SCHEDULE 14A
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
(Amendment No. )
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Check the appropriate box:
[ ] Preliminary Proxy Statement
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14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
BANCORP RHODE ISLAND, INC.
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(Name of Registrant as Specified in Its Charter)
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BANCORPRI [LOGO]
BANCORP RHODE ISLAND, INC.
April 14, 2006
Dear Shareholder:
You are cordially invited to attend the 2006 Annual Meeting of
Shareholders of Bancorp Rhode Island, Inc. to be held at the Hotel
Providence, 311 Westminster Street, Providence, Rhode Island 02903, on
Wednesday, May 17, 2006 at 10:00 a.m.
The official Notice of Annual Meeting, Proxy Statement and Proxy are
included with this letter. The matters listed in the Notice of Annual
Meeting are more fully described in the Proxy Statement. I encourage you to
take the time to review the Proxy Statement.
It is important that your shares be represented and voted at the
Annual Meeting. Accordingly, regardless of whether or not you plan to
attend the meeting, please sign and date the enclosed proxy form and return
it in the enclosed postage paid envelope, so that your shares may be
represented at the meeting. If you decide to attend the meeting you may
revoke your proxy and vote your shares yourself.
Thank you for your consideration. I look forward to seeing you.
Very truly yours,
/s/ Malcolm G. Chace
Malcolm G. Chace
Chairman
BANCORP RHODE ISLAND, INC.
One Turks Head Place
Providence, Rhode Island 02903
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
To Be Held Wednesday, May 17, 2006
To the Shareholders of Bancorp Rhode Island, Inc.:
The Annual Meeting of Shareholders of Bancorp Rhode Island, Inc. (the
"Meeting"), a Rhode Island corporation (the "Company"), will be held at the
Hotel Providence, 311 Westminster Street, Providence, Rhode Island 02903 on
Wednesday, May 17, 2006, at 10:00 a.m. local time, for the following
purposes:
1. To elect five Class I Directors to serve until 2009;
2. To consider and act upon a proposal to amend the Company's
Amended and Restated Non-Employee Director Stock Plan to
increase the number of shares of common stock reserved for
issuance thereunder by 25,000 shares;
3. To consider and act upon a proposal to ratify the appointment
of KPMG LLP as independent auditors for the Company; and
4. To transact such other business as may properly come before the
Meeting or any adjournments thereof.
The Board of Directors of the Company has fixed the close of business
on March 31, 2006 as the record date for the determination of Shareholders
entitled to receive notice of and to vote at the Meeting or any adjournment
thereof. The stock transfer books will not be closed.
All Shareholders are cordially invited and urged to attend the
Meeting. PLEASE SIGN, DATE AND RETURN THE PROXY EVEN THOUGH YOU PLAN TO
ATTEND THE MEETING. Upon your arrival your proxy will be returned to you if
you desire to revoke it or vote in person. Your attendance in person is
encouraged, but should anything prevent your attendance in person, your
presence by proxy will still allow your shares to be voted.
By Order of the Board of Directors
/s/ Margaret D. Farrell
Margaret D. Farrell, Secretary
April 14, 2006
BANCORP RHODE ISLAND, INC.
One Turks Head Place
Providence, Rhode Island 02903
PROXY STATEMENT
This Proxy Statement is being furnished to the holders of Common
Stock (the "Shareholders") of Bancorp Rhode Island, Inc., a Rhode Island
corporation ("Bancorp"), in connection with the solicitation of proxies by
the Board of Directors of Bancorp for the Annual Meeting of Shareholders of
Bancorp (the "Meeting") to be held at the Hotel Providence, 311 Westminster
Street, Providence, Rhode Island on Wednesday, May 17, 2006 at 10:00 a.m.
local time, and at any adjournments and postponements thereof. This Proxy
Statement and the related proxy form are being mailed on or about April 14,
2006 to holders of record of Bancorp's Common Stock on March 31, 2006. As
used herein, the "Company" means both Bancorp and Bank Rhode Island, a
Rhode Island financial institution (the "Bank"), the only significant
operating subsidiary of Bancorp.
ACTION TO BE TAKEN UNDER THE PROXY
A proxy for use at the Meeting is enclosed. Subject to such
revocation or suspension, the proxy holders will vote all shares
represented by a properly executed proxy received in time for the Meeting
in accordance with the instructions on the proxy. If no instructions are
specified with regard to the matters to be acted upon, the proxy holders
will vote FOR approval of the proposals set forth in the Notice of Meeting.
Any proxy may be revoked by any Shareholder who attends the Meeting and
gives oral notice of his or her intention to vote in person, without
compliance with any other formalities. In addition, any proxy given
pursuant to this solicitation may be revoked prior to the Meeting by
delivering an instrument revoking it or a duly executed proxy bearing a
later date to the Secretary of Bancorp. The Secretary of Bancorp is
Margaret D. Farrell, and any revocation should be filed with her c/o
Hinckley, Allen & Snyder LLP, 1500 Fleet Center, Providence, Rhode Island
02903.
A proxy may confer discretionary authority to vote with respect to
any matter to be presented at the Meeting which management does not know of
a reasonable time before the date hereof. Management does not know of any
such matter which may come before the Meeting and which would be required
to be set forth in this Proxy Statement or the related proxy form. If any
other matter is properly presented to the Meeting for action, it is
intended that the persons named in the enclosed form of proxy and acting
thereunder will vote in accordance with their best judgment on such matter.
PERSONS MAKING THE SOLICITATION
The Board of Directors of Bancorp is soliciting these proxies.
Bancorp will bear the expense of preparing, assembling, printing and
mailing this Proxy Statement and the material used in the solicitation of
proxies for the Meeting. Bancorp contemplates that proxies will be
solicited principally through the use of the mail, but officers, directors
and employees of the Company may solicit proxies personally or by
telephone, without receiving special compensation therefor. Although there
is no formal agreement to do so, Bancorp may reimburse banks, brokerage
houses and other custodians, nominees and fiduciaries for their reasonable
expenses in forwarding these proxy materials to their principals. In
addition, Bancorp may utilize the services of individuals or companies not
regularly employed by the Company in connection with the solicitation of
proxies, if management of Bancorp determines that this is advisable.
VOTING SECURITIES
Holders of record of Bancorp's common stock, par value $.01 per share
(the "Common Stock"), at the close of business on March 31, 2006, the
record date for the Meeting, are entitled to notice of and to vote at the
Meeting. As of the close of business on March 31, 2006, Bancorp had
outstanding 4,757,036 shares of Common Stock entitled to vote. Holders of
the Common Stock are entitled to one vote for each share held on the
matters properly presented at the Meeting.
The holders of a majority of the shares entitled to vote, present in
person or represented by proxy, will constitute a quorum for the
transaction of business at the Meeting. A plurality of votes cast is
required to elect the directors. All other proposals to be voted upon at
the Meeting will require the affirmative vote of holders of a majority of
the Common Stock present in person or represented by proxy at the Meeting.
Abstentions are treated as present and entitled to vote and therefore have
the effect of a vote against a matter. A broker non-vote on a matter is
considered not entitled to vote on the matter and thus is not counted in
determining whether a matter requiring approval of a majority of the shares
present and entitled to vote has been approved.
PROPOSAL NO. 1
ELECTION OF DIRECTORS
Bancorp's Articles of Incorporation provide that the Board of
Directors shall be divided into three classes, designated as Class I, Class
II and Class III, and as nearly equal as possible. The Board of Directors
currently consists of 15 persons, of whom five are designated as Class I
Directors, five as Class II Directors and five as Class III Directors.
Directors serve staggered three year terms and until their successors are
duly elected and qualified or until the director's earlier resignation or
removal.
At the Meeting, five Class I Directors are to be elected to serve
until the 2009 annual meeting and until their successors are duly elected
and qualified. The Directors of Bancorp also serve as directors of the
Bank. All nominees are currently directors of both Bancorp and the Bank.
The Board of Directors has reviewed the relationship that each director has
with the Company and with other parties, and affirmatively determined that
all directors, other than Ms. Sherman, are independent as defined under the
Nasdaq listing standards.
Unless authority to do so has been withheld or limited in a proxy, it
is the intention of the persons named as proxies to vote the shares to
which the proxy relates FOR the election of the five nominees named below
to the Board of Directors as Class I Directors. If any nominee named below
is not available for election to the Board of Directors at the time of the
Meeting, it is the intention of the persons named as proxies to act to fill
that office by voting the shares to which a proxy relates FOR the election
of such person or persons as may be designated by the Board of Directors
or, in the absence of such designation, in such other manner as the proxies
may in their discretion determine, unless authority to do so has been
withheld or limited in the proxy. The Board of Directors anticipates that
each of the nominees will be available to serve if elected.
2
The Board of Directors recommends a vote "FOR" the election of the nominees
for election as directors.
The following table sets forth certain information for both the five
nominees for election as Class I Directors (the "Nominees"), and for those
Class II and Class III Directors whose terms expire at the annual meetings
of Bancorp's Shareholders in 2007 and 2008, respectively.
NOMINEES FOR CLASS I DIRECTOR (Term to Expire 2009)
Year First
Business Experience Became
Name Age During Past 5 Years Director
---- --- ------------------- ----------
Karen Adams 50 Television news anchor for WPRI-TV (Sunrise 2002
Television Corp.) since 1989.
