8-K: Fidelity D & D Bancorp Enhances Executive Compensation with New Retirement and Life Insurance Agreements

Fidelity D & D Bancorp has entered into a supplemental executive retirement plan and a split dollar life insurance agreement with Executive Vice President and Chief Consumer Banking Officer, Ruth Turkington.

Summary

• Fidelity D & D Bancorp has established a supplemental executive retirement plan (SERP) for Ruth Turkington, crediting her account with $5,417 monthly until age 70, with a fixed 4% annual interest rate compounded monthly.
• The SERP account will be paid out in monthly installments upon separation from service after age 70, or earlier under specific conditions such as disability or change in control.
• A split dollar life insurance agreement was also established, providing a death benefit to Mrs. Turkington's beneficiary equal to the lesser of three times her base salary or the net death proceeds from bank-owned life insurance policies.
• The bank will also include the current $50,000 group term plan coverage amount towards the benefit provided by the Split Dollar Agreement.
• Mrs. Turkington may retain a benefit under the Split Dollar Agreement equal to the greater of two times her highest base salary or the net death proceeds after separation from service if vesting requirements are met.

Sentiment

Score: 7

Explanation: The document outlines positive compensation arrangements for a key executive, indicating a commitment to retaining talent. The terms are generally favorable, but there are some forfeiture clauses that could be seen as negative. Overall, the sentiment is moderately positive.

Positives

• The SERP provides a structured retirement benefit with a guaranteed interest rate, offering long-term financial security for the executive.
• The split dollar life insurance agreement provides a significant death benefit for the executive's beneficiary, enhancing financial protection.
• The vesting provisions in the split dollar agreement provide an incentive for continued service and loyalty to the bank.
• The agreements are designed to comply with Code Section 409A, ensuring tax compliance and proper administration.

Negatives

• The SERP benefits are subject to forfeiture if the executive is terminated for cause or breaches post-employment restrictive covenants.
• The split dollar life insurance benefits are forfeited if the executive is terminated for cause.
• If separation from service occurs before the first day of the fourth plan year for a reason other than death, disability or following a change in control, the participant will not receive any benefit from the SERP.

Risks

• The bank's board has the discretion to change the monthly crediting amount to the SERP account, which could impact the final benefit.
• The split dollar life insurance benefit is dependent on the net death proceeds of the bank-owned life insurance policies, which could fluctuate.
• The agreements are subject to regulatory restrictions, including potential termination of benefits if the executive is removed from office by a federal banking agency.
• The agreements are subject to forfeiture if the executive violates certain provisions of the employment agreement.

Future Outlook

The agreements are designed to provide long-term retirement and death benefits for the executive, with payments commencing upon separation from service, disability, or change in control, subject to certain conditions.

Management Comments

• The Employer recognizes the valuable services the Executive has performed for the Employer and wishes to encourage the Executives continued employment and to provide the Executive with additional incentive to achieve corporate objectives.

Industry Context

These types of executive compensation packages are common in the banking industry to attract and retain key talent, aligning executive interests with the long-term success of the institution.

Comparison to Industry Standards

• Supplemental Executive Retirement Plans (SERPs) are a common tool used by financial institutions to provide additional retirement benefits to key executives, often supplementing traditional 401(k) plans.
• The 4% interest rate on the SERP is within the typical range for such plans, though some may offer variable rates tied to market performance.
• Split dollar life insurance agreements are also frequently used in executive compensation, providing a tax-efficient way to offer life insurance benefits.
• The death benefit multiples (3x base salary during employment, 2x after separation) are fairly standard for these types of agreements, though some companies may offer higher or lower multiples depending on the executive's role and the company's financial position.
• Companies like JPMorgan Chase, Bank of America, and Wells Fargo also utilize similar executive compensation strategies, including SERPs and split dollar life insurance, to attract and retain top talent.

Stakeholder Impact

• Shareholders may view the executive compensation package as a positive sign of the company's commitment to retaining key talent.
• Employees may see the package as a positive indication of the company's commitment to its leadership.
• The executive benefits from enhanced retirement and life insurance coverage.

Next Steps

• The bank will begin monthly crediting to the SERP account.
• The bank will maintain the life insurance policies as per the split dollar agreement.
• The executive will need to complete beneficiary designation forms.

Key Dates

Keywords

executive compensation, retirement plan, life insurance, SERP, split dollar, deferred compensation, banking, benefits