boli the most misunderstood revenue generator · historical boli transactions (2010-2018 new...

BOLI – The Most Misunderstood

Revenue Generator

September 21, 2019

WHY BOLI?AS OUTLINED IN FDIC FIL 127-2004, BOLI CAN BE USED TO OFFSET THE FOLLOWING

EXPENSES:

PAGE 2

How BOLI is Different From Typical Life Insurance?

PAGE 3

*Illustrations are to convey conceptual differences only, not exact proportions of any particular products

❑ BOLI was designed specifically for banks

❑ It creates tax free “other income”

❑ There are no surrender charges

❑ It is a single, one-time premium; not monthly or annual

❑ It is a “bank eligible” earning asset

❑ The earnings begin to compound immediately

❑ The death benefit can be split between bank and employee

❑ It has a reduced death benefit to minimize mortality charges (see below)

Within First Year of Purchase* Several Years Later*

Death

Benefit

Annual Premium

Death Benefit

One-Time

Premium

Cash Value

Death

Benefit

Annual

Premium

Death Benefit

One-Time

Premium

Cash Value

Death Benefit = Drag on Earnings

No Surrender Changes =

Immediate Cash Value Increases

(Earnings)

BOLI is a Single Premium

BOLI was designed to have as little

death benefit as possible, while still

complying with the IRS Tax Code

for life insurance

Typically life insurance takes years

before the cash value increases

greater than the surrender charges

Regular life insurance is annual

premium. This means that BOLI

premium is going to work

immediately to increase in cash

value

Peer Group BOLI Holdings for All Banks(All Banks)

Asset Size Total

Number

of Bank

Banks

with

BOLI

% of

Banks

with BOLI

Small Banks (under $250M) 2,925 1,540 52.65%

Medium Banks ($250M to $999M) 1,736 1,287 74.14%

Large Banks ($1B to $9.999B) 689 571 82.87%

Super Banks ($10B and above) 145 114 78.62%

Total 5,495 3,512 63.91%

States: All

Source: FDIC Call Report as of 12/31/2018

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Small Banks Medium Banks Large Banks Super Banks

Percent of Banks with BOLI

Percent of Banks without BOLI

PAGE 4

Peer Group BOLI Holdings for All Banks(Georgia Banks)

Asset Size Total

Number

of Bank

Banks

with

BOLI

% of

Banks

with BOLI

Small Banks (under $250M) 112 65 58.04%

Medium Banks ($250M to $999M) 46 36 78.26%

Large Banks ($1B to $4.999B) 6 5 83.33%

Super Banks ($5B and above) 4 4 100.00%

Total 168 110 65.48%

States: GA

Source: FDIC Call Report as of 12/31/2018

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

Small Banks Medium Banks Large Banks Super Banks

Percent of Banks with BOLI

Percent of Banks without BOLI

PAGE 5

BOLI PRODUCT TYPESBFS GROUP WILL DESIGN THE BEST BOLI STRATEGY TO FIT YOUR

REQUIREMENTS AND RISK TOLERANCE.

PAGE 6

HISTORICAL BOLI TRANSACTIONS(2010-2018 New Premium Sales Trending)

bfsmcgroup.com

Source: Industry Research Data Report – IBIS Associates and SNL Financial

-

2,000

4,000

6,000

8,000

10,000

12,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

47%81%

84%

54%

57%

19%14%

48%

9%

0%

3%

3%

9%18% 40% 31%

20%

32%

53%

16%

13%

37%25%

41%

54%

32%

60%

$ 3,643 M

$ 2,745 M

$ 4,413 M

$ 3,179 M

$ 3,269 M

$ 4,058 M

$ 3,245 M

$ 5,420 M

$ 1,747 M

2010 2011 2012 2013 2014 2015 2016 2017 2018

Total 3,643 2,745 4,413 3,179 3,269 4,058 3,245 5,420 1,747

General Account 1,499 1,495 1,391 1,896 2,479 3,050 2,948 3,266 1,501

Hybrid Account 1,456 864 884 1,009 698 494 149 188 33

Separate Account 688 387 2,138 274 92 515 147 1,967 213

PAGE 7

HISTORICAL RATES(AVERAGE RATES)

*BOLI historical rates are an average of first year net crediting rates from a sample of general account products. Treasury rates are based on the average of the past year’s rates.

These returns do not reflect the payment of any death benefits. Past returns are not indicative of future results.