Meredith A. Curren 46 Chief Executive Officer and Principal of Pease 2002
& Curren, Inc. (precious metals) since 1990.
Also, a Trustee of Ocean State Tax Exempt Fund.
Bogdan Nowak 42 President of Rhode Island Novelty, Inc. since 2002
1986 and President of Chemical Light
Technologies, Inc. since 1995.
Cheryl W. Snead 47 President and Chief Executive Officer of 1996
Banneker Industries, Inc. (manufacturing,
assembly and packaging and logistics management)
since 1991.
John A. Yena 65 Vice Chairman of the Board of each of Bancorp 1996
and the Bank since July 2003. Chairman of the
Board of Johnson & Wales University since June
2004. Previously Chief Executive Officer of
Johnson & Wales University from July 1989 to
June 2004.
CLASS II DIRECTORS CONTINUING IN OFFICE (Term to Expire 2007)
Year First
Business Experience Became
Name Age During Past 5 Years Director
---- --- ------------------- ----------
John R. Berger 62 Business consultant since 1994. Prior thereto, 1997
Executive Vice President and Director of
Mergers and Acquisitions (1993-94) and
Executive Vice President and Chief Investment
Officer (1985-93) for Shawmut National
Corporation.
Karl F. Ericson 72 Business consultant and certified public 1996
accountant. From 1970 through 1990, a partner
of KPMG LLP.
Margaret D. Farrell 56 Partner of Hinckley, Allen & Snyder LLP (law 1996
firm) since 1981.
Mark R. Feinstein 50 President of Northeast Management Inc. (video 1996
store franchisee) since 1991.
Pablo Rodriguez, M.D. 51 President of Women's Care, Inc. (medical 2003
services) since 1987.
3
CLASS III DIRECTORS CONTINUING IN OFFICE (Term to Expire 2008)
Year First
Business Experience Became
Name Age During Past 5 Years Director
---- --- ------------------- ----------
Anthony F. Andrade 58 President of A&H Composition and Printing, 1996
Inc. and former President of Universal Press
Graphics, Inc. until his retirement in April
1997.
Malcolm G. Chace 71 Chairman of the Board of each of Bancorp and 1996
the Bank since their formation. Chairman of
Mossburg Industries, Inc. (plastics manufacturer
and packaging) and of Southeastern New England
Shipbuilding Corporation (SENESCO Marine)
(manufacturer of double-hulled barges). Also, a
director of Berkshire Hathaway, Inc.
Ernest J. Chornyei, Jr. 63 Business consultant since February 2000. 1996
Prior thereto, Chairman of the Board of Bradford
Dyeing Association, Inc. (textiles) in Westerly,
Rhode Island.
Edward J. Mack II 47 President and owner of Tri-Mack Plastics 2002
Manufacturing Company (engineering, design and
manufacture of custom high performance plastic
parts) since 1990.
Merrill W. Sherman 57 President and Chief Executive Officer of each 1996
of Bancorp and the Bank since their formation.
Also, a director of the Providence Journal Co.,
a subsidiary of Belo Corp.
* The dates of directorship before 2000 reflect the years in which
certain of the directors were elected directors of the Bank, which
was formed in 1996 and became a wholly-owned subsidiary of Bancorp on
September 1, 2000.
Meetings and Committees
General. The Bancorp Board of Directors met six times and the Bank's
Board of Directors met twelve times during 2005. All Directors attended at
least 75% of the Bancorp Board meetings and meetings of Bancorp committees
on which such director serves. The Board of Directors has adopted a policy
that requires members of the Board of Directors to make every effort to
attend each annual Shareholders meeting. All members of the Board of
Directors attended the 2005 Annual Shareholders Meeting.
The Bancorp Board of Directors currently has five standing
committees: an Executive Committee, an Audit Committee, a Compensation
Committee, the Board Governance and Nominating Committee and a Technology
and Operations Committee, which was formed in February 2006. The members
and chairs of each of those committees are appointed each year. Each member
of the Bancorp Executive, Audit and Compensation Committees is also a
member of the corresponding committee of the Bank. No member of the Audit,
Compensation or Board Governance and Nominating Committee is an employee of
Bancorp or its subsidiaries and all are independent as defined under the
applicable Nasdaq listing standards and Securities and Exchange Commission
("SEC") rules. In addition to the Committees noted above, the Bank has a
Directors' Loan Committee.
Each of the Audit, Compensation and Board Governance and Nominating
Committees has a written charter approved by the Board of Directors. A copy
of each charter is available on the Company's website at www.bankri.com
under "Investor Relations - Corporate Governance".
Executive Committee. The Executive Committee is authorized to
exercise all the powers of the Board in the management of the business and
affairs of the Company while the Board is not in session, subject to
certain limitations set forth in Bancorp's Articles of Incorporation and
the Bank's Agreement to Form. The current members of the Executive
Committee are Malcolm G. Chace (Chairman), Karl F. Ericson, Margaret D.
Farrell, Merrill W. Sherman and John A. Yena. The Executive Committee held
one meeting in fiscal year 2005.
4
Audit Committee. The Audit Committee assists the Board of Directors
in overseeing the integrity of the Company's financial reports; the
Company's compliance with legal and regulatory requirements; the
qualifications and independence of the Company's independent accountants;
and the performance of the Company's internal audit function and
independent accountants. The Audit Committee is responsible for appointing,
setting the compensation and overseeing the Company's independent
accountants. The Audit Committee meets each quarter with the Company's
independent accountants and management, to review the Company's interim
financial results before the publication of quarterly earnings press
releases. The Audit Committee also meets separately each quarter with the
independent accountants and management. The Audit Committee reviews the
adequacy of the Company's internal controls and summaries of regulatory
examinations to assess the Company's program for complying with laws and
regulations. The Audit Committee also oversees and approves the selection
and performance of the Chief Auditor and reviews and approves the Company's
internal audit plan. The current members of the Audit Committee are Karl F.
Ericson (Chairman), Ernest J. Chornyei, Jr., Meredith A. Curren and Cheryl
W. Snead. The Board of Directors has determined that all four members of
the Audit Committee satisfy the financial literacy requirements of the
Nasdaq listing standards and are independent as defined under the Nasdaq
listing requirements and applicable SEC rules. Additionally, the Board of
Directors has determined that Karl F. Ericson qualifies as an "audit
committee financial expert" as defined by the SEC rules. The Audit
Committee held six meetings in fiscal year 2005.
Compensation Committee. The Compensation Committee assists the Board
of Directors in discharging the Board's responsibilities relating to
director and executive compensation. The Compensation Committee's
responsibilities include establishing and reviewing the Company's executive
and director compensation philosophy, strategies, plans and policies,
making recommendations to the Board of Directors with respect to the design
of the Company's incentive compensation plans and equity based plans and
overseeing generally the administration of such plans, evaluating the
performance and determining the compensation of the Chief Executive Officer
("CEO") and advising and assisting the CEO in formulating and implementing
programs to facilitate the selection and development of other key managers.
The Compensation Committee also reviews and approves the compensation of
other executive officers of the Company and discharges duties assigned to
it under various benefit and compensation plans. The Compensation Committee
is composed of five members, each of whom is independent as defined under
applicable Nasdaq listing requirements. The current members of the
Compensation Committee are John R. Berger (Chairman), Anthony F. Andrade,
Meredith A. Curren, Edward J. Mack, II and Pablo Rodriguez, M.D. The
Compensation Committee held five meetings in fiscal year 2005.
Board Governance and Nominating Committee. The Board Governance and
Nominating Committee is responsible for: identifying individuals qualified
to be members of the Board of Directors and recommending such individuals
to be nominated by the Board of Directors for election to the Board of
Directors by the Shareholders; developing and recommending to the Board of
Directors a set of corporate governance principles applicable to the
Company that are consistent with sound corporate governance practices and
in compliance with applicable legal, regulatory or other requirements; and
monitoring and reviewing any other corporate governance matters which the
Board of Directors may refer to the committee from time to time. The Board
Governance and Nominating Committee is composed of four members, each of
whom is independent as defined under applicable Nasdaq listing
requirements. The current members of the Board Governance and Nominating
Committee are Malcolm G. Chace (Chairman), Margaret D. Farrell, Bogdan
Nowak and John A. Yena. The Board Governance and Nominating Committee held
two meetings in fiscal year 2005.
Technology and Operations Committee. The Technology and Operations
Committee is responsible for assisting the Board of Directors in fulfilling
its oversight responsibilities in respect of the overall role and use of
technology throughout the Company and ensuring that the Company's
technology programs and operational processes effectively support the
Company's business objectives and strategies. The Technology and Operations
Committee is comprised of three independent outside directors and the Chief
Operating Officer of the Bank. The current members of the Technology and
Operations Committee are Edward J. Mack, II (Chairman), Ernest J. Chornyei,
John R. Berger and Jeffrey W. Angus. The Technology and Operations
Committee was formed in early 2006.
