of the accrued value of the retirement benefit plus one half of the
difference between the accrued value of the benefit and the full
benefit. For Mr. Davis, Mr. Hastings, and Mr. Monroe, the retirement
benefit under these assumptions would be the accrued value of the retirement
benefit. If any officer is receiving benefits under a Salary
Continuation Agreement under these assumptions, the present value of the
remaining unpaid retirement benefit must be paid in a lump sum within ten days
following a change of control.
However, if a change in control occurs
before the TARP investment has been repaid, the named executive officers would
receive only the accrued benefit, which would be paid at the officer’s
retirement date as stated in the Salary Continuation Agreement.
If any change of control payments would
cause the imposition of excise taxes on Mr. Bauer or Mr. Clark under Section
280G and Section 4999 of the Code, the Salary Continuation Agreements require
that the officer must be reimbursed an additional amount necessary to compensate
the officer for any applicable excise tax payments, net of all income, payroll,
and excise taxes. However, until the Company has repaid the TARP
investment, the Company is prohibited from paying the executives any
reimbursements for any applicable excise tax payments.
The Salary Continuation Agreements also
provide for the Bank to reimburse up to $500,000 in legal fees for Mr. Bauer and
Mr. Clark and up to $250,000 in legal fees for Mr. Davis, Mr. Hastings and Mr.
Monroe if the officer is required to seek legal advice to enforce his rights
under the Salary Continuation Agreement following a change of
control. This benefit is in addition to the legal fee reimbursement
provided under the employment agreements with each officer.
Post-Employment
Benefits.
Provided that the named executive officer exercises
any vested stock options held by the officer on or before the final date of
employment, the officer will be able to realize gain on the difference between
the exercise price and the fair market value of the stock
options. See “
Outstanding Equity Awards at Fiscal
Year-End”
above for a listing of each officer’s stock option
holdings. Based upon the fair market value of the Company’s common
stock as of December 31, 2009, no officer would have any gain since the market
value of the common stock was less than the exercise price on any of the options
held by the officer.
As discussed above, while the Company
holds a TARP investment, federal law and Treasury regulations prohibit the Bank
from making certain payments to the named executive officers even though the
payments are required by various contractual agreements with those
officers. For that reason, the following descriptions will summarize
the payments that the Bank would expect to make while the Company holds a TARP
investment and the payments that the Bank would expect to make once the Company
no longer holds a TARP investment.
Potential Payments Upon Termination
Other Than for Cause while the Company holds a TARP
investment.
In the event any named executive officer’s
employment is terminated by the employer for any reason other than Cause, the
officers will remain eligible for the salary continuation benefits and
nonqualified deferred compensation benefits under our various plans in which
they participate. The vested accrued benefits under those plans are
payable upon attainment of the retirement date noted above.
These
benefits qualify as accrued compensation under the Treasury’s TARP regulations
and would be payable while the Company holds a TARP investment. Mr. Bauer, Mr.
Clark, and Mr. Davis are fully vested in those benefits. Neither Mr.
Hastings nor Mr. Monroe is vested in a retirement benefit and neither will be
vested in any retirement benefit until three years following their date of
employment nor fully vested until the completion of five years of
service. Upon termination due to disability, Mr. Hastings and Mr.
Monroe will be vested in the accrued retirement benefit and the Treasury
regulations permit acceleration in the event of disability. As of
December 31, 2009, if Mr. Bauer, Mr. Clark, or Mr. Davis terminated employment
due to disability or for reasons other than death, disability, or termination
for Cause, the estimated annual retirement benefit under the Salary Continuation
Agreements would have been $59,311 for Mr. Bauer, $14,010 for Mr. Clark and
$13,147 for Mr. Davis. As of December 31, 2009, if Mr. Hastings or
Mr. Monroe terminated employment due to disability, the estimated annual
retirement benefit under their Salary Continuation Agreements would have been
$6,606 for Mr. Hastings and $12,917 for Mr. Monroe. The retirement
benefit is forfeited if the officer competes with the Bank during the two year
period following termination of employment, except following a Change of
Control.
Under the TARP rules, only payments
that qualify as accrued compensation or for current services are permitted, so
in the event the employment of Mr. Bauer, Mr. Clark, Mr. Davis, Mr. Monroe or
Mr. Hastings is terminated by the employer for any reason, no further payments
would be due to the officers under their Officer Agreements.
Potential Payments Upon Termination
Other Than for Cause once the Company no longer holds a TARP
investment.
