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EXHIBIT 10.2
FIRST FARMERS & MERCHANTS NATIONAL BANK
COLUMBIA, TENNESSEE
BANK PLAN(TM)
OWNER'S MANUAL
DEFERRED COMPENSATION PLAN
APRIL 29, 1993
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Introduction
Your bank has purchased an executive compensation plan designed by Bank
Compensation Strategies Group through our Executive Benefits Consultant, Mark
Pletts of BCS in Bloomington, Minnesota.
Bank Compensation Strategies Group is a Minneapolis, Minnesota based company.
Our business is designing and marketing non-qualified executive compensation
products for executives of banks and other financial institutions. This is our
only business and our objective is to provide you with high quality products and
superior advice and service. We operate through a network of executive benefits
consultants throughout the midwestern and western United States.
Our products are endorsed and recommended by the American Bankers Association,
the California Bankers Association. the Colorado Bankers Association, the
Connecticut Bankers Association, the Georgia Bankers Association, the Community
Bankers Association of Illinois, the Indiana Bankers Association, the Iowa
Independent Bankers Association, the Iowa League of Savings Institutions, the
Kansas Bankers Association, the Louisiana Bankers Association, the Minnesota
Bankers Association, the Mississippi Bankers Association, the Montana Bankers
Association, the Nebraska Bankers Association, the Missouri League of Savings
Institutions, the New Mexico Bankers Association, the North Dakota Bankers
Association, the Oklahoma Bankers Association, the Pennsylvania Bankers
Association, the Savings League of Minnesota, the South Carolina Bankers
Association, the South Dakota Bankers Association, the Tennessee Bankers
Association, the Texas Bankers Association, the Utah Bankers Association, the
Vermont Bankers Association, the Independent Bankers Association of Wisconsin,
and the Wyoming Bankers Association.
We have prepared this Owner's Manual to provide you which a "plain English"
description of the plan which you have purchased, provide you with information
concerning records you should maintain concerning the plan at your bank, provide
guidance concerning the accounting procedures and issues concerning your plan,
describe the type and frequency of correspondence you should expect to receive
in the future and provide you with the names of experienced contact people at
our offices should you have any questions or if you need assistance. Please do
not hesitate to telephone us if we can be of assistance.
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Summary of Your Bank Plan(TM)
Deferred Compensation Plan
The proposals prepared for your bank; contemplated the establishment of Deferred
Compensation Plans to provide retirement income for the following individuals:
Estimated Estimated
Annual Annual Duration of
Income Retirement Retirement Retirement
Name Deferred Birthdate Age Age Benefit
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Abercrombie, K. 4,300 06-06-42 65 20,612 10 Years
Bailey, J. Jr. 4,700 11-30-42 65 22,529 10 Years
Bowsher, H. 11,100 04-23-28 70 10,605 10 Years
Cook, H. Jr. 11,100 01-16-41 65 47,037 10 Years
Hickman, W. 9,900 06-15-34 70 32,319 10 Years
Kennedy, S. 6,500 12-09-26 70 4,736 10 Years
Knox, T. 10,300 08-06-28 70 12,396 10 Years
Lancaster, J. 12,500 06-11-29 70 18,436 10 Years
Stevens, T. 3,900 04-23-51 65 41,897 10 Years
Wheeler,D. 4,700 06-07-42 70 32,249 10 Years
Wise, D. 9,900 08-22-31 70 20,753 10 Years
A Deferred Compensation Plan (DCP) is a non-qualified executive benefit plan in
which the eligible bank officer or director voluntarily elects to defer some or
all of his or her current compensation (salary or fees) in exchange for the
bank's promise to pay a deferred benefit some time in the future. Because a DCP
is a non-qualified plan, unlike a 401(k) plan or a pension plan, which are
qualified plans under Internal Revenue Service guidelines. a bank can
selectively make this plan available to certain highly compensated employees
without regard to the nondiscrimination requirements of qualified plans. The DCP
enables the bank official to reduce current taxable income in exchange for
larger payments at retirement when the recipient may be in a lower tax bracket.
Under this type of plan, the deferred fees or salary are expensed by the bank
and set aside in a separate liability account and interest is periodically
credited on the account balance. The deferred amount is not taxable income to
the individual and is not a tax deductible expense to the bank. The terms of the
DCP are covered in a written agreement between the individual covered by the
plan and the bank. The agreements often provide that if the covered individual
were to die prior to or during retirement, the promised benefits would be paid
to the individual's beneficiary or estate. A DCP is an unfunded plan, which
means that the employee has no rights under the agreement beyond those of a
general creditor of the bank, and there are no specific assets set aside by the
bank in connection with the DCP. Likewise, the DCP is not an employment
contract.