Nomination of Directors
The Board Governance and Nominating Committee considers suggestions from
many sources, including Shareholders, regarding possible candidates for
director. The Board of Directors has adopted a policy that requires
5
consideration by the Board Governance and Nominating Committee of
nominations submitted by a Shareholder or group of Shareholders that
beneficially own more than 5% of Bancorp's Common Stock for at least one
year as of the date the recommendation was made. The Board Governance and
Nominating Committee does not set specific criteria for directors but
believes the Company is well served when its directors bring to the Board
of Directors a variety of experience and backgrounds, evidence of
leadership in their particular fields, demonstrate the ability to exercise
sound business judgment and independence of thought and have substantial
experience in business and outside the business community in, for example,
the academic or public communities. All candidates must possess integrity
and a commitment to ethical behavior. The Company also strives to have all
directors other than the CEO be independent within the meaning of
applicable Nasdaq rules. The Board Governance and Nominating Committee must
also ensure that members of the Board of Directors as a group maintain the
requisite qualifications under the Nasdaq listing standards for populating
the Audit, Compensation and Board Governance and Nominating Committees. The
Board Governance and Nominating Committee considers Shareholder nominees
for director in the same manner as nominees for director from other
sources.
Shareholders may send recommendations for director nominees to the
Board Governance and Nominating Committee at the Company's offices at One
Turks Head Place, Providence, Rhode Island 02903. Submissions should
include information regarding a candidate's background, qualifications,
experience and willingness to serve as a director. In addition, Section
3.03 of Bancorp's By-Laws set forth specific procedures that, if followed,
enable any Shareholder entitled to vote in the election of directors to
make nominations directly at an annual meeting of Shareholders. These
procedures include a requirement for written notice to the Company at least
60 days prior to the scheduled annual meeting and must contain the name and
certain information concerning the nominee and the Shareholders who support
the nominee's election. For the Bancorp annual meeting to be held in 2007,
the notice deadline under the By-Laws is March 17, 2007. A copy of this By-
Law provision may be obtained by writing to Bancorp Rhode Island, Inc.,
Attn: Investor Relations Department, One Turks Head Place, Providence,
Rhode Island 02903.
Communications with the Board of Directors
The Company's Board of Directors provides a process for Shareholders
to communicate directly with the members of the Board of Directors or the
individual chairman of standing committees. Any Shareholder who desires to
contact one or more of the Company's non-management directors may send a
letter to those individuals at the following address: c/o Bancorp Rhode
Island, Inc., One Turks Head Place, Providence, Rhode Island 02903.
Communications are distributed to any individual director or directors as
appropriate, depending on the facts and circumstances outlined in the
communication. In that regard, the Board of Directors has requested that
certain items that are unrelated to the duties and responsibilities of the
Board should be excluded, such as:
* Spam
* Junk mail and mass mailings
* Product inquiries
* New product suggestions
* Resumes and other forms of job inquiries
* Surveys
* Business solicitations or advertisements
In addition, material that the Company believes poses a security risk will
be excluded, with the provisions that any communication that is filtered
out must be made available to any outside director upon request.
Compensation of Directors
Directors of the Company (other than Ms. Sherman) receive a combined
annual retainer of $10,000 - $7,000 for service as a Bancorp director and
$3,000 for service as a Bank director. Mr. Chace, as Chairman of the Board
and Executive Committee receives an additional $4,000 annual retainer.
Other Committee Chairmen receive the following retainers: Audit ($3,000);
Compensation and Technology ($2,500); and all other Committees (other than
the Executive Committee) ($2,000). Directors of the Company receive $200
for each Bancorp Board meeting attended, as well as $200 for each Bancorp
Executive Committee and Compensation
6
Committee meeting attended and $600 for each Bancorp Audit Committee, Board
Governance and Nominating Committee and Technology Committee meeting
attended. In addition, directors receive $600 for each meeting of the
Bank's Board of Directors, Executive Committee, Audit Committee or
Compensation Committee attended, and $700 for each Directors' Loan
Committee meeting attended.
Under the Amended and Restated Non-Employee Director Stock Plan (the
"Director Plan") approved by the Bank's shareholders at the 1998 annual
meeting and assumed by Bancorp in connection with the reorganization of the
Bank into a holding company structure on September 1, 2000 (the
"Reorganization"), each non-employee director elected at the 1998 meeting
received an option to purchase 1,500 shares of Common Stock, and each new
non-employee director elected thereafter receives an option to purchase
1,000 shares of Common Stock as of the date of election to the Board. In
addition, annual grants of options are made as of the date of each annual
meeting of Shareholders to each non-employee director (other than a
director who is first elected at or within six months of the meeting) to
purchase 500 shares of Common Stock. All options have a ten-year term and
an exercise price equal to the fair market value on the date of grant.
Options may be exercised with cash, Common Stock, or both. Options vest six
months after the grant date, unless automatically accelerated in the event
of death, disability or a change in control.
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of 5% Beneficial Owners
The following table sets forth certain information, as of March 31,
2006, regarding the beneficial owners of more than 5% of the outstanding
common stock:
Amount of Securities Percent
Name Beneficially Owned (a) Ownership (b)
---- ---------------------- -------------
Malcolm G. Chace (c) 545,255 11.5%
c/o Point Gammon Corporation
One Providence Washington Plaza, Providence, RI 02903
Century Capital Management. 291,626 6.1%
100 Federal Street, 29th Floor, Boston MA 02110
Wellington Mgmt Co. LLP. 290,100 6.1%
75 State Street, Boston MA 02109
Merrill W. Sherman (d) 282,885 5.9%
c/o Bancorp Rhode Island, Inc.
One Turks Head Place, Providence, RI 02903
Richard A. Grills 249,995 5.3%
P.O. Box 539, Westerly, RI 02891
Mendon Capital Advisors Corp 246,155 5.2%
150 Allens Creek Road, Rochester, New York 14618
-------------------
(a) All information is based upon ownership of record as reflected on the
stock transfer books of the Company or as reported on Schedule 13G or
Schedule 13D filed under Rule 13d-1 under the Securities Exchange Act
of 1934.
(b) Percent ownership is based upon 4,757,036 shares of common stock
outstanding as of March 31, 2006.
(c) Includes 530,255 shares held by trusts of which Mr. Chace, his spouse
or an immediate family member is a co-trustee and has shared voting
and investment power. Also includes 4,500 shares held by Mr. Chace's
spouse, 10,000 shares held by a non-profit corporation and 500 shares
that may be acquired pursuant to options. Mr. Chace disclaims any
economic or beneficial interest in 20,950 shares which are held by
trusts of which Mr. Chace is only trustee and not a beneficiary and
the 10,000 shares held by a non-profit corporation with respect to
which he has voting power but no pecuniary interest.
(d) Includes 189,750 shares that may be acquired pursuant to options.
7
Security Ownership of Directors and Officers
The following table sets forth certain information regarding the
beneficial ownership of Bancorp's Common Stock as of March 31, 2006 by each
director, each executive officer named in the Summary Compensation Table
appearing on page 10 and all directors and executive officers as a group.
Unless otherwise indicated, each person has sole voting and dispositive
power over the shares indicated as owned by such person.
Amount of Securities Percent
Name of Beneficial Owner Beneficially Owned Ownership (a)
------------------------ -------------------- -------------
Karen Adams (b)(c) 3,775 *
Anthony F. Andrade (d) 55,000 1.2%
John R. Berger (d) 9,069 *
Malcolm G. Chace (e) 545,255 11.5%
Ernest J. Chornyei, Jr. (d)(f) 113,000 2.4%
Meredith A. Curren (b) 3,300 *
James V. DeRentis (j) 40,300 *
Karl F. Ericson (d) 14,000 *
Margaret D. Farrell (d)(g) 7,500 *
Mark R. Feinstein (d) 18,500 *
Edward J. Mack II (b) 3,175 *
Donald C. McQueen (k) 57,581 1.2%
Bogdan Nowak (b)(l) 23,800 *
Pablo Rodriguez, M.D. (b) 3,000 *
Albert R. Rietheimer 3,000 *
Merrill W. Sherman (h) 282,885 5.9%
Linda H. Simmons (m) 22,800 *
Cheryl W. Snead (d) 5,510 *
John A. Yena (i) 10,000 *
All directors and executive officers
as a group (19 individuals) (n) 1,171,869 24.6%
-------------------
* Less than one percent.
(a) If applicable, beneficially owned shares include shares owned by the
spouse, children and certain other relatives of the director or
executive officer, as well as shares held by trusts of which the
person is a trustee or in which he or she has a beneficial interest
and shares acquirable pursuant to options which are presently or will
become exercisable within 60 days. All information with respect to
beneficial ownership has been furnished by the respective directors
and executive officers.
(b) Includes 2,500 shares that may be acquired pursuant to options.
(c) Includes 325 shares held by Ms. Adams' spouse.
(d) Includes 5,000 shares that may be acquired pursuant to options.
(e) Includes 530,255 shares held by trusts of which Mr. Chace, his spouse
or an immediate family member is a co-trustee and has shared voting
and investment power. Also includes 4,500 shares held by Mr. Chace's
spouse, 10,000 shares held by a non-profit corporation and 500 shares
that may be acquired pursuant to options. Mr. Chace disclaims any
economic or beneficial interest in 20,950 shares which are held by
trusts of which Mr. Chace is only trustee and not a beneficiary and
the 10,000 shares held by a non-profit corporation with respect to
which he has voting power but no pecuniary interest.
(f) Includes 108,000 shares held by a trust of which Mr. Chornyei is a
beneficiary.
(g) Includes 500 shares held by spouse's retirement plan.
(h) Includes 189,750 shares that may be acquired pursuant to options.
(i) Includes 1,500 shares that may be acquired pursuant to options.
(j) Includes 39,200 shares that may be acquired pursuant to options.