In
the event any named executive officer’s employment is terminated by the employer
for any reason other than Cause, the officers will be entitled to the salary
continuation benefits and nonqualified deferred compensation benefits described
above under “
Potential
Payments Upon Termination Other Than for Cause while the Bank holds a TARP
investment.”
In addition, once the Company has
repaid the TARP investment, in the event either the employment of Mr. Bauer, Mr.
Clark, Mr. Davis or Mr. Hastings is terminated by the employer for any reason
other than Cause, or in the event any officer terminates his employment due to a
Good Reason Termination (defined above under “
Employment Agreements
”), the
employer will be required by the Officer Agreements to pay the officer’s base
salary for the remaining term of the employment agreement and continue all
insurance and medical benefits for the remaining term of the employment
agreement or until the officer is reemployed or dies. Also, any
remaining policy premiums on Mr. Bauer’s long-term care insurance (owned
exclusively by Mr. Bauer) must be paid in full and the life insurance providing
a death benefit of no less than $500,000 must be transferred to Mr.
Bauer. No benefits are owed upon termination for
Cause. Termination for Cause includes termination because of the
Officer's intentional act of fraud, embezzlement, or theft, gross negligence or
gross neglect of his duties, intentional wrongful damage to the business or
property of the employer, breach of fiduciary duties as an officer or director,
material breach of any provision of the Officer Agreement, removal of the
officer from office or permanent prohibition from participating in the Bank’s
affairs by an order issued by a bank regulator, conviction of the officer for or
plea of nolo contendere to a felony or conviction of or plea of nolo contendere
to a misdemeanor involving moral turpitude, or the actual incarceration of the
officer. Assuming the TARP investment had been repaid in 2009 and
assuming that their insurance and medical benefits would continue for the
remaining term of each officer’s employment agreement, as of January 1, 2010,
the estimated cost to the Company to terminate the employment agreements without
Cause, or if each officer terminated his employment due to a Good Reason
Termination, would have been approximately $893,847 for Mr. Bauer, approximately
$622,417 for Mr. Clark, approximately $495,217 for Mr. Davis, and approximately
$527,438 for Mr. Hastings.
Mr. Monroe’s employment agreement
provides that the Bank must pay his base salary for the remaining term of his
employment agreement in the event that his employment is terminated by the
employer for any reason other than Cause, which would include personal
dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving
personal profit, failure to perform stated duties, willful violation of any law,
rule, or regulation (other than traffic violations or similar offenses) or final
cease-and-desist order, or material breach of any provision of his employment
agreement. The estimated cost to the Company to terminate the Monroe
Officer Agreement without Cause as of January 1, 2010, assuming repayment of the
TARP investment in 2009, would have been approximately $250,583.
Potential Payments Upon a Change of
Control while the Company holds a TARP investment.
Upon the
occurrence of a change of control, certain payments must be made to the named
executive officers pursuant to their Salary Continuation
Agreements. Provided those payments are limited to the accrued
benefit described above under “
Potential Payments Upon Termination
Other Than for Cause while the Company holds a TARP investment,”
they
will qualify as accrued compensation and will be payable while the Company holds
a TARP investment. Treasury regulations prohibit any payments under
the Officer Agreements other than for accrued benefits or current services while
the Company holds a TARP investment, so in the event of a change in
control of the Company, no further payments would be due to Mr. Bauer, Mr.
Clark, Mr. Davis, Mr. Monroe or Mr. Hastings under their Officer Agreements even
if the officer’s employment is terminated.
Potential Payments Upon a Change of
Control once the Company no longer holds a TARP
investment.
Upon the occurrence of a change of control once
the Company repays the TARP investment, certain payments must be made to the
named executive officers pursuant to their Salary Continuation Agreements and to
Mr. Bauer and Mr. Clark pursuant to their employment agreements. Upon
the occurrence of certain events following a change of control, Mr. Davis, Mr.
Hastings and Mr. Monroe Employment Agreements are also entitled to certain
payments pursuant to their employment agreements. A "change of
control" is defined in the same manner under both under their Officer Agreements
and their Salary Continuation Agreements and is discussed above under “
Employment
Agreements
.”
Upon a change of control once the TARP
investment has been repaid, the present value of the full retirement benefit
pursuant to his Salary Continuation Agreement is payable to Mr.