Source: Based on the initial first year new premium tier 1 (if applicable price tiers apply) interest rates for the following highly rated most commonly

placed BOLI insurance carriers- Great-West Life, Guardian, MassMutual, MetLife, Midland National, Minnesota Life, New York Life, Northwestern Mutual, Ohio National

Tax Rate: 25.50%

PAGE 8

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00

8.00

9.00

10.00

11.00

% R

ate

Year

Year BOLI

Historical Rates*

BOLI

Tax-Equivalent

5 Year Treasury 10 Year Treasury

BOLI ATTRIBUTES

• A single premium purchase of a life insurance policy on the lives of “highly compensated” employees*

(top 35% highest paid).

• Bank is the owner and beneficiary of the life insurance policies.

• The policy’s initial cash value is 100% of the initial premium.

• Principal does not fluctuate (not a mark-to-market asset).

• Inside build-up of the policy’s cash value is non taxable income to the bank. Death benefit proceeds

are received tax-free.

• Institutionally priced products that result in higher yields.

• Total policy value is available upon request, with no surrender charge.

• Growth in cash value is recorded as “Other Non-Interest Income” on the Bank’s financial statements.

PAGE 9

SIZING A NEW BOLI TRANSACTION

• In accordance with FDIC FIL 127-2004, the bank should not exceed 25% of their Tier 1

Capital.

• In accordance with FDIC FIL 127-2004, when considering a BOLI transaction, a Bank

should ensure that the transaction complies with its legal lending limit and concentration

of credit limit.

• As of the end of the 2nd Quarter 2019, XYZ Bank had $27,584,000 of Tier 1 Capital. In

accordance with FDIC FIL 127-2004, XYZ Bank has the ability to purchase $6,896,000 of

BOLI without exceeding the suggested regulatory guidelines.

PAGE 10

Cash Value as of

6/30/2019

BOLI as a % of

Allowable Capital

BOLI Maximum per Regulatory Guidance $6,896,000 25.00%

Less: Current BOLI $0 0.00%

Remaining BOLI Capacity $6,896,000 25.00%

PROPOSED BOLI TRANSACTIONAlternative Investments

PAGE 11

Tier 1 Capital + ALLL $27,584,000

BOLI Capacity @ 25% $6,896,000

BOLI Premium Assumption $5,000,000

Marginal Tax Rate 25.50%

Investment Alternatives Yield & Earnings Comparison

BOLI Alternative

Principal Investment $5,000,000 BOLI Premium $5,000,000 Annual Net Yield on BOLI 3.50%

Alternative Investment Yield 2.00% BOLI Yield 3.50% Net After Tax Yield 1.49%

Gross Earnings $100,000 Gross Earnings $175,000 Yield Improvement 2.01%

Tax on Earnings @ 0.255 $25,500 Tax on Earnings @ 0.255 $0

Net after Tax Income $74,500 Net After Tax Income $175,000 Net after Tax Income from BOLI $175,000

Net After Tax Yield 1.49% Tax Equivalent Yield 4.70% Net after Tax Income from AI $74,500

Total Death Benefit $0 Total Death Benefit $17,388,000 Increased Earnings $100,500

Pure Insurance $12,388,000

Alternative Investment Trade Out Summary

Annual

Net Income

Efficiency

Ratio

Return on

Average Equity

Effective

Tax Rate

Annual Non Interest

Income

Before BOLI 2,325,145 67.29% 9.19% 25.50% 601,000

After BOLI 2,425,645 66.36% 9.58% 24.10% 776,000

Net Impact of BOLI Investment 4.32% 1.39% 4.32% 5.48% 29.12%

l

l

l

l

Alternative Investment Trade Out

Pure insurance (Total Death Benefit - Cash Surrender Value) will be additional unbooked income above cash value at time of death.

Return on

Average Assets

1.06%

1.10%

4.32%

Asset growth inside a life insurance policy is not currently taxed if held until maturity

Reflects a $5M new BOLI purchase

Financial Impact

Alternative Investment Trade Out

BOLI Yield does not include death benefits

Source LTM Quarterly Call Report as provided by SNL.