(k) Includes 27,375 shares that may be acquired pursuant to options.
(l) Includes 10,000 shares held by investment company of which Mr. Nowak
is a control person.
(m) Includes 22,800 shares that may be acquired pursuant to options.
(n) Includes 309,750 shares that may be acquired pursuant to options.
9
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires executive officers and
directors and persons who beneficially own more than ten percent of
Bancorp's Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission (the
"SEC") and any national securities exchange on which Bancorp's securities
are registered. Based solely on a review of the copies of such forms
furnished to Bancorp and written representations from the executive
officers and directors, Bancorp believes that during 2005 its executive
officers, directors and greater than ten percent beneficial owners complied
with all applicable Section 16(a) filing requirements, except that Form 4s
for each non-employee director were not timely filed in connection with the
annual grant of options under the Director Plan.
9
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued by
the Company to its Chief Executive Officer and each of its executive
officers who earned more than $100,000 in salary and bonus in 2005 and were
employed by the Company on December 31, 2005 and each former executive
officer who would have been one of the four most highly compensated
executive officers in 2005 but for the fact that such individual was no
longer employed by the Company on December 31, 2005 (together, the "Named
Executive Officers"), for the calendar years ending December 31, 2005, 2004
and 2003:
Summary Compensation Table
Long Term Compensation
---------------------------
Awards Payouts
Annual Compensation (a) --------------- ----------
--------------------------------------- Securities
Other Annual Underlying LTIP All Other
Name and Principal Position Year Salary($)(b) Bonus($) Compensation($) Options/SARs(#) Payouts($) Compensation($)(c)
--------------------------- ---- ------------ -------- --------------- --------------- ---------- -------------------
Merrill W. Sherman 2005 421,078 220,000 107,921(d) 13,200 152,537(d) 11,534
(President and CEO of both 2004 425,034 246,000 --- 19,250 --- 11,095
Bancorp and the Bank) 2003 386,100 0(e) --- 18,900 --- 14,677
Donald C. McQueen(f) 2005 222,270 50,000 --- 5,200 --- 9,119
(Vice President and Assistant 2004 210,293 107,500 --- 9,350 --- 8,433
Secretary of Bancorp and 2003 195,525 0(e) --- 7,100 --- 8,288
Executive Vice President and
Chief Operating Officer of the
Bank until November 2005; Vice
President and Ass. Secretary
of Bancorp and Chief Credit
Officer of the Bank until
January 2006)
Albert R. Rietheimer(g) 2005 99,000 0 --- 4,000 --- 6,942
(Chief Financial Officer of 2004 179,495 69,200 --- 7,450 --- 7,670
both Bancorp and the Bank and 2003 167,825 0(e) --- 6,100 --- 6,774
Treasurer of Bancorp until
July 2005)
James V. DeRentis 2005 189,116 94,000 --- 4,200 --- 7,532
(Vice President of Bancorp 2004 166,998 69,200 --- 7,000 --- 6,920
and Chief Business Officer 2003 148,435 0(e) --- 5,400 --- 6,093
of the Bank)
Linda H. Simmons (h) 2005 212,847 94,000 --- 12,800 --- 3,284
(Chief Financial Officer 2004 64,442 90,000(i) --- 10,000 --- 0
and Treasurer of both
Bancorp and the Bank)
-------------------
(a) Any perquisites or other personal benefits received from the Company
by the Named Executive Officer were substantially less than 10% of the
individual's cash compensation.
(b) Includes portion of salary deferred under the 401(k) Plan and the
Nonqualified Deferred Compensation Plan.
(c) Amounts paid in 2005 include the Company's contributions under the
Company's 401(k) Plan in the amounts of $8,400, $8,400, $6,458, $7,229
and $3,284 and imputed income resulting from premiums paid by the
Company with respect to split dollar life insurance purchased for such
executives in the amounts of $3,134, $719, $483, $303 and $936 for Ms.
M. Sherman, Messrs. D. McQueen, A. Rietheimer and J. DeRentis and Ms.
Simmons, respectively.
(d) On January 1, 2005, 50% of the 7,700 shares of restricted stock
granted to Ms. Sherman under a Restricted Stock Agreement entered into
with the Company in 2001 vested. The value of such shares equals
$152,537 based upon the current share price of the Company's shares on
the vesting date. In connection with this vesting, the Company made a
"gross-up" payment in the amount of $107,921 for income taxes owed by
Ms. Sherman as a result of the vesting of these shares.
(e) The executive management team volunteered to forgo any salary increase
or bonuses for 2003 in conjunction with developing the Company's 2003
budget. Accordingly, the absence of 2003 bonuses should not be
construed as reflecting a negative assessment of executive
management's performance in 2003.
(f) Mr. McQueen resigned from the Company as of January 2006.
(g) Mr. Rietheimer resigned from the Company as of July 2005.
(h) Ms. Simmons' employment commenced in September 2004.
(i) Includes signing bonus in the amount of $30,000.
10
Option/SAR Grants in Last Fiscal Year
The following table provides information on option grants in 2005 to
the Named Executive Officers. The Company has not issued stock appreciation
rights.
Number of % of Total
Securities Options/SARs Exercise
Underlying Granted to or Base
Options/SARs Employees in Price Expiration Grant Date
Name Granted(#) Fiscal Year ($/Sh) Date Value($)(a)
---- ------------ ------------ -------- ---------- -----------
Merrill W. Sherman 13,200(b) 19.4% 37.98 04/08/2015 149,556
Donald C. McQueen 5,200(b) 7.6% 37.98 04/08/2015 58,916
Albert R. Rietheimer 4,000(b) 5.9% 37.98 04/08/2015 45,320
James V. DeRentis 4,200(b) 6.2% 37.98 04/08/2015 47,586
Linda H. Simmons 4,800(b) 7.1% 37.98 04/08/2015 54,384
8,000(b) 11.8% 36.64 07/19/2015 84,320
-------------------
(a) Amounts represent the fair value of each option granted and were
estimated as of the date of the grant using the Black-Scholes option-
pricing model with the following weighted average assumptions:
expected volatility of 25%; expected life of 7 years; average risk-
free interest rate of 3.90%; and average Common Stock dividend rate
of 1.70%.
(b) These options are incentive stock options which were exercisable in
four equal annual installments when granted, but became exercisable
immediately in full as of December 30, 2005.
Aggregated Option/SAR Exercises in Last Fiscal Year
and Year-End Option/SAR Values
The following table sets forth certain information regarding stock
options exercised during 2005 and currently outstanding options held by the
Named Executive Officer as of December 31, 2005:
Number of Securities Value of
Underlying Unexercised Unexercised
Options/SARs at Fiscal In-the-Money
Shares Acquired Value Year End 2005 Option/SARs($)(b)
Name on Exercise(#) Realized($) Exercisable/Unexercisable (a) Exercisable/Unexercisable
---- --------------- ----------- ----------------------------- -------------------------
Merrill W. Sherman 0 0 213,750/0 3,524,035/0
Donald C. McQueen 9,800 202,560 27,375/0 137,904/0
Albert R. Rietheimer 54,700 1,174,407 0/0 0/0
James V. DeRentis 1,000 27,990 39,200/0 480,958/0
Linda H. Simmons 0 0 22,800/0 0/0
-------------------
(a) As of December 30, 2005 all outstanding options of Bancorp vested
immediately as part of an accelerated vesting undertaken upon
adopting Financial Accounting Standards Board Statement No. 123R,
"Share Based Payment" (SFAS 123R). Under SFAS 123-R, the Company
would be required to record compensation expense for the fair value
of unvested stock options over the remaining service period. At the
time of the vesting acceleration, approximately 79% of the expenses
anticipated to be recorded over the next three years related to stock
options that had no intrinsic value, as the stock options were "out-
of-the-money". Additionally, 73% of the unvested options with a
positive intrinsic value, or "in-the-money", were scheduled to fully
vest within four months after December 31, 2005. As a result of this
accelerated vesting, the Company estimates that it will not be
required to recognize anticipated non-cash compensation expense
relating to stock options of approximately $370,000 in 2006, $260,000
in 2007 and $70,000 in 2008.
(b) Based on the December 30, 2005 closing sale price of the Common Stock
of $33.29 less the exercise price of the options.
11
Employment Agreements. The Company entered into employment agreements
with Ms. Sherman and Mr. DeRentis in December 2000 and with Ms. Simmons in
September 2004. The agreement with Mr. DeRentis was subsequently amended on
February 24, 2006 to reflect his promotion to Chief Business Officer of the
Bank. The agreements provide that during the term of the contract, their
base salary will not be reduced and they will remain eligible for
participation in the Company's executive compensation and benefit programs.
Ms. Sherman's agreement provides for a three-year term, which
automatically renews for successive three-year terms on each successive
one-year anniversary unless either party has given the other party written
notice of election not to extend the term at least 90 days prior to any
anniversary date. In the event Ms. Sherman's employment is terminated by
the Company without cause or Ms. Sherman terminates her employment for
"Good Reason," the Company must pay her a lump sum severance payment equal
to 2.99 times the sum of (i) her annual base salary as in effect at the
time of termination and (ii) an amount equal to the average executive cash
bonus earned by Ms. Sherman in the two full fiscal years immediately
preceding the year in which termination occurs, and continue to pay for all
medical and life insurance coverage for 36 months. Ms. Sherman is also
allowed continued use of the automobile provided to her in her agreement
(with an option to purchase). In addition, any options which are
exercisable on the date of termination shall not terminate until the
earlier of their expiration or three years after the date of termination.