Bauer. For Mr. Clark, the retirement benefit pursuant to his Salary
Continuation Agreement once the TARP investment has been repaid is the sum of
the accrued value of the retirement benefit plus one half of the difference
between the accrued value of the benefit and the full benefit and it is payable
upon a change of control. If the change of control payments would
cause the imposition of excise taxes on either officer under Section 280G and
Section 4999 of the Code, the Salary Continuation Agreements require that the
officer must be reimbursed an additional amount necessary to compensate the
officer for any applicable excise tax payments, net of all income, payroll, and
excise taxes. Upon a change of control (regardless of whether the
TARP investment has been repaid), Mr. Davis, Mr. Hastings and Mr. Monroe will be
entitled to the vested accrued value of the retirement benefit pursuant to their
Salary Continuation Agreements.
Pursuant to the Officer Agreements,
once the TARP investment has been repaid, the Company has agreed to pay Mr.
Bauer, Mr. Clark, Mr. Davis and Mr. Hastings a lump sum payment equal to three
times the officer’s base salary during the year in which the change of control
occurs plus the incentive compensation paid in the previous year. For
Mr. Davis and Mr. Hastings, this payment is due only following the occurrence of
certain events, which include a reduction in salary or benefits, a reduction in
responsibility or status, a material breach of the employment agreement, or a
relocation of the Bank’s principal headquarters to a location more than a
certain distance from its then current location.
If this change in control payment is
due and the TARP investment has been repaid, the Company is also required to
continue all insurance and medical benefits under the officer’s employment
agreement for the remaining term of the agreement or until the officer is
reemployed or dies, to fully vest the officer in all benefit plans of the
employer, and to make matching and profit sharing payments under the Company’s
401(k) plan for that plan year.
Therefore, assuming the
TARP investment had been repaid in 2009, the estimated cost to the Company in
the event of a change of control as of January 1, 2010 pursuant to the
employment agreements and Salary Continuation Agreements would have been
approximately $4,996,768 on behalf of Mr. Bauer, approximately $2,724,182 on
behalf of Mr. Clark, and approximately $806,327 on behalf of Mr. Davis (assuming
one of the stated events occurred following the change in
control). Mr. Hastings will not be vested in the change of control
benefit pursuant to his Salary Continuation Agreement until January 28, 2011,
three years following his initial date of employment. Assuming one of
the stated events occurred following a change in control on January 1, 2010, Mr.
Hastings would have been entitled to approximately $654,750 pursuant to his
employment agreement (assuming the TARP investment had been repaid in
2009). In addition, if any of these officers is required to seek
legal advice to enforce his rights under the agreements following a change of
control, the Company is required to reimburse up to $500,000 of their legal fees
for Mr. Bauer and Mr. Clark under both the Salary Continuation and Officer
Agreements (total of $1.0 million each for Mr. Bauer and Mr. Clark) and up to
$200,000 for Mr. Davis and Mr. Hastings under their employment agreements and up
to $250,000 under their Salary Continuation Agreements (total of $450,000 each
for Mr. Davis and Mr. Hastings).
Mr. Monroe will not be vested in the
change of control benefit pursuant to his Salary Continuation Agreement until
April 15, 2010, three years following his initial date of
employment. If Mr. Monroe is required to seek legal advice to enforce
his rights under the Salary Continuation Agreement, to the extent he is vested
in any change of control benefit at such time, the Company is required to
reimburse up to $200,000 of Mr. Monroe’s legal fees. Once the TARP
investment has been repaid, the Monroe Officer Agreement provides that the Bank
must pay him an amount equal to twice his “base amount” as defined in Section
280G of the Code upon the occurrence of certain events constituting termination
of employment within twenty-four months following a change in
control. Mr. Monroe has the right to terminate his employment if he
determines, in his sole discretion, that he has not been assigned duties,
responsibilities and status commensurate with his duties prior to the change of
control, his salary has been reduced below the amount he would have received
under the Officer Agreement, his benefits have been reduced or eliminated, or he
has been transferred to a location which is a more than 35 miles from his then
current principal work location. Assuming the TARP investment had
been repaid in 2009, as of January 1, 2010, the estimated cost to the Company to
terminate the Monroe Officer Agreement following a change of control would have
been approximately $388,000.
PROPOSAL
2: APPROVAL OF EXECUTIVE COMPENSATION
As
required by Section 111(e)(1) of the Emergency Economic Stabilization Act of
2008, as amended by the American Recovery and Reinvestment Act of 2009, the
Company is providing its shareholders with an opportunity to cast an advisory
vote on the compensation of its executive officers at the Annual
Meeting. This “say-on-pay” proposal permits shareholders to approve
the compensation paid or provided to the Company’s executive officers (as
identified elsewhere in this Proxy Statement) and the Company’s compensation
policies and practices. A vote “FOR” Proposal 2 will approve the
compensation paid or provided to executive officers of the Company and the Bank
and the Company’s and Bank’s executive compensation policies and practices, as
described in the tabular and narrative compensation disclosures contained in
this Proxy Statement.