The agreement usually provides for fun vesting since the covered employee is
setting aside his or her current compensation. If the covered individual leaves
the bank's employ, the amount deferred may be payable in a lump sum.
The deferred compensation plans proposed by BCS are informally linked with a
single premium universal life insurance policy on the life of each participant
which is purchased by the bank; in connection with the implementation of the
plan. The employee is the insured, but the bank is the owner and beneficiary of
the policy. The insured employee has no claim on the policy, its cash value or
the proceeds thereof. Single premium policies are used because this type of
policy is the most efficient way for a financial institution to insure its
officials. While the insurance contract is
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generally purchased simultaneously with the execution of the DCP agreement,
there is no direct linkage between the two.
The insurance purchased by your bank in connection with the DCP is as follows:
Name of Insurer & Single Premium Initial Net
Insured Policy No. Insurance Deposit Insurance
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Abercrombie, K. West Coast 342049 70,000 140,000
Bailey, J. Jr. West Coast 342052 75,000 150,000
Bowsher, t1. A. Hamilton 8477347 110,000 70,000
Cook, H. Jr. West Coast 342055 160,000 310,000
Hickman, W. A. Hamilton 8477457 250,000 215,000
Kennedy, S. TMG Life 530987 35,000 35,000
Knox, T. A. Hamilton 8477444 75,000 85,000
Lancaster, J. West Coast 342058 110,000 125,000
Stevens, T. West Coast 342056 80,000 280,000
Wheeler, Dan A. Hamilton 8545033 140,000 215,000
Wise, D. West Coast 342057 110,000 140,000
The insurance cash surrender value is earned in other assets on the bank's books
and the plan design is such that the policy income is generally sufficient to
cover the insurance mortality costs and the interest crediting expense on the
deferred compensation balance. The insurance policy(ies) covers the bank's
contingent liability associated with the possible premature death of the covered
individual and also serves as an informal funding vehicle to cover the cost of
interest crediting.
After retirement, the benefit payments are taxable income to the individual and
are tax-deductible expenses to the bank as they are paid. If the individual were
to die, either prior to or during retirement, the bank would receive the
insurance death proceeds tax free, except for possible alternative minimum
taxes, and the payments made by the bank to the individual's beneficiary or
estate would be tax-deductible expenses. Since the present value of the bank's
obligation to the individual has been booked as of the retirement date, the
impact of the benefit payments on the bank's income statement is minimal.
The combination of tax-preferred income generated by the cash value of the
insurance policy, the tax-free insurance death benefit proceeds to the bank and
fully tax-deductible benefit payments by the bank are the economic reasons that
a bank can often provide this significant fringe benefit to its officials at
little or no cost to the bank.
Should a DCP participant covered by the DCP leave the bank prior to retirement,
the insurance policy on that individual can be transferred to one or more of the
bank's other officials for a modest policy transfer change. By taking advantage
of this feature, the bank can avoid policy surrender charges.
The cash value of the insurance policies purchased by the bank are a significant
asset on your books which earn tax preferred interest. The policy interest rates
are adjusted annually by the insurance company and will fluctuate with the
general level of interest rates in the economy, much the same as a bank's
average cost of funds. The insurance policies purchased by your bank were issued
by high quality insurance companies and you will receive periodic financial dare
on the insurer to enable you to monitor their financial condition and
performance. In order to diversify credit risk, the insurance policies purchased
by your bank may have been issued by more than one insurer.
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Employee Retirement Income Security Act
The Employee Retirement income Security Act (ERISA) has an impact on executive
benefit plans other than qualified retirement plans and your bank must comply
with the reporting requirements of ERISA. The Secretary of Labor has established
a simplified reporting format to satisfy this requirement. The Department of
Labor must be notified that the plan was adopted, that a copy of the plan will
be provided upon request, and that the plan covers only highly compensated
executives. The notice must be filed with the Secretary of Labor within 120 days
after the inception of the plan. A letter which satisfies this requirement was
provided to you shortly after the adoption of the plan for filing with the
Department of Labor. Please contact us if you did not receive this letter and we
will provide an additional copy.
Accounting Guidelines
When your bank made the wire transfer of funds to purchase the insurance
policies to commence the plan, we sent a letter to you which provided the
initial accounting entries necessary to account for the plan on the bank's
books. This section of the manual will provide you with a general discussion of
the accounting principles concerning the single premium insurance policies and
the Deferred Compensation Plan. The two elements of the plan, the key executive
insurance and the benefit plans should be accounted for separately.