"Good Reason" is defined in Ms. Sherman's agreement as (i) a significant
reduction in the nature or scope of her duties, responsibilities, authority
and powers; (ii) any requirement that she perform her duties at a location
more than 50 miles from where she currently performs her duties; or (iii)
failure of the Company either to renew the agreement or enter into a new
agreement on terms not less favorable than those existing immediately prior
to such nonrenewal (other than a reduction of fringe benefits required by
law or applicable to all employees generally).
In the event of a "Terminating Event" within one year of a "Change in
Control," Ms. Sherman is entitled to receive as severance an amount equal
to 2.99 times the sum of (i) her annual base salary in effect at the time
of the Change in Control plus (ii) the amount of the largest annual bonus
paid to Ms. Sherman in the three years preceding the Change in Control,
payable in a lump sum. In addition, Ms. Sherman is entitled to receive
continuing medical and life insurance benefits and use of the automobile
provided to her in the agreement (with an option to purchase), for three
years. All options vest upon a Change in Control and remain exercisable for
such three-year period. A "Terminating Event" for this purpose means either
(a) termination of employment for any reason other than for cause or (b)
resignation, death or disability following (i) a Takeover Transaction or
(ii) a Change in Control resulting from a new Board supermajority, in
either case, prior to the first anniversary of the Takeover Transaction or
Change in Control.
The agreements with Mr. DeRentis and Ms. Simmons provide for a two-
year term, which automatically renews for successive two-year terms on each
successive one year anniversary unless either party has given the other
party written notice of election not to renew at least 90 days prior to any
anniversary date. According to the agreement with Mr. DeRentis, if the
Company terminates the employment relationship without cause or the
executive terminates his employment for "Good Reason", the executive would
be entitled to continuance of his base salary and all medical and life
insurance coverage for 18 months following the date of termination. Under
the terms of the agreement with Ms. Simmons, the term of such continuance
of base salary and medical and life insurance coverage is nine months
following the date of termination. Mr. DeRentis forfeits his severance
payments in the event that within one year of the date of termination he
accepts certain types of positions as specified in his agreement. In the
event Ms. Simmons commences other full-time employment within her severance
period, her severance will be reduced by the amount of compensation she
receives from such employment, and she will forfeit all medical and life
insurance coverage. "Good Reason" is defined in the agreements of Mr.
DeRentis and Ms. Sherman as the Company's failure to renew the agreement on
any anniversary date or enter into a new employment agreement on
substantially similar terms.
The agreements with Mr. DeRentis and Ms. Simmons provide that in the
event of a "Terminating Event" within one year of a Change in Control, the
executive is entitled to receive a severance benefit equal to two times the
sum of (i) the executive's annual base salary in effect at the time of the
Change in Control, and (ii) an amount equal to the largest executive cash
bonus earned by the executive in the two years preceding the Change in
Control, payable in a lump sum. In addition, each executive shall continue
to receive medical and life insurance coverage for the 24 months commencing
on the date of the Terminating Event. A "Terminating Event" means for this
purpose either (a) termination of employment for any reason other than
death, disability or for cause or (b) resignation
12
following (i) a significant reduction in the nature or scope of the
executive's duties, responsibilities, authority and powers from those
exercised prior to the Change in Control, (ii) a greater than 10% reduction
in the executive's annual base salary or fringe benefits (other than
across-the-board salary reductions or changes in fringe benefit plans),
(iii) a requirement that the executive perform duties at a location more
than 50 miles from the location where such duties were performed prior to
the Change in Control, or (iv) failure of any successor of the Company to
continue the executive's employment on substantially similar employment
terms.
If payments under the employment agreements following a Change in
Control are subject to the "golden parachute" excise tax, the Company will
make a "gross-up" payment sufficient to ensure that the net after-tax
amount retained by the executive (taking into account all taxes, including
those on the gross-up payment) is the same as if such excise tax had not
applied.
For purposes of all of the agreements, a "Change in Control" will be
deemed to have occurred if: (1) the Company effectuates a Takeover
Transaction; or (2) the Company commences substantive negotiations with a
third party with respect to a Takeover Transaction, if within 12 months of
the commencement of such negotiations, the Company enters into a definitive
agreement with respect to a Takeover Transaction with any party with which
negotiations were originally commenced; or (3) any election of directors of
the Company (whether by the directors then in office or by the shareholders
at a meeting or by written consent) where a majority of the directors in
office following such election are individuals who were not nominated by a
vote of two-thirds of the members of the Board of Directors immediately
preceding such election; or (4) the Company effectuates a complete
liquidation of Bancorp or the Bank.
A "Takeover Transaction" for this purpose means a (i) reorganization,
merger, acquisition or consolidation of Bancorp or the Bank with, or an
acquisition of Bancorp or the Bank or all or substantially all of Bancorp's
or the Bank's assets by, any other bank or corporation, in which the
individuals and entities who were the "beneficial owners" (as defined in
Rule 13d-3 under the Exchange Act) immediately prior to such
reorganization, merger, acquisition or consolidation, do not, following
such reorganization, merger, acquisition or consolidation, beneficially own
more than 50% of the voting power of the corporation resulting from the
reorganization, merger, acquisition or consolidation, (ii) the issuance of
additional shares of Bancorp or the Bank if the individuals or entities who
were the beneficial owners of the outstanding voting securities of Bancorp
or the Bank immediately prior to such issuance do not, following such
issuance, beneficially own securities representing more than 50% of the
voting power of Bancorp or the Bank or (iii) when any person or entity or
group of persons or entities (other than Bancorp or any trustee or other
fiduciary holding securities under an employee benefit plan of Bancorp)
either related or acting in concert becomes the beneficial owner of
securities of the Company representing more than 30% of the voting power of
all outstanding shares of voting securities of Bancorp, other than a person
who was already a 30% beneficial owner as of the date on which the
executive's employment with the Company commenced.
401(k) Retirement Plan. The Company maintains a 401(k) Plan which
qualifies as a tax-exempt plan and trust under sections 401 and 501 of the
Internal Revenue Code of 1986, as amended. Generally, Company employees who
are at least 21 years of age and have completed at least one year of
service with the Company, are eligible to participate in the 401(k) Plan.
Under the 401(k) Plan the Company will make matching contributions of up to
4% of an employee's compensation, subject to qualified plan limitations.
These contributions are vested monthly.
Nonqualified Deferred Compensation Plan. The Company maintains a
nonqualified deferred compensation plan under which certain participants
may contribute the amounts they are precluded from contributing to the
Company's 401(k) Plan because of the qualified plan limitations, and
additional compensation deferrals which may be advantageous for personal
income tax or other planning reasons. In addition, under the deferred
compensation plan participants receive an amount of employer matching
contributions that they have lost under the Company's 401(k) Plan as a
result of the nondiscrimination rules applicable to qualified plans. All
amounts contributed by the participant and by the Company under the plan
are immediately vested. Any excess contributions which cannot be
contributed under the 401(k) Plan and which would otherwise be returned to
the participant at the end of the year, plus the amount of any supplemental
deferrals the participant may choose to make, and any matching
contributions provided for under the plan are credited to a deferred
compensation account (a bookkeeping account) which is credited with
interest at a rate equal to the greater of the Baa1 30-year corporate
13
bond index, or the Company's projected rate of return on average earning
assets as reflected in its budget for such year.
Participants are entitled to receive a distribution of their account
upon retirement, death, disability or termination of employment except that
any amounts attributable to employer contributions under the nonqualified
plan are subject to forfeiture if the participant is terminated for fraud,
dishonesty or willful violation of any law that is committed in connection
with the participant's employment. A participant is eligible to withdraw
amounts credited to the deferred compensation account in the event of
unforeseeable financial hardship.
The amount deferred under the plan is not includible in the income of
the participant until paid and, correspondingly, the Company is not
entitled to a deduction for any liabilities established under the plan
until the amount credited to the participant's deferred compensation
account is paid to him or her.
The amount credited to the deferred compensation account is not
funded or otherwise set aside or secure from the creditors of the Company
and the participant is subject to the risk that deferred compensation may
not be paid in the event of the Company's insolvency or the Company is
otherwise unable to satisfy the obligation. The plan permits (but does not
require) the Company to establish a grantor trust for the purpose of
funding the plan. If such a trust were created, the corpus of the trust
would, under current federal income tax regulations, have to be available
to creditors of the Company in the event of insolvency or bankruptcy in
order to prevent adverse income tax consequences to the participant.
Supplemental Executive Retirement Plans. The Company has adopted two
Supplemental Executive Retirement Plans (each a "SERP") for certain of its
senior executives under which participants designated by the Board are
entitled to an annual retirement benefit. Currently, Ms. Sherman and Mr.
DeRentis (collectively, the "2000 SERP Participants") are the only
employees who are entitled to participate in the 2000 SERP (although two
former executives are entitled to receive benefits under the 2000 SERP).
The annual retirement benefit under the 2000 SERP is $250,000 for Ms.