The vote
by the Company’s shareholders on this Proposal 2 is a non-binding, advisory
vote. This means that the results of the vote will not be binding on
the Company’s Board of Directors or its Compensation Committee, will not
overrule or affect any previous action or decision by the Board or the
Compensation Committee or any compensation previously paid or awarded, and will
not create or imply any additional duty on the part of the Board or the
Compensation Committee.
The Board
of Directors and its Compensation Committee believe that the Company’s
compensation policies and practices appropriately reward performance without
inviting unnecessary risk-taking by its executive officers and are strongly
aligned with the long-term interests of the Company’s
shareholders. Further, the Board of Directors and its Compensation
Committee believe the compensation paid or provided to the Company’s executive
officers is and has been appropriate for each of the executive officers and for
the industry in which the Company operates.
All
executive compensation is annually reviewed and approved by the Compensation
Committee, which is composed only of independent directors. The
Compensation Committee reviews the range of salaries earned by executive
officers with financial institutions of similar asset size in North Carolina
(obtained from their proxy statements) and an analysis of other similarly
situated public banking companies nationally, which is obtained from third party
national surveys of compensation prepared by SNL Securities and America’s
Community Bankers. The 2009 base salaries of both the Chief Executive
Officer and the President of the Company were below the mid-point of the salary
range for those executive officers at peer institutions even before the officers
voluntarily reduced their compensation. No executive officer received
any incentive compensation for performance during 2009.
The Board of Directors recommends that
you approve the non-binding resolution on the Company’s executive officers
compensation by voting “FOR” Proposal 2. This proposal will be
approved if the number of votes cast in favor of Proposal 2 exceeds the number
of votes cast against it.
ITEM
3: STOCKHOLDER PROPOSAL REGARDING
ELIMINATION
OF STAGGERED DIRECTOR TERMS
The
Company received the shareholder proposal set forth below. The Board
disclaims any responsibility for the content, accuracy or veracity of the
proposal and the statement in support of the proposal, which are presented in
the form received from the shareholder.
For the reasons set forth after this
proposal, the Board recommends a vote “AGAINST” Item 3.
If
requested, the Company will promptly provide the name, address and the number of
shares held by the shareholder making the proposal below to any shareholder who
contacts the Company, in writing to Elizabeth H. Prince, Corporate Secretary, or
by telephone at (336) 768-8500.
Resolved:
That the
shareholders of SOUTHERN COMMUNITY FINANCIAL CORPORATION request its Board of
Directors to take the steps necessary to eliminate classification of terms of
the Board of Directors to require that
all
Directors stand
for election annually. The Board classification shall be completed in
a manner that does not affect the unexpired terms of the previously-elected
Directors.
Supporting
Statement
The
proponent believes that lessened accountability could be the underlying cause of
elimination of the dividend.
The
current practice of electing only one-third of the directors for three-year
terms is not in the best interest of the corporation or its
shareholders. Eliminating this staggered system increases
accountability and gives shareholders the opportunity to express their views on
the performance of each director annually. The proponent believes the
election of directors is the strongest way that shareholders influence the
direction of any corporation and our corporation should be no
exception.
As a
professional investor, the proponent has introduced the proposal at several
corporations which have adopted it. In others, opposed by the board
or management, it has received votes in excess of 70% and is likely to be
reconsidered favorably.
The
proponent believes that increased accountability must be given our shareholder
whose capital has been entrusted in the form of share investments especially
during these times of great economic challenge.
Arthur
Levitt, former Chairman of The Securities and Exchange Commission said, “In my
view, it’s best for the investor if the entire board is elected once a
year. Without annual election of each director, shareholders have far
less control over who represents them.”
While
management may argue that directors need and deserve continuity, management
should become aware that continuity and tenure may be best assured when their
performance as directors is exemplary and is deemed beneficial to the best
interests of the corporation and its shareholders.
The
proponent regards as unfounded the concern expressed by some that annual
election of all directors could leave companies without experienced directors in
the event that all incumbents are voted out by shareholders.
In the
unlikely event that shareholders do vote to replace all directors, such a
decision would express dissatisfaction with the incumbent directors and reflect
the need for change.