PROPOSED PREMIUM ALLOCATION

PAGE 12

Year

Cash

Surrender

Value

Annual

Net

Yield

Tax

Equivalent

Yield

Yield

Since

Inception

Net

Amount at

Risk

Death

Benefit

BOLI

Income

5,000,000

1 5,175,000 3.50% 4.70% 3.50% 12,213,000 17,388,000 175,000

2 5,349,915 3.38% 4.54% 3.44% 12,037,309 17,387,224 174,915

3 5,525,927 3.29% 4.42% 3.39% 11,880,744 17,406,671 176,012

4 5,702,757 3.20% 4.30% 3.34% 11,690,651 17,393,408 176,830

5 5,880,683 3.12% 4.19% 3.30% 11,467,332 17,348,014 177,926

6 6,058,868 3.03% 4.07% 3.25% 11,269,494 17,328,361 178,185

7 6,238,816 2.97% 3.99% 3.21% 11,042,704 17,281,520 179,948

8 6,421,613 2.93% 3.93% 3.18% 10,788,310 17,209,924 182,797

9 6,607,198 2.89% 3.88% 3.15% 10,505,445 17,112,643 185,585

10 6,796,164 2.86% 3.84% 3.12% 10,262,207 17,058,371 188,966

11 6,989,175 2.84% 3.81% 3.09% 10,064,412 17,053,587 193,011

12 7,185,571 2.81% 3.77% 3.07% 9,772,376 16,957,946 196,396

13 7,386,048 2.79% 3.74% 3.05% 9,528,002 16,914,050 200,477

14 7,590,642 2.77% 3.72% 3.03% 9,336,489 16,927,131 204,594

15 7,800,143 2.76% 3.70% 3.01% 9,048,166 16,848,310 209,502

16 8,014,647 2.75% 3.69% 2.99% 8,816,112 16,830,759 214,504

17 8,233,447 2.73% 3.66% 2.98% 8,562,785 16,796,232 218,800

18 8,457,397 2.72% 3.65% 2.96% 8,372,823 16,830,220 223,950

19 8,685,747 2.70% 3.62% 2.95% 8,077,744 16,763,491 228,350

20 8,919,393 2.69% 3.61% 2.94% 7,849,066 16,768,459 233,647

Assumptions:

l I llustrat ions based on September 2019 rates

l I llustrated Non-Guaranteed Values, average age 45, male NS

l Tax Rate: 25.50%

l Does not include death benefit proceeds

l Pending carrier approval

General Account

Hypothetical BOLI Illustration

Guaranteed Issue

BOLI – A Key Component of Profitability

• Larger banks are typically more profitable than smaller banks.

• Smaller banks are typically less profitable despite having higher Net Interest Margins

(“Margin”), Interest Rate Spreads (“Spread”), and a higher percentage of Earning-

Assets/Assets.

• Smaller banks are almost totally dependent on Margin and Spread for their profits.

• Larger banks typically have more Non-Interest Income and better Efficiency Ratios than smaller

banks.

• Non-Interest Income is the primary differentiator of profitability between large and small banks.

• Banks typically have little control over their Margin and Spread as they are dictated by market

forces, however, Non-Interest Income can be improved efficiently through the use of BOLI.

PAGE 13

Increase Non-Interest Income

PAGE 14

Sources of Non-Interest Income include:

• Fees

• Service charges

• Wealth management services

• Stock brokerage fees

• Sale of insurance

• BOLI

Not all sources of Non-Interest Income are equal:

• Some are easier to implement than others

• Some require size and scale

• Some require time and manpower to implement and operate

• Some involve ongoing expenses

BOLI is a low risk strategy for generating Non-Interest Income:

• Quick and easy to implement

• Available to Banks of all sizes

• Involves no out of pocket expenditures by the Bank

• Involves no additional staffing commitment

EARLY SURRENDER ANALYSIS

PAGE 15

Year

Initial

Premium

End of Year

Cash

Surrender

Value

Taxable

Policy

Gain

Tax Due

Upon

Surrender

@ 25.50%

10% MEC

Penalty Due

Upon

Surrender

Total

Tax and

Penalty Due

Upon

Surrender

Net Cash Due

to Bank

Following

Surrender

Cumulative

Net Yield After

Surrender

Alternative

Taxable

Investment

Rate @

25.50%

1 5,000,000 5,175,000 175,000 44,625 17,500 62,125 5,112,875 2.26% 3.03%

2 5,349,915 349,915 89,228 34,992 124,220 5,225,695 2.23% 3.00%

3 5,525,927 525,927 134,111 52,593 186,704 5,339,223 2.21% 2.97%

4 5,702,757 702,757 179,203 70,276 249,479 5,453,278 2.19% 2.94%

5 5,880,683 880,683 224,574 88,068 312,642 5,568,040 2.18% 2.92%

6 6,058,868 1,058,868 270,011 105,887 375,898 5,682,970 2.16% 2.90%

7 6,238,816 1,238,816 315,898 123,882 439,780 5,799,036 2.14% 2.87%

8 6,421,613 1,421,613 362,511 142,161 504,673 5,916,941 2.13% 2.86%

9 6,607,198 1,607,198 409,835 160,720 570,555 6,036,643 2.12% 2.84%

10 6,796,164 1,796,164 458,022 179,616 637,638 6,158,526 2.11% 2.83%

11 6,989,175 1,989,175 507,240 198,917 706,157 6,283,018 2.10% 2.82%

12 7,185,571 2,185,571 557,321 218,557 775,878 6,409,693 2.09% 2.81%

13 7,386,048 2,386,048 608,442 238,605 847,047 6,539,001 2.09% 2.80%

14 7,590,642 2,590,642 660,614 259,064 919,678 6,670,964 2.08% 2.79%

15 7,800,143 2,800,143 714,037 280,014 994,051 6,806,092 2.08% 2.79%

16 8,014,647 3,014,647 768,735 301,465 1,070,200 6,944,447 2.07% 2.78%

17 8,233,447 3,233,447 824,529 323,345 1,147,874 7,085,573 2.07% 2.78%

18 8,457,397 3,457,397 881,636 345,740 1,227,376 7,230,021 2.07% 2.78%

19 8,685,747 3,685,747 939,865 368,575 1,308,440 7,377,307 2.07% 2.78%

20 8,919,393 3,919,393 999,445 391,939 1,391,385 7,528,009 2.07% 2.77%

21 9,157,541 4,157,541 1,060,173 415,754 1,475,927 7,681,614 2.07% 2.77%

22 9,400,216 4,400,216 1,122,055 440,022 1,562,077 7,838,139 2.06% 2.77%

23 9,647,441 4,647,441 1,185,098 464,744 1,649,842 7,997,600 2.06% 2.77%

24 9,900,204 4,900,204 1,249,552 490,020 1,739,573 8,160,632 2.06% 2.77%

25 10,157,610 5,157,610 1,315,190 515,761 1,830,951 8,326,658 2.06% 2.77%

26 10,420,692 5,420,692 1,382,276 542,069 1,924,346 8,496,346 2.06% 2.77%

27 10,688,504 5,688,504 1,450,568 568,850 2,019,419 8,669,085 2.06% 2.76%

28 10,961,060 5,961,060 1,520,070 596,106 2,116,176 8,844,884 2.06% 2.76%

29 11,239,471 6,239,471 1,591,065 623,947 2,215,012 9,024,459 2.06% 2.76%

30 11,522,706 6,522,706 1,663,290 652,271 2,315,561 9,207,145 2.06% 2.76%

30 Year Early Surrender Analysis

Assumptions:

l Illustrations based on September 2019 rates

l Illustrated Non-Guaranteed Values, average age 45, male NS

l Tax Rate: 25.50%

DEATH BENEFIT ANALYSIS

PAGE 16

Plan

Year

Cash

Surrender

Value ($)

Net Yield

Since

Inception

(%)

Tax-

Equivalent

Yield Since

Inception

(%)

Net Amount

at Risk ($)

Death

Benefit ($)

Net Return

at Death

(%)

Tax-

Equivalent

Net Return

at Death

(%)