Sherman, and $35,000 for Mr. DeRentis and is payable upon the later of the
executive attaining age 65 or the executive's retirement. Under the 2002
SERP, the 2000 SERP Participants and Ms. Simmons are entitled to a
supplemental retirement benefit equal to 70% of compensation, reduced by
the employer contribution under the 401(k) plan and any social security
offset and, in the case of Ms. Sherman and Mr. DeRentis, the amount of
their respective annual benefit under the 2000 SERP. Under the SERPs, the
Company will also provide a pre-retirement death benefit equal to the
projected age 65 accrual balance and a post-retirement death benefit for
the participant equal to the accrual balance at the date of the SERP
participant's death, provided that Ms. Sherman's additional pre-retirement
death benefit under the 2002 SERP is limited to her accrual balance at date
of death under the 2002 SERP. The pre-retirement and post-retirement death
benefits (other than Ms. Sherman's additional death benefit under the 2002
SERP) are funded through life insurance policies on the lives of the SERP
participants purchased and owned by the Bank, which contain a split dollar
endorsement in favor of the SERP participants.
The benefit for each of the 2000 SERP Participants is fully vested.
The benefits under the 2002 SERP vested beginning on November 1, 2005 in
the case of Ms. Sherman, and will commence to vest on November 1, 2008 for
Mr. DeRentis and November 1, 2009 for Ms. Simmons. Benefits under the 2002
SERP vest in 20% increments such that the accrual balance would be fully
vested on the fourth anniversary of the first vesting date. Thus, if an
executive left at end of the vesting period, he or she would be 100% vested
in their 2002 SERP accrual balance (i.e., the amount the Company has
accrued to reflect the liability), but not the full benefit, resulting in a
reduced retirement benefit in the event of early retirement. The executive
is required to remain employed at the Company until age 65 to get the full
2002 SERP benefit. The full benefit will vest immediately upon death. In
addition, in the event of a Change of Control, Ms. Sherman and Mr. DeRentis
are entitled to receive their respective benefits under the 2000 SERP and
become fully vested in the greater of (i) the retirement benefit calculated
in accordance with the 70% formula described above or (ii) a specific
annual Change of Control Benefit Amount, which is intended to approximate
the formula amount under the 2002 SERP. The current Change of Control
Benefit Amount under the 2002 SERP is $131,034 for Ms. Sherman, $190,850
for Mr. DeRentis and $212,441 for Ms. Simmons.
The SERPs are unfunded but provide that upon a Change in Control, the
Company must deposit funds in a trust equal to the present value of all
accrued benefits provided under both SERPs and thereafter make annual
14
additional deposits to reflect any increases in the accrued benefits. All
benefits are forfeited in the event that the participant's employment is
terminated on account of a criminal act of fraud, misappropriation,
embezzlement or a felony that involves property of the Company.
Compensation Committee Interlocks and Insider Participation
None of the Company's executive officers serves as a member of the
board of directors or compensation committee of any entity that has one or
more of its executive officers serving as a member of the Company's
Compensation Committee. In addition, none of the Company's executive
officers serves as a member of the compensation committee of any entity
that has one or more of its executive officers serving as a member of the
Company's Board of Directors.
Compensation Committee Report on Executive Compensation
The Compensation Committee of the Board (the "Compensation
Committee") is composed entirely of independent directors as defined under
applicable requirements of the Nasdaq listing standards, non-employees
within the meaning of Rule 16b-3 of the Exchange Act and outside directors
within the meaning of Section 162(m) of the Internal Revenue Code. From
time to time, Ms. Sherman meets with the Compensation Committee to review
the compensation program and make recommendations for executives reporting
to her. Ms. Sherman does not participate during deliberations regarding her
compensation. The Compensation Committee is charged with the broad
responsibility of seeing that officers and key management personnel are
effectively compensated in a manner which is internally equitable and
externally competitive. From time to time, the Compensation Committee
utilizes various consultants to assist it in its review and evaluation of
the Company's compensation program for executives and other senior
management.
Executive Compensation Philosophy. The Company's executive
compensation philosophy seeks to link executive compensation with the
value, objectives, business strategy, management initiatives and financial
performance of the Company. The overall objectives of the program are to
attract and retain highly qualified individuals in key executive positions,
to motivate executives to achieve goals inherent in the Company's business
strategy, and to link executives' and Shareholders' interests. The Company
also seeks to achieve a balance of the compensation paid to a particular
individual and the compensation paid to other executives both inside the
Company and at comparable corporations and to remain competitive with
larger financial institutions in its marketplace with which the Company
competes for executive talent.
In 2004, the Compensation Committee directly engaged an outside
consulting firm to prepare an executive compensation study. The study
provided comparative information on various components of compensation and
total compensation against a representative peer group of financial
institutions. In the course of its review of executive compensation, the
Compensation Committee sought the advice and input of both its outside
compensation consultant and Company management. This compensation review
confirmed that our compensation program elements individually and in the
aggregate support and reflect our compensation philosophy and strategic
objectives, both on a cash and long-term incentive basis.
Base Salary. Base salaries for executive officers are substantially
dependent upon the base salaries paid for comparable positions at similar
corporations, the responsibilities of the position held, and the experience
level of the particular executive officer. The Compensation Committee sets
the base salary for executives by reviewing compensation for competitive
positions in the market and the historical compensation levels of the
executives. As part of the overall review of the Company's executive
compensation program undertaken in 2004, salaries of certain of the
Company's executives were increased, effective September 2004, to reflect
promotions and increased responsibilities. The Compensation Committee
generally sought, through these increases, to place such salaries at the
median of the survey group. In 2005, the base salaries of Ms. Simmons and
Mr. DeRentis were also increased in connection with their promotions to
Chief Financial Officer and Chief Business Officer, respectively.
Cash Bonus Policy. In keeping with the Company's philosophy to pay
for performance, cash bonuses tied to performance measures represent a
substantial portion of an executive's total compensation opportunity. Under
the cash bonus policy, executive officers of the Company are eligible to
receive bonuses of up to 50% (60% in the case of the Chief Executive
Officer) of their base salaries. All bonuses for executive officers are
determined at the
15
discretion of the Compensation Committee, which annually establishes
specific financial goals and performance criteria for the executive
management team. In 2005, the bonus awards were keyed to achieving or
exceeding budgeted net income. The Compensation Committee generally seeks
to award bonuses for superior performance that bring total cash
compensation to the 75th percentile of the survey group. Based upon the 2004
executive compensation study commissioned by the Compensation Committee,
total cash compensation for the Named Executive Officers falls within that
targeted level.
Stock Options. Total compensation at the senior executive level also
includes long-term incentives afforded by stock options granted under the
2002 Equity Incentive Plan. The objectives of the equity incentive programs
are to align executive and Shareholder long-term interests by creating a
strong and direct link between executive pay and total Shareholder return,
and to enable executives to develop and maintain a significant, long-term
stock ownership position in Bancorp's Common Stock. Annual grants of stock
options reflect the executive's position with the Company and his or her
contributions to the Company and are awarded at a level such that the
aggregate exercise price the options equals 85% to 115% of the executive's
annual salary, which the Company believes to be competitive with other
comparable companies. Options are granted at fair market value and have
three to four year vesting schedules to encourage key employees to continue
in the employ of the Company; provided, however, that as of December 30,
2005 all outstanding options under the 2002 Equity Incentive Plan vested
immediately as part of an accelerated vesting undertaken by Bancorp upon
adopting Financial Accounting Standards Board Statement No. 123R, "Share
Based Payment" (SFAS 123R). Under SFAS 123-R, the Company would be required
to record compensation expense for the fair value of unvested stock options
over the remaining service period. At the time of the vesting acceleration,
approximately 79% of the expenses anticipated to be recorded over the next
three years related to stock options that had no intrinsic value, as the
stock options were "out-of-the-money". Additionally, 73% of the unvested
options with a positive intrinsic value, or "in-the-money", were scheduled
to fully vest within four months after December 31, 2005. As a result of
this accelerated vesting, the Company estimates that it will not be
required to recognize anticipated non-cash compensation expense relating to
stock options of approximately $370,000 in 2006, $260,000 in 2007 and
$70,000 in 2008. The Compensation Committee is evaluating whether to
provide a portion of this long-term equity award through restricted stock
in lieu of options.
Compensation of Chief Executive Officer. The Company's employment
agreements with Ms. Sherman and the other Named Executive Officers provide
for annual base salary adjustments and entitle the executive to a cash
bonus under the Company's cash bonus policy described above. In January
2004, the Compensation Committee increased Ms. Sherman's base salary from
$386,100 to $410,000, effective January 1, 2004, which represented a 6.2%
increase. (The Summary Compensation Table reflects a slightly higher number
for 2004 due to an extra pay period falling within the year.) In
establishing her 2004 base salary the Committee took into account that the
executive management team, including Ms. Sherman, had voluntarily foregone
a raise in 2003. In May 2005, Ms. Sherman's base salary was increased to
$426,000, representing a 3.90% increase, consistent with Company-wide
salary adjustments. In February 2006, the Compensation Committee awarded
Ms. Sherman a cash bonus of $220,000, representing 86% of Ms. Sherman's
maximum bonus opportunity under the executive cash bonus policy. Ms.
Sherman also received options to acquire 13,200 shares of Common Stock in
2005. In addition, on January 1, 2005, 50% of the 7,700 shares of
restricted stock granted to Ms. Sherman under a Restricted Stock Agreement
entered into with the Company in 2001 vested. The value of such shares
equals $152,537 based upon the current share price of the Company's shares
on the vesting date. In connection with this vesting, the Company made a
"gross-up" payment in the amount of $107,921 for income taxes owed by Ms.