If you
agree that shareholders may benefit from greater accountability afforded by
annual election of
all
directors, please
vote “FOR” this proposal.
Board
of Directors Position
The Board
considered this proposal and does not believe its adoption would be in the best
interests of the Company or its shareholders. The general purpose of
staggered terms of office for board members is to promote stability and
continuity in the leadership of the Board. Also, this Company was
formed specifically to serve the local needs of the communities in which we
operate. From the date of incorporation of the Bank, our corporate
charter has given the Board the right to consider a number of economic and
social issues and other stakeholders of the Company in determining what is in
the best interests of the corporation. Staggered terms of office
provide the Board with a greater opportunity to protect the interests of all of
the Company’s stakeholders in the event of an unsolicited takeover
offer. The Board continues to believe these purposes are important
and enhance the long-term value of the Company.
Directors
afforded the opportunity to serve three-year instead of one-year terms are able
to take a long-term view in managing the affairs of the Company. One
lesson from the run-up to our recent economic crisis is that pressures to
produce short-term gains caused excessive risk-taking and short-sighted business
decisions. By subjecting Directors to annual elections, the
proponent’s resolution would enhance pressure to put short-term gains ahead of
long-term value creation.
Staggered board terms impede an
unsolicited hostile takeover offer by prohibiting a hostile bidder from taking
control of a company through the election of its nominees for director at only
one annual meeting. North Carolina corporate law gives directors the
fiduciary duty to consider shareholder return when evaluating a takeover
bid. The founding documents of this Company also give our Board to
the right to consider the following when presented with a hostile
bidder:
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·
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The
social and economic effects on the Company and its employees, depositors,
customers, and creditors, and the communities in which the Company
operates;
|
|
·
|
The
business and financial condition and earnings prospects of the acquiring
person;
|
|
·
|
The
possible effects of the acquiring person’s business and financial
conditions upon the Company and the communities in which the Company
operates; and
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|
·
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The
competence, experience, and integrity of the acquiring
person.
|
With
staggered board terms, a hostile bidder must negotiate with the
Board. Without staggered board terms, the hostile bidder could avoid
any of these considerations by electing a majority of the board at one annual
meeting. Creating an environment that brings a hostile bidder to the
negotiating table benefits all stakeholders of the Company.
Finally,
the shareholder proponent suggests that Directors with staggered terms are less
accountable than those elected annually and that this fact “could be” the
“underlying cause” for the Board to eliminate the cash
dividend. Neither suggestion is true. Board members always
remain accountable to the shareholders through the election
process. Further, the Board’s choice to eliminate the dividend had
nothing to do with the length of each director’s term. The Board made
a difficult decision that it was in the best, long-term interests of the
Company. In these uncertain economic times, the Board determined that
conservation of the Company’s capital was primary. Given the losses
the Company has had to recognize, and the potential for future losses if the
economy does not improve, the Board decided that all capital should be retained
in the Company to ensure that the Company remains well-capitalized throughout
this economic downturn. The Company took taxpayer money when it
elected to participate in TARP by selling preferred stock and a warrant to
purchase common stock to the Treasury. The Board does not believe it
is appropriate to pay cash dividends to shareholders while the Company continues
to incur operating losses and hold Treasury TARP
investments. Continuing to pay cash dividends under the current
circumstances is a short-sighted business decision that is not in the best
interests of the future of this Company.
For the foregoing reasons, the Board
of Directors recommends that you vote AGAINST Proposal 3. This
proposal will be approved if the number of votes cast in favor of Proposal 3
exceeds the number of votes cast against it
.
INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The
Company’s independent certified public accountant for the year ended December
31, 2009 was Dixon Hughes PLLC (“Dixon Hughes”), which is expected to be
retained by the Audit Committee as the Company’s independent certified public
accountant for the year ended December 31, 2010. Representatives of
Dixon Hughes will be present at the Annual Meeting with the opportunity to make
a statement if they desire, and will be available to respond to appropriate
questions.