Accounting for the Insurance Policies
The accounting rules, Financial Accounting Standards Board Technical Bulletin
No. 85-4, Accounting for Purchases of Life Insurance, provide that the amount
that could be realized under the insurance contract should be reported as an
asset.
When your bank wire transferred funds for the purchase of the insurance
policy(ies), a cash surrender value asset should have been recorded for the
amount of the single premium deposit, less the 2 percent policy load which was
written off as an expense. Beginning 30 days after that date and each month
thereafter, the insurance mortality costs should be recorded as an expense which
reduces the cash surrender value and the policy earnings should be recorded as
income, which increases the cash surrender value asset.
At the end of the calendar year, you will receive a year-end statement on each
individual insurance policy directly from the insurance company. The annual
statement will detail the income and expenses associated with each policy and
the year-end cash surrender value. You should use the year-end statements to
assure that your books balance to the insurance company's cash value figures.
Usually there are minor adjustments that have to be made.
If your policies were purchased from Alexander Hamilton Life, TMG Life or Zurich
American Life, you will receive a letter each July from that insurance company
for each policy. If your policies were purchased from Chubb Life, West Coast
Life or Pruco Life, you will receive a letter each January from that insurance
company for each policy. This letter will advise you of any change in the policy
interest rate and will contain a forecast of the income and expenses and policy
equity values for the next 12-month period (July to June for Alexander Hamilton,
TMG or Zurich American and January to December for Chubb, West Coast or Pruco).
You should use the projections to adjust your monthly entries for mortality
costs and policy earnings for the next 12 month period.
At each annual anniversary of the insurance policy(ies), you will receive a
statement of activity for each policy from the insurance company. This statement
can also be used to assure that your records are in balance with the insurance
company's records.
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SUBSIDIARY ACCOUNTS
We recommend that you establish a subsidiary record for each individual
insurance policy to assure that your records properly reflect the carrying value
of each individual policy and to facilitate balancing your books with the
periodic correspondence from the insurance company.
SURRENDER CHARGES
The insurance contracts contain a surrender charge of approximately 2 percent of
the original single premium deposit which is imposed at the beginning of years 2
and again at the beginning of year 3. From year 3 through year 10, the total 4
percent surrender charge remains in effect. You will not actually incur this
charge unless you turn the policy in; however, because the accounting rules
(Financial Accounting Standards Board Technical Bulletin No. 85-4, Accounting
for Purchases of Life insurance) require that insurance be carried on your books
at the cash surrender value, we recommend that you record the surrender charges
and reduce the cash value on your books in years 2 and 3. This accounting entry
on your boots does not affect the actual "equity" value of the policy and there
is no reduction in the policy income. In the materials and statements from the
insurance company, the "surrender value" is the difference between the policy
equity value and the surrender charge. After year 10, the surrender charges no
longer apply and the cash value of the policy will be equal to the equity value
of the policy. At this point, your cash surrender value asset account can be
increased by the amount of the surrender charge with a corresponding credit to
income.
Although the accounting guidelines for life insurance policies are as outlined
above, many CPAs have taken the position that the surrender charge need not be
booked because it is not a material item with respect to an institution's
overall financial position. Please feel free to consult your independent
accounting concerning accounting for the surrender charge or any other
accounting matter concerning this Plan.
INCOME TAXES AND DEFERRED INCOME TAXES
The insurance premiums paid are not tax deductible and the death benefits are
received tax free except for possible alternative minimum taxes.
The annual increase in the cash surrender value of insurance is not taxable
income to the bank unless the insurance policies are cashed in or surrendered.
In connection with its implementation of Financial Accounting Standard No. 96,
Accounting for Income Taxes, on August 3, 1988, the Financial Accounting
Standards Board issued an "action alert" which indicated that ". . . [a] tax
planning strategy to hold a life insurance policy until the death of the insured
would eliminate a deferred tax liability for the excess of cash surrender value
over premiums paid if the second criteria for tax strategies is met, that is, if
no significant future cash payments for premiums or interest would be required
to keep the policy in force until the death of the insured." Since the insurance
policies used in your benefit plan are single premium policies, no further
payments are required to keep the insurance in force and it is unlikely that a
financial institution would have to borrow against the policy cash value.
Provided that your tax planning strategy is to hold the policy until the death
of the insured, there is no need to record deferred taxes against the policy
income.
CALL REPORT TREATMENT
The instructions for the Consolidated Reports of Income and Condition ("Call
Reports") indicate with respect to Schedule RC -- Balance Sheet, that the cash
surrender value of life insurance policies be reported in Other Assets.
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With respect to Schedule R1-- Income Statement, the insurance policy income
should be included in "Other non-interest income " Expenses associated with the
insurance policies (load, mortality and surrender charges) should be included in
"Other non-interest expense."