Sherman as a result of the vesting of these shares. The remaining 3,850
shares of restricted stock under Ms. Sherman's Restricted Stock Agreement
vested on January 1, 2006. The value of the shares on January 1, 2006 and
any "gross-up" payment to Ms. Sherman in connection with the vesting of
such shares will be reflected in the Company's 2007 proxy statement. The
Compensation Committee has reviewed all components of Ms. Sherman's
compensation, including salary, bonus and equity compensation, accumulated
realized and unrealized stock option and restricted stock gains, the dollar
value to her and cost to the Company of all perquisites and other personal
benefits and the projected payout obligations under the SERP. Based on this
review, the Compensation Committee has determined Ms. Sherman's total
compensation in the aggregate to be reasonable and not excessive.
Compliance with Internal Revenue Code Section 162(m). Section 162(m)
of the Internal Revenue Code generally disallows a tax deduction to public
companies for compensation over $1 million paid to a company's chief
executive officer and the four other most highly compensated executive
officers at year end. Qualifying
17
performance-based compensation will not be subject to the deduction limit
if certain requirements are met. The Committee's policy is to preserve
corporate tax deductions by qualifying compensation paid over $1 million to
Named Executive Officers as performance-based compensation. Nevertheless,
maintaining tax deductibility is but one consideration among many (and is
not the most important consideration) in the design of the compensation
program for senior executives. The Committee may, from time to time,
conclude that compensation arrangements are in the best interest of the
Company and its shareholders despite the fact that such arrangements might
not, in whole or in part, qualify for tax deductibility.
Conclusion. The Committee believes that the compensation program for
executives is competitive and that the program effectively ties executive
compensation to the Company's performance and Bancorp's resultant stock
price performance.
Compensation Committee
John R. Berger - Chairman
Anthony F. Andrade Meredith A. Curren
Edward J. Mack II Pablo Rodriguez, M.D.
Notwithstanding anything to the contrary set forth in any of Bancorp's
previous filings under the Exchange Act that might incorporate future
filings, including this Proxy Statement, in whole or in part, the foregoing
Compensation Committee Report on Executive Compensation and the following
Performance Graph shall not be deemed incorporated by reference into any
such filing.
17
PERFORMANCE GRAPH
The following graph shows changes in the value of $100 invested on
December 31, 2000 through December 31, 2005, in Bancorp's Common Stock, the
Russell 3000(r) Index, and the SNL Financial L.C. New England Bank Index. The
investment values are based on share price appreciation plus dividends paid
in cash, assuming that dividends were reinvested on the date on which they
were paid.
[GRAPH]
Period Ending
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Index 12/31/00 12/31/01 12/31/02 12/31/03 12/31/04 12/31/05
--------------------------------------------------------------------------------------------------
Bancorp Rhode Island, Inc. 100.00 141.20 190.24 280.35 343.09 293.97
Russell 3000 100.00 88.54 69.47 91.04 101.92 108.70
SNL New England Bank Index 100.00 95.31 71.89 118.62 125.46 126.54
18
The Board of Directors and its Compensation Committee recognize that
the market price of stock is influenced by many factors, only one of which
is issuer performance. Bancorp's stock price may also be influenced by
market perception, Bancorp in particular and the financial services
industry in general, economic conditions, fluctuating interest rates, and
government regulation and supervision. The stock price performance shown in
the graph is not necessarily indicative of future price performance.
TRANSACTIONS WITH MANAGEMENT
The Company has extended loans to certain of its officers, directors,
and principal shareholders, including their immediate families and
affiliated companies ("related parties"). Loans outstanding to related
parties aggregated $5.6 million at December 31, 2005. Loans to related
parties are made in the ordinary course of business under normal credit
terms, including interest rates and collateral, prevailing at the time of
origination for comparable transactions with other persons, and do not
represent more than a normal risk of collectibility or other unfavorable
features.
The law firm of Hinckley, Allen & Snyder LLP, of which Margaret D.
Farrell (a director and Secretary of the Company) is a partner, provides
legal services to the Company. In addition, the spouse of director Edward
J. Mack II is also a partner in Hinckley, Allen & Snyder LLP.
AUDIT COMMITTEE REPORT
Management is responsible for the Company's internal controls and
financial reporting process. The independent accountants are responsible
for performing an audit of the Company's consolidated financial statements
in accordance with generally accepted auditing standards and to issue a
report thereon. The Audit Committee's responsibility is to monitor and
oversee these processes.
The Audit Committee's responsibilities focus on two primary areas:
(1) the adequacy of the Company's internal controls and financial reporting
process and the reliability of the Company's financial statements; and (2)
the independence and performance of the Company's internal auditors and
independent auditors. The Audit Committee meets at least quarterly to, as
appropriate, review, evaluate, and discuss with the Company's management
and internal and external auditors the scope of their audit plans, the
results of their work, the Company's financial statements (including
quarterly earnings releases), quarterly reports issued by the Company's
internal auditor, the adequacy and effectiveness of the Company's internal
controls and changes in accounting principles. The Audit Committee
regularly meets privately with both the internal and external auditors,
each of whom has unrestricted access to the Audit Committee.
In connection with these responsibilities, the Audit Committee
reviewed and discussed the Company's audited financial statements for the
fiscal year ended December 31, 2005 with management and the Company's
independent accountants, KPMG LLP. The Audit Committee also discussed with
KPMG LLP the matters required by Statement on Auditing Standards No. 61.
The Audit Committee received from KPMG LLP written disclosures regarding
the firm's independence as required by Independence Standards Board
Standard No. 1, wherein KPMG LLP confirms their independence within the
meaning of the SEC and Independence Standards Board Rules and disclosed the
fees charged for professional services in the fiscal year ended December
31, 2005. The Audit Committee discussed this information with KPMG LLP and
also considered the compatibility of non-audit services provided by KPMG
LLP with maintaining its independence. The Audit Committee also reviewed
KPMG LLP's proposal to act as the Company's external auditor for the year
ending December 31, 2006.
Based on the review of the audited financial statements and these
various discussions, the Audit Committee recommended to the Board of
Directors that the audited financial statements be included in the
Company's Annual Report on Form 10-K, to be filed with the SEC.
Audit Committee
Karl F. Ericson - Chairman
Ernest J. Chornyei, Jr. Meredith A. Curren Cheryl W. Snead
19
PROPOSAL NO. 2
APPROVAL OF AMENDMENT OF THE NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Under the Director Plan, Bancorp may grant options for up to 65,000
shares of Common Stock to all non-employee directors. As of December 31,
2005, options to acquire an aggregate of 63,500 shares had been granted
under the Director Plan. Because there are insufficient shares remaining in
the Director Plan to permit future awards, the Board of Directors, on
February 21, 2006 voted in favor of amending the Director Plan to increase
the maximum number of shares for which options may be granted from 65,000
shares of Common Stock to 90,000 shares of Common Stock, subject to
approval by the Shareholders.
The Board of Directors recommends a vote "FOR" approval of the
amendment of the Director Plan.
Purpose. The purpose of the Director Plan is to attract and retain
persons of exceptional ability to serve as directors and to solidify the
common interests of the Shareholders and the directors in enhancing the
value of Bancorp's Common Stock.
Award to Directors. Pursuant to the Director Plan, each non-employee
director elected at the 1998 annual meeting of shareholders received an
option to purchase 1,500 shares of Common Stock, and each new non-employee
director elected thereafter receives an option to purchase 1,000 shares of
Common Stock, as of the date of election to the Board. In addition, annual
grants of options are made as of the date of each annual meeting of
shareholders to each non-employee director (other than a director who is
first elected at or within six months of the meeting) to purchase 500
shares of Common Stock. All options have a ten-year term and an exercise
price equal to the fair market value on the date of grant. Options may be
exercised with cash, Common Stock, or both. Options vest six months after
the grant date, unless automatically accelerated in the event of death,
disability or a change in control. The closing price of Bancorp's Common
Stock on March 31, 2006 was $34.91.
Tax Consequences. There will be no federal income tax consequences to
either the non-employee director or Bancorp on the grant of the options
described above. On the exercise of such options, the director has taxable
ordinary income equal to the excess of the fair market value of the Common
Stock received on the exercise date over the option price of the Common
Stock. Bancorp will be entitled to a federal income tax deduction in an
amount equal to such excess. Upon a subsequent sale or taxable exchange of
Common Stock acquired upon exercise of an option, a director will recognize
long-term or short-term capital gain or loss equal to the difference
between the amount realized on the sale and the tax basis of such shares.
In the event Common Stock is used to pay the option price for an
option, gain or loss is not normally recognized in connection with such
exchange. To the extent that the number of shares of Common Stock received
on exercise does not exceed the number of shares surrendered, the
director's basis in these shares is equal to the basis of the stock
surrendered, and the director's holding period therefor is the same holding
period as for the Common Stock surrendered.
To the extent the director receives an amount of shares in excess of
the number of shares surrendered, the director's basis in such additional
shares is zero (plus any cash paid in connection with the exercise) and the
holding period for such additional shares will begin from the date of such
exchange.
Amendment and Termination. No option grant will be made after May 20,
2008. The Board at any time will be permitted to amend, suspend or
terminate the Director Plan, but no such amendment shall permit directors
who are employees of the Company to participate in the Director Plan and no
such amendment shall affect the rights of any participating director to
previously granted options without his or her consent.