5,000,000

1 5,175,000 3.50% 4.70% 12,213,000 17,388,000 247.76% 332.56%

2 5,349,915 3.44% 4.62% 12,037,309 17,387,224 86.48% 116.08%

3 5,525,927 3.39% 4.55% 11,880,744 17,406,671 51.56% 69.21%

4 5,702,757 3.34% 4.49% 11,690,651 17,393,408 36.57% 49.09%

5 5,880,683 3.30% 4.43% 11,467,332 17,348,014 28.25% 37.92%

6 6,058,868 3.25% 4.37% 11,269,494 17,328,361 23.02% 30.90%

7 6,238,816 3.21% 4.31% 11,042,704 17,281,520 19.38% 26.02%

8 6,421,613 3.18% 4.26% 10,788,310 17,209,924 16.71% 22.43%

9 6,607,198 3.15% 4.22% 10,505,445 17,112,643 14.65% 19.66%

10 6,796,164 3.12% 4.18% 10,262,207 17,058,371 13.06% 17.53%

11 6,989,175 3.09% 4.15% 10,064,412 17,053,587 11.80% 15.84%

12 7,185,571 3.07% 4.12% 9,772,376 16,957,946 10.71% 14.38%

13 7,386,048 3.05% 4.09% 9,528,002 16,914,050 9.83% 13.19%

14 7,590,642 3.03% 4.06% 9,336,489 16,927,131 9.10% 12.22%

15 7,800,143 3.01% 4.04% 9,048,166 16,848,310 8.44% 11.32%

16 8,014,647 2.99% 4.02% 8,816,112 16,830,759 7.88% 10.58%

17 8,233,447 2.98% 4.00% 8,562,785 16,796,232 7.39% 9.92%

18 8,457,397 2.96% 3.98% 8,372,823 16,830,220 6.98% 9.36%

19 8,685,747 2.95% 3.96% 8,077,744 16,763,491 6.57% 8.82%

20 8,919,393 2.94% 3.94% 7,849,066 16,768,459 6.24% 8.37%

21 9,157,541 2.92% 3.92% 7,600,759 16,758,300 5.93% 7.96%

22 9,400,216 2.91% 3.91% 7,426,171 16,826,386 5.67% 7.61%

23 9,647,441 2.90% 3.89% 7,139,107 16,786,548 5.41% 7.26%

24 9,900,204 2.89% 3.88% 6,930,143 16,830,347 5.19% 6.96%

25 10,157,610 2.88% 3.86% 6,704,023 16,861,632 4.98% 6.69%

26 10,420,692 2.86% 3.85% 6,460,829 16,881,521 4.79% 6.43%

27 10,688,504 2.85% 3.83% 6,199,332 16,887,836 4.61% 6.19%

28 10,961,060 2.84% 3.82% 6,028,583 16,989,643 4.47% 5.99%

29 11,239,471 2.83% 3.80% 5,732,130 16,971,602 4.30% 5.78%

30 11,522,706 2.82% 3.79% 5,530,899 17,053,605 4.17% 5.60%

Assumptions:

l Illustrations based on September 2019 rates

l Illustrated Non-Guaranteed Values, average age 45, male NS

l Tax Rate: 25.50%

ACTIVE BOLI CARRIER RATINGSHIGHEST TO LOWEST RATED

PAGE 17

Gross Minimum Credited Rate 2.00% Gross Minimum Credited Rate 1.00% Gross Minimum Credited Rate 2.00%

Comdex Rating 100 Comdex Rating 100 Comdex Rating 99

A.M. Best Company A++ (1) A.M. Best Company A++ (1) A.M. Best Company A++ (1)

Standard & Poor's AA+ (2) Standard & Poor's AA+ (2) Standard & Poor's AA+ (2)

Moody's Aaa (1) Moody's Aaa (1) Moody's Aa2 (3)

Fitch Ratings AAA (1) Fitch Ratings AAA (1) Fitch Ratings AA+ (2)



A.M. Best Company A++ (1) A.M. Best Company A+ (2) A.M. Best Company A+ (2)

Standard & Poor's AA+ (2) Standard & Poor's AA (3) Standard & Poor's AA- (4)

Moody's Aa3 (4) Moody's Aa3 (4) Moody's Aa3 (4)

Fitch Ratings AA+ (2) Fitch Ratings AA (3) Fitch Ratings AA (3)



A.M. Best Company A+ (2) A.M. Best Company A+ (2) A.M. Best Company A+ (2)

Standard & Poor's AA- (4) Standard & Poor's AA- (4) Standard & Poor's A+ (5)

Moody's Aa3 (4) Moody's A1 (5) Moody's - -

Fitch Ratings AA- (4) Fitch Ratings A+ (5) Fitch Ratings A+ (5)

Northwestern Mutual (WI) New York Life (NY)

Massachusetts Mutual (MA) Great-West Life & Annuity (CO) Minnesota Life (MN)

Lincoln National (IN)Metropolitan Life (NY)

Guardian Life (NY)

Midland National (IA)*

*Hybrid GMCR is 1.00%

Sharing of Death Benefits – Ancillary Benefits:

• Methodologies for sharing the proceeds:

- Endorsement Split Dollar – Supplemental Life or Group Term Replacement (GTR)