Accounting for the Deferred Compensation Plans
The accounting for the deferred compensation plan your bank has established will
be determined by the terms of the written agreement(s) that were executed to
implement the plan.
There are many different forms these agreements may take and different
accounting treatments may apply. For example, if the agreements provide that a
director paid on an annual retainer basis defers a fixed dollar amount of fees
for a specific number of years in exchange for a specific annual payment at
retirement for a specific period of time, the bank must have accrued as of the
date of retirement, a liability equal to the then present value of the payments
to be made during the retirement period. In this situation, the interest
crediting rate would be fixed and the annual expense amounts for the various
plan years can be determined at the onset of the plan. If directors are
compensated only for meetings actually attended, it would not be possible to
pre-compute the annual entries and the ultimate amount of benefits to be paid or
the duration of benefits could not be determined until retirement. Also, if your
agreements provide for annual adjustments to the interest crediting rate
throughout the duration of the agreement, it would be impossible to determine
the ultimate level or duration retirement benefits in advance of the actual
retirement date.
Basically, the compensation deferred by each individual should be expensed as
"deferred compensation expense" including the amount of interest crediting,
rather than salary or director fee expense Salaries or directors fees will
decline by the amount deferred and the only net increase to the bank's overall
expenses associated with the plan will be the additional expense for interest
crediting. The plan illustrations provided to you by our executive benefits
consultant were based on a bank official who was salaried or on an annual
retainer, a fixed interest crediting rate selected by you, monthly crediting of
interest to the deferred balance and annual compounding of interest.
The suggested accounting entries provided to you by letter when you purchased
the insurance policies were based on the final plan illustrations provided to
you by our executive benefits consultant.
You may wish to consult with your CPA concerning accounting for the DCP if you
have any questions.
If you provide us with a copy of your deferred compensation agreement, we will
assist you concerning the proper accounting for your plan.
Subsidiary Accounts
We recommend that you establish a separate subsidiary liability account for each
official who is covered by a salary continuation or deferred compensation plan
at your bank.
Income Taxes and Deferred Income Taxes
The establishment of a deferred compensation plan may affect your bank's
deferred taxes because you may be able to record a credit in the income
statement against the expense accruals for the pop. The calculations concerning
deferred taxes are complex and unique to each individual bank's tax situation
and we recommend that you consult with your CPA concerning deferred taxes.
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During the pre-retirement period, the accruals and expenses for the DCP are not
tax deductible expenses to the bank and are not taxable income to the bank
official. When the payments are actually made to the executive after retirement,
those cash payments are tax deductible expenses to the bank and taxable income
to the recipient.
Call Report Treatment
The accrued expenses for the DCP should be included in non-interest expenses.
specifically, salaries and employee benefits, in Schedule RI -- Income
Statement.
With respect to Schedule RC -- Balance Sheet, the balance of the liability
account for amounts accrued for the DCP should be reported in Other liabilities.
DOCUMENTATION AND APPROVAL OF YOUR BANK PLAN(TM)
The establishment of the Deferred Compensation Plan(s) and the purchase of
insurance on the lives of the bank's officials should have been approved by your
bank's board of directors or by an appropriate committee thereof.
The benefit agreements established by your bank should be in writing and should
contain all of the terms of the agreement between the bank and the covered
executive.
Our executive benefits consultant may have provided you courtesy copies of
sample agreements for the benefit agreements. We recommend that your bank's
attorney either prepare or review the agreements prior to their execution.
BANK REGULATORY ISSUES
Bank examiners and the venous bank regulatory agencies will expect: that your
bank account for the benefit plans and the related insurance policies consistent
with generally accepted accounting principles; that the benefit plans are
covered by written agreements between the bank and the covered executives; that
the benefit plan and related insurance be properly approved by your board of
directors; that you are dealing with a high quality insurance company; that you
maintain current financial data on the insurance company(ies) and that the
amount of cash surrender value of insurance with any one company is reasonable
in relation to your bank's capital and reserves. Policies purchased by national
banks and state banks in certain states must comply with Banking Circular No.
249 (Bank Purchases of Life Insurance) which was issued by the Comptroller of
the Currency in 1991.
We are familiar with expectations of the bank regulatory agencies and your Bank
Plan(TM) has been designed accordingly.
Please feel free to refer any questions from bank examiners to us.
CONTACT PEOPLE IN OUR COMPANY
Kevin Murphy Vice President of Compliance
Bank Compensation Strategies Group
3600 West 80th Street, Suite 200
Minneapolis, MN 55431
612/893-6767
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