20
New Plan Benefits. The following table illustrates the aggregate
benefits which will be received by non-employee directors under the
Director Plan in 2006. Annual awards under the Director Plan will be equal
to options to purchase 500 shares of Common Stock for each non-employee
director.
Dollar Number of
Value ($) Options
--------- ---------
Each nominee for election as a director Fair market value 500
on date of grant
All current directors who are not executive Fair market value 7,000
officers as a group on date of grant
Securities Authorized For Issuance Under Equity Compensation Plans.
The following table sets forth information about the Company's equity
compensation plans as of December 31, 2005:
Number of Securities
Number of Securities to Weighted-Average Remaining Available for
be Issued Upon Exercise Exercise Price of Future Issuance Under
of Outstanding Options, Outstanding Options, Equity Compensation
Plan category Warrants and Rights Warrants and Rights Plans
------------- ----------------------- -------------------- -----------------------
Equity Compensation Plans Approved
by Security Holders 478,480(1) $21.42 121,163(2)
Equity Compensation Plans Not
Approved by Security Holders 0 N/A 0
------- ------ -------
Total 478,480 $21.42 121,163
======= ====== =======
-------------------
Includes 428,980 shares issuable upon exercise of outstanding awards
granted under the Bancorp 2002 Equity Incentive Plan and predecessor
plan (Amended and Restated Bancorp Rhode Island, Inc. 1996 Incentive
and Nonqualified Stock Option Plan) and 49,500 shares issuable upon
exercise of outstanding awards granted under the Director Plan.
Includes 119,663 shares reserved for awards under the Bancorp 2002
Equity Incentive Plan and predecessor plan and 1,500 shares reserved
for awards under the Director Plan. The Bancorp 2002 Equity Incentive
Plan provides for automatic incremental increases each year in the
number of shares authorized for issuance under such plan on the date
of the annual shareholders meeting equal to the least of (i) 2% of
total issued and outstanding common stock on the date of the
shareholders meeting, (ii) 75,000 shares and (iii) such lesser number
as determined by the Board of Directors of the Company.
PROPOSAL NO. 3
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Audit Committee has sole authority to select, evaluate and when
appropriate, to replace the Company's independent auditors. The Audit
Committee has appointed KPMG LLP as the Company's independent auditors for
the 2006 fiscal year. Although action by shareholders in this matter is not
required, the Audit Committee believes it is appropriate to seek
shareholder ratification in light of the critical role played by the
independent auditors in maintaining the integrity of Company financial
controls and reporting and hereby requests Shareholders to ratify such
appointment.
The Board of Directors recommends a vote "FOR" the ratification of
the appointment of KPMG LLP as independent auditors.
KPMG LLP has served as independent auditor of the Company since the
Bank's formation in 1996. Representatives of KPMG LLP will be present at
the Meeting and will have an opportunity to make a statement if they so
desire and to respond to appropriate questions from Shareholders.
21
Independent Accountant Fees and Services.
Aggregate fees for professional services rendered for the Company by
KPMG LLP as of or for the fiscal years ended December 31, 2005 and 2004 are
set forth below. The aggregate fees included in the Audit category are
billed for the fiscal years for the audit of the Company's annual financial
statements and review of financial statements and statutory and regulatory
filings or engagements. The aggregate fees included in each of the other
categories are fees billed in the fiscal years.
2005 2004
---- ----
Audit Fees $503,100 $361,500
Audit-Related Fees $0 $0
Tax Fees $27,000 $23,000
All Other Fees $0 $22,000
Audit Fees for the fiscal years ended December 31, 2005 and 2004 were
for professional services rendered for the audits of the financial
statements of the Company, quarterly review of the financial statements
included in the Company's Quarterly Reports on Form 10-Q, consents,
compliance with Section 404 of the Sarbanes-Oxley Act and other assistance
required to complete the year end audit of the consolidated financial
statements. In addition, audit fees for fiscal year ended December 31, 2005
included fees related to the review of Bancorp's registration statements in
connection with Bancorp's offering of 550,000 shares of its common stock in
an underwritten public offering and the registration for resale of 51,532
shares issuable to DWW Leasing, formerly known as Macrolease International
Corporation.
Tax Fees as of the fiscal years ended December 31, 2005 and 2004 were
for services rendered for tax returns and estimates, tax advice and tax
planning.
All Other Fees as of the fiscal year ended December 31, 2004 were for
additional fees associated with the audit of the Company's financial
statements for the fiscal year ended December 31, 2003.
The Audit Committee has determined that the provision of the above
services is compatible with maintaining KPMG LLP's independence.
Policy on Audit Committee Pre-Approval. The Audit Committee pre-
approves all audit and non-audit services provided by the independent
accountants prior to the engagement of the independent accountants with
respect to such services. The Chairman of the Audit Committee has been
delegated the authority by the Committee to pre-approve the engagement of
the independent accountants when the entire Committee is unable to do so.
The Chairman must report all such pre-approvals to the entire Audit
Committee at the next committee meeting. None of the services described
above were approved by the Audit Committee under the de minimus exception
provided by Rule 2-01(C)(7)(i)(c) under Regulation S-X.
OTHER BUSINESS OF THE MEETING
The Board of Directors is not aware of any matters to come before the
Meeting other than those stated in the Proxy Statement. In the event that
other matters properly come before the Meeting or any adjournment thereof,
it is intended that the persons named in the accompanying proxy and acting
thereunder will vote in accordance with their best judgment.
ANNUAL REPORT AND FORM 10-K
The 2005 Annual Report of Bancorp was mailed to Shareholders with
this Proxy Statement. Upon request, Bancorp will furnish without charge a
copy of Bancorp's Annual Report on Form 10-K for the fiscal year ended
December 31, 2005, including financial statements, but without exhibits, a
copy of which has been filed with the SEC. It may be obtained by writing to
Investor Relations Department, Bancorp Rhode Island, Inc., One Turks Head
Place, Providence, Rhode Island 02903.
22
SHAREHOLDER PROPOSALS FOR 2007
Bancorp's next annual meeting is scheduled to be held on May 16,
2007. A Shareholder who wants to have a qualified proposal considered for
inclusion in the Proxy Statement for the Company's 2007 annual meeting of
Shareholders must notify the Secretary of Bancorp not later than December
22, 2006. Shareholder proposals that are to be considered at the 2007
annual meeting but not requested to be included in the Proxy Statement must
be submitted no later than March 17, 2007 and no earlier than December 23,
2006.
23
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
REVOCABLE PROXY
BANCORP RHODE ISLAND, INC.
Proxy Solicited on Behalf of the Board of Directors
for Annual Meeting of
Shareholders to be held May 17, 2006
The undersigned hereby authorizes and appoints Malcolm G. Chace,
Merrill W. Sherman, and Linda H. Simmons, and each of them, as proxies with
full power of substitution in each, to vote all shares of Common Stock, par
value $.01 per share, of Bancorp Rhode Island, Inc. (the "Company") held of
record on March 31, 2006 by the undersigned at the Annual Meeting of
Shareholders to be held at 10:00 a.m. local time, on Wednesday, May 17,
2006, at the Hotel Providence, 311 Westminster Street, Providence, Rhode
Island, and at any adjournments or postponements thereof, on all matters
that may properly come before said meeting.
THE DIRECTORS RECOMMEND A VOTE FOR EACH PROPOSAL.
With- For All
For hold Except
PROPOSAL 1 - Election of five Class I [ ] [ ] [ ]
Directors with terms expiring in 2009.
Class I Directors (Term to Expire 2009)
Karen Adams
Meredith A. Curren
Bogdan Nowak
Cheryl W. Snead
John A.Yena
INSTRUCTION: To withhold authority to vote for any individual
nominee, mark "For All Except" and write that nominee's name in the
space provided below.
___________________________________________________________________________
For Against Abstain
PROPOSAL 2 - To Consider and act upon a [ ] [ ] [ ]
proposal to amend the Company's Amended
and Restated Non-Employee Director Stock
Plan to increase the number of shares of
common stock reserved for issuance
thereunder by 25,000 shares.
PROPOSAL 3 - Ratify the appointment of [ ] [ ] [ ]
KPMG LLP as independent auditors for
the Company.
This proxy when properly executed will be voted (i) as directed above, or,
in the absence of such direction, this proxy will be voted FOR the
specified nominees in Proposal 1 and FOR Proposals 2 and 3 and (ii) in
accordance with the judgment of the proxies upon other matters that may
properly come before said meeting or any adjournments or postponements
thereof.
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Please be sure to sign and date |Date |
this Proxy in the box below. | |
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---Shareholder sign above----------Co-holder (if any) sign above---
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Detach above card, sign, date and mail in postage paid envelope provided.
BANCORP RHODE ISLAND, INC.
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| This Proxy must be signed exactly as the name of the |
| Shareholder(s) appears on this card. |
|Executors, administrators, trustees, etc. should give full title as such.|
|If the signatory is a corporation, please sign full corporate name by |
|duly authorized officer. |
| PLEASE SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED |
| ENVELOPE WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. |
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IF YOUR ADDRESS HAS CHANGED, PLEASE CORRECT THE ADDRESS IN THE SPACE
PROVIDED BELOW AND RETURN THIS PORTION WITH THE PROXY IN THE ENVELOPE
PROVIDED.
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