- Death Benefit Only

▪ Endorsement Split Dollar Plan - a type of plan in which an employer (policy owner) promises a

specified death benefit to the employee’s (insured) named beneficiary(ies). This plan can be

provided on a pre-retirement and/or post-retirement benefit basis. In this method, the insurance

coverage (Net At Risk) from BOLI can be utilized as a supplemental benefit to employees; or it can

be used to replace and enhance the existing Group Term Coverage in place in a cost-efficient

manner. In the event of death, the split dollar proceeds are paid directly from the insurance carrier

to the beneficiary(ies), with any remaining proceeds paid to the Bank. The employee must report

imputed income each year on their W2 as long as they are entitled to a benefit, and would

substantially reduce the reportable income amount on an annual basis in a GTR scenario. The

death benefit is not taxable to the insured’s beneficiary(ies).

▪ Death Benefit Only Plan - a type of plan in which an employer (policy owner) promises a specified

benefit amount to the employee’s (insured) beneficiary(ies). This plan can be provided on a pre-

retirement and/or post-retirement benefit basis. In the event of death, the proceeds are paid 100%

to the Bank, who would then pay the named beneficiary(ies) directly, and keep the remaining

proceeds. There is no reportable income associated with a DBO Plan, but proceeds are taxable to

the beneficiary(ies) when paid. The insurance proceeds paid to the employee’s would be

considered tax-deductible to the Bank when paid.

PAGE 16

Life Insurance Sharing Sample

PAGE 19

50 100,000 200,000 300,000 311,637 735,464 1,047,101 535,464

51 104,000 208,000 322,979 726,704 1,049,683 518,704

52 108,160 216,320 334,165 718,455 1,052,620 502,135

53 112,486 224,973 345,237 707,735 1,052,971 482,762

54 116,986 233,972 356,148 694,488 1,050,636 460,517

55 121,665 243,331 366,830 682,304 1,049,134 438,974

56 126,532 253,064 377,821 668,744 1,046,565 415,680

57 131,593 263,186 389,089 653,670 1,042,759 390,483

58 136,857 273,714 400,673 637,070 1,037,743 363,356

59 142,331 284,662 412,543 622,940 1,035,484 338,278

60 148,024 296,049 424,681 611,540 1,036,221 315,491

61 153,945 307,891 437,134 594,502 1,031,636 286,611

62 160,103 320,206 449,917 580,392 1,030,309 260,186

63 166,507 333,015 463,113 569,629 1,032,741 236,614

64 173,168 346,335 476,756 553,037 1,029,793 206,702

65 180,094 360,189 490,667 539,734 1,030,402 179,545

66 504,807 524,999 1,029,805 524,999

67 519,102 513,911 1,033,013 513,911

68 533,577 496,226 1,029,803 496,226

69 548,216 482,430 1,030,647 482,430

70 563,042 467,325 1,030,367 467,325

Assumption:

l Illustrations reflect Guaranteed Issue rates as of September 2019

l Pre-Retirement SokyBenefit equal to Tw o Times (2x) Salary

l Projected Salary Grow th: 4% annually

l Retirement Age 65

BOLI

Premium

2x Salary

Split Dollar

Benefit

Amount

For the Employee For the Bank

Insurance

Age

Employee

Salary

Cash

Surrender

Value

Net

at Risk

Total

Death

Benefit

Excess/

(Shortfall)

NAR

Coverage

BOLI ISSUES / RISKS

Credit

• Only the highest rated carriers provide BOLI products. As a life insurance policy owner, a Bank is in

the first position as a creditor in the event of a bankruptcy.

• The Bank has the right to direct a IRC 1035 Exchange from one carrier to another (in the event of a

credit downgrade or carrier non-performance) without creating a taxable event.

Interest Rate

• Carrier resets the interest rate each quarter or year depending on the product’s portfolio investment

return and current interest rate environment.

Compliance

• The BOLI transaction complies with FDIC FIL 127-2004, and applicable state insurable interest Laws.

Price Risk

• Assumed by carriers, a Bank’s investment in BOLI is always held and accounted for at current book

value.

PAGE 20

BOLI ISSUES / RISKS

Liquidity

• A small percentage of a Bank’s total assets are involved.

Transaction

• There is over $160 billion of BOLI on banks’ balance sheets.