AUDIT
FEES
The
following table sets forth the aggregate fees billed or expected to be billed to
the Company by Dixon Hughes for professional services rendered for the years
ended December 31, 2009 and 2008.
|
|
For
the Years Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Audit
fees (1)
|
|
$
|
254,000
|
|
|
$
|
244,800
|
|
Audit-related
fees (2)
|
|
|
11,000
|
|
|
|
10,000
|
|
Tax
fees
|
|
|
11,800
|
|
|
|
21,550
|
|
All
other fees
|
|
|
18,675
|
|
|
|
24,570
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
295,475
|
|
|
$
|
300,920
|
|
|
(1)
|
Includes
costs incurred for the audit of the Company’s annual financial statements,
review of the Company’s interim financial statements, issuance of
consents, the audit of internal controls over financial reporting and
FDICIA attest services.
|
|
(2)
|
Includes
costs incurred in the audit of the employee 401(k)
plan.
|
In
accordance with its Audit Committee Charter, the Company’s Audit Committee must
approve in advance any audit and permissible non-audit services provided by the
Company’s independent auditors and the fees charged. The Audit
Committee Charter also permits the Audit Committee to delegate to one or more
designated members of the Committee the authority to grant pre-approvals of
permissible non-audit services. The Audit Committee has delegated
this authority to its Chair and Vice-Chair.
ANNUAL
REPORT
In
accordance with the regulations of the Securities and Exchange Commission
(“SEC”), the Company's Annual Report on Form 10-K for the year ended December
31, 2009, including the financial statements and schedules,
accompanies this Proxy
Statement. No part of the 2009 Annual Report shall be regarded as
proxy-soliciting materials or as a communication by means of which any
solicitation is being or is to be made.
The
Company will furnish any exhibit to the Form 10-K upon payment of the cost of
copying the exhibit, upon written request to:
James C.
Monroe, Jr., Treasurer
Southern
Community Financial Corporation
4605
Country Club Road
Winston-Salem,
North Carolina 27104
DATE
FOR RECEIPT OF SHAREHOLDER PROPOSALS
How to submit proposals for possible
inclusion in the 2011 proxy materials:
For shareholder
proposals to be considered for inclusion in the proxy materials for the
Company's 2011 Annual Meeting, any such proposals must be received at the
Company's principal office (currently 4605 Country Club Road, Winston-Salem,
North Carolina 27104) not later than December 21, 2010. In order for
a proposal to be included in the Company’s proxy material for an annual meeting,
the person submitting the proposal must own, beneficially or of record, the
lesser of 1% or $2,000 in market value of the Shares entitled to be voted on
that proposal at that annual meeting and must have held those shares for a
period of at least one year and continue to hold them through the date of that
annual meeting. Also, the proposal must comply with certain other
eligibility and procedural requirements established under the Securities and
Exchange Act or related SEC regulations. The Board will review any
shareholder proposal received by that date to determine whether it meets these
criteria. Please submit any proposal by certified mail, return
receipt requested.
Shareholder proposals after December
21, 2010:
Proposals submitted after December 21, 2010 will not
be included in the proxy materials for the 2011 Annual
Meeting. However, if a shareholder wishes to have a proposal
considered at the 2011 Annual Meeting as other business, any such proposals
should be delivered to the Company’s principal office no later than March 5,
2011. Management proxies shall have discretionary authority to vote
on any proposals received after March 5, 2011.
Nominations of directors:
The
nomination of any person for election to the Board may be made by a shareholder
entitled to vote on such election if written notice of the nomination of such
person shall have been delivered to the Company’s Secretary at the principal
office of the Company not less than seven days nor more than 60 days prior to
the date of the meeting at which the directors are elected. Each such
notice shall set forth: (a) the name and address of the shareholder
who intends to make the nomination, the beneficial owner, if any, on whose
behalf the nomination is made, and of the person or persons to be nominated; (b)
the class and number of shares of stock of the Company which are owned
beneficially and of record by such shareholder and such beneficial owner, and a
representation that the shareholder intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the notice; (c) a
description of all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person or persons)
pursuant to which the nomination or nominations are to be made by the
shareholder; (d) all other information regarding each nominee proposed by such
shareholder as would be required to be included in the proxy statement for the
meeting if the nominee had been nominated by the Board; and (e) the written
consent of each nominee to serve as director of the Company if so elected.
Recommendations and
nominations not made in accordance herewith may, in his discretion, be
disregarded by the Chair of the shareholders’ meeting, and upon his instruction,
the voting inspectors may disregard all votes cast for each such
nominee.
OTHER
MATTERS
Management
knows of no other matters that will be brought before this meeting, but if any
such matter is properly presented at the meeting or any adjournment thereof, the
persons named in the enclosed form of appointment of proxy will vote in
accordance with their best judgment.
By
order of the Board of Directors.
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F.
Scott Bauer
|
Chairman
of the Board and Chief Executive
Officer
|