The Most Misunderstood - PDF document

1 BOLI – The Most Misunderstood Revenu
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 â

2 ‘ It is a ”bank eligible” earning as
‘ 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 (Earnin

3 gs) BOLI is a Single Premium BOLI was de
gs) 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 B

4 anks (under $250M) 2,925 1,540 52.65% Me
anks (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 Ban

5 ks with BOLI Small Banks (under $250M)
ks 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 TYPES BFS GROUP WILL DESIGN THE BEST BOLI STRATEGY TO FIT YOUR REQUIREMENTS AND RISK TOLERANCE. PAGE 6 HIS

6 TORICAL BOLI TRANSACTIONS (2010 - 2018 N
TORICAL 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

7 3,269 4,058 3,245 5,420 1,747 General A
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 r ate s 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 indica

8 tive of future results. Source: Based o
tive 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 rat ed 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 % Rate Year Year