Tax and Insurable Interest Implication

• There are no adverse tax implications of the BOLI asset if held to maturity. The bank has significant

insurable interest in the lives of the employees.

Reputation Risk

• A Bank will be required to obtain written consent from all participants to comply with transparency

regulations.

• A Bank will be permitted to purchase insurance only on specific individuals associated with the bank.

PAGE 21

Annual Review of BOLI Program

PAGE 22

- Additional Details of this review can be found in our 2018 BOLI Annual Review Binder.- Capital and BOLI Values as of June 30, 2019.

Pursuant to FDIC FIL 127-2004, which addresses ongoing risk management of Bank Owned Life Insurance

(“BOLI”), management reviewed the following items from XYZ Bank’s BOLI Investment policy:

1) Identification of employees that are insured: All insured lives are current or former employees of the Bank.

2) Assessment of death benefit amounts relative to employee salaries: A stratification was run showing the average insurance multiple of 4.07 for the Bank.

3) Calculation of the percentage of insured persons still employed by the institution: 100% of the original insured group remains employed by the Bank.

4) Evaluation of the material changes to BOLI risk management policies: No changes at this time.

5) Assessment of the effects of policy exchanges: All BOLI carriers are highly rated, and performing as anticipated. No changes recommended at

this time.

6) Analysis of mortality performance and impact on income: No Death Claims have been processed to date.

7) Evaluation of material findings from internal and external audits: There are none.

8) Identification of the reason for, and tax implications of, any policy surrenders: The surrender analysis shows there is a gain of $174,083 and the sum of IRS taxation on the gains

as a result of surrender (federal and state taxes and the MEC penalty) is $87,041.

9) Comparative BOLI Holdings:

Please see Section 6 of the BOLI Annual Review and page 9 of the Executive Summary.

10) Percentage of BOLI to Capital:

Tier 1 Capital is $25,171,000.

BOLI as % of capital is 20.56%.

Total BOLI Holdings are $5,174,083.

Additional BOLI Capacity is $1,118,667.

WHY BFS Group?

▪ A firm dedicated to the Bank Owned Life Insurance (BOLI) industry and focused exclusively on consulting with community and regional banks.

▪ A team that offers over 150 years of combined experience and expertise in the BOLI marketplace and non-qualified benefits.

▪ Works exclusively with BFS-MC Group, the developer of the BFS MINT System, a proprietary secure portal used to support and service all BFS Group clients.

▪ BFS Group continues to demonstrate its long-term commitment to the BOLI market through an implemented succession plan. This plan ensures the continuity of service for each client for the life of their BOLI policies.

▪ Mandatory internal training programs guarantees seamless support and service for all BFS clients.

▪ BFS Group consists of 12 Regional Offices with16 Regional Managing Directors.

PAGE 23

Who is BFS Group today?

The parent company, Integrated Financial Services, was founded in 1994. In 1998, Bank Financial Services Group (BFS) was officially formed. In 2019 the Principals of BFS Group and Meyer Chatfield created a new administration company, BFS-MC Group. The independent sales entity BFS Group still operates and supports the entire banking community across the country.

▪ 12 Regional Offices with 16 Regional Managing Directors:

PAGE 24

BFS SOUTHEAST SUPPORT SERVICES

Richard Pearson, Jr.

Chief Administrative Officer

BFS-MC Group

411 South State Street

Newtown, PA 18940

P: (267) 352-9232

C: (215) 962-3959

F: (215) 220-3563

E-mail: [email protected]

www.bfsmcgroup.com

Michael Bruschini

VP - Account Executive

BFS-MC Group


Newtown, PA 18940

P: (267) 352-9224 C: (609)-306-5324

F: (215) 220-3563


www.bfsmcgroup.com

Brian McCracken


BFS-MC Group


Newtown, PA 18940

P: (267) 352-9231

C: (609) 917-4919

F: (215) 220-3563


www.bfsmcmcgroup.com

David Schwartz


BFS-MC Group


Newtown, PA 18940

P: (267) 352-9234

C: (215) 805-0976

F: (215) 220-3563


www.bfsmcgroup.com

John Gianacaci

Regional Managing Director

Bank Financial Services Group

Palm Beach Gardens, FL 33410

P: (609) 915-9168


www.bfsgroup.com

Chuck Sloane

Regional Marketing Consultant

Bank Financial Services Group

Atlanta, GA 30319

P: (404) 229-8388


www.bfsgroup.com

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