This excerpt taken from the BNCN DEF 14A filed Apr 17, 2009.
Salary Continuation and Endorsement Split Dollar Agreements
The Bank also entered into amended Salary Continuation Agreements and associated Endorsement Split Dollar Agreements with the executives on December 18, 2007. Also referred to as SERPs, the Salary Continuation Agreements promise a specified annual retirement benefit to each executive when he attains the normal retirement age age 65 or a reduced annual benefit if the executives employment terminates before age 65, whether termination occurs because of involuntary termination without cause, voluntary termination for any reason, or termination because of disability. Benefits for termination before age 65 are determined solely by the amount of the liability accrual balance maintained by the Bank. Consistent with generally accepted accounting principles the Banks liability accrual balance increases incrementally each month so that the final liability accrual balance at the executives normal retirement age equals the present value of the specified normal retirement benefit. If an executives employment terminates before age 65, instead of the specified normal retirement benefit he will receive a reduced annual benefit that is based on the amount of the Banks liability accrual balance when employment termination occurs. The reduced benefit would not be payable until the executive finally attains age 65. Annual SERP benefits are payable for life, and in the case of Messrs. Montgomery, Callicutt, and Spencer only the benefit increases annually by 3%. Mr. Strayhorns benefit amount is fixed and does not increase annually. Like the employment agreements, the SERPs also provide for a lump-sum cash benefit payable immediately after a change in control, regardless of whether the executives employment also terminates. For Messrs. Montgomery, Callicutt, and Spencer the lump-sum benefit would consist of cash in an amount equal to the present value of the executives specified normal retirement age benefit, meaning the liability accrual balance projected to exist when the executive attains age 65. In Mr. Strayhorns case the lump-sum benefit would be the greater of (x) the SERP liability accrual balance when the change in control occurs or (y) $600,000. Like the employment agreements, the SERPs make clear that this lump-sum change-in-control benefit is payable on no more than one occasion. If the change-in-control benefit is paid under the SERPs the executives would be entitled to no other SERP benefits, except for a potential tax gross-up benefit and potential reimbursement of their legal expenses. The excise tax gross-up benefit potentially payable under the SERPs is not in addition to the excise tax gross-up benefit potentially payable under the executives employment agreements. Instead it is a single benefit affirmed in two separate agreements. If a change in control occurs while the executive is receiving or is entitled at age 65 to receive retirement benefits under the SERP, the executive would instead receive an immediate lump-sum payment consisting of the liability accrual balance. The Bank has assured each executive that it will reimburse the executives legal expenses if his SERP is challenged after a change in control, up to $500,000. This promise is in addition to the similar legal fee reimbursement promise contained in the employment agreements.
The amended Endorsement Split Dollar Agreements associated with the SERPs assure the executives designated beneficiaries of a death benefit after the executives death, whether death occurs before or after employment termination, but if the executive is terminated for cause he would forfeit all benefits under his SERP and the associated Endorsement Split Dollar Agreement. At the executives death the executives designated beneficiaries would be entitled to (x) an amount equal to the liability accrual balance existing at the executives death, payable under the SERPs in a single lump 90 days after the executives death, and (y) under the
Endorsement Split Dollar Agreements associated with the SERPs, 100% of the net death benefit payable under Bank-owned insurance policies on the executives lives, payable directly by the insurer to the designated beneficiary, or in Mr. Strayhorns case only the lesser of 100% of the net death benefit or $2 million. The term net death benefit means the total life insurance policy death proceeds minus the policy cash surrender value. The policy cash surrender value is payable in its entirety to the Bank. The Financial Accounting Standards Board clarified in late 2006 that a split dollar arrangement providing post-retirement death benefits requires the employer to recognize compensation expense during an employees working years to account for the split dollar insurance obligation, even though the split dollar benefit will ultimately be paid by the insurance company and not the employer. Accordingly, the Bank recognizes compensation expense associated with this post-retirement split dollar insurance arrangement.
Mr. McMurrays SERP and Mr. Nelsons SERP promise an annual normal retirement benefit payable for 15 years, $74,000 for Mr. McMurray and $53,000 for Mr. Nelson, payable in each case beginning at the age 65 normal retirement age. The annual benefit amount is fixed and does not increase annually. For early termination before age 65, instead of the specified normal retirement benefit Mr. McMurray and Mr. Nelson would receive a reduced annual benefit that is based on the amount of the Banks liability accrual balance when early termination occurs, whether termination occurs because of involuntary termination without cause, voluntary termination for any reason, or because of disability. For early termination because of disability the SERP benefit is not subject to a vesting requirement, but for early termination for other reasons the early termination benefit is payable if and only if a vesting condition is satisfied. The vesting condition in Mr. McMurrays SERP is a requirement that he shall have served with the Bank for at least ten years when early termination occurs. The vesting condition in Mr. Nelsons SERP is a requirement that he shall have served with the Bank for at least three years when early termination occurs. Mr. Nelsons SERP provides that after three years of continuous service he is 40% vested in the early termination benefit, becoming vested in the remaining 60% in equal 15% increments over the next four years. The vesting feature for early termination benefits would not apply, however, if a change in control occurs before early termination. The normal retirement, early termination, and disability benefits under Mr. McMurrays and Mr. Nelsons SERPs are payable for 15 years beginning at age 65.
If Mr. McMurrays employment is terminated involuntarily but without cause or voluntarily because of an adverse change in employment circumstances, in either case within 24 months after a change in control, promptly after termination he will receive a lump-sum payment in cash in an amount equal to the Banks SERP liability accrual balance when termination occurred. If the change-in-control benefit is paid to Mr. McMurray under his SERP he would be entitled to no other SERP benefits. Mr. McMurrays SERP does not provide for an excise tax gross-up benefit. If a change in control occurs while Mr. McMurray is receiving or is entitled at age 65 to receive annual retirement benefits under his SERP, instead of receiving annual benefits Mr. McMurray would receive an immediate lump-sum payment consisting of the liability accrual balance. The change-in-control benefit under Mr. Nelsons SERP is essentially the same as the change-in-control benefit under Mr. McMurrays SERP, except that Mr. Nelsons SERP change-in-control benefit is payable for involuntary termination without cause (x) within 24 months after a change in control or (y) before the change in control occurs but after the change in control is publicly announced. Finally, the SERP provides that the Bank will reimburse Mr. McMurray and Mr. Nelson for up to $25,000 of legal expenses if their SERPs are challenged after a change in control.
Mr. McMurrays Amended Endorsement Split Dollar Agreement assures his designated beneficiaries of a death benefit, whether death occurs before or after employment termination, but if Mr. McMurray is terminated for cause he would forfeit all benefits both under his SERP and under the associated Amended Endorsement Split Dollar Agreement. At his death Mr. McMurrays designated beneficiaries would be entitled to (x) an amount equal to the liability accrual balance existing at Mr. McMurrays death, payable under the SERP in a single lump within 90 days, and (y) under the Amended Endorsement Split Dollar Agreement, the lesser of 100% of the net death benefit payable under Bank-owned policies on McMurrays life or a fixed amount that changes each year according to a schedule. For 2008 the scheduled death benefit amount was $562,754, which would have been the maximum payable to Mr. McMurrays designated beneficiaries under the Amended Endorsement Split Dollar Agreement had Mr. McMurrays death occurred in 2008. Mr. Nelsons Endorsement Split Dollar Agreement provides for a death benefit of up to $250,000 payable to Mr. Nelsons designated beneficiaries from the net death proceeds of Bank-owned policies on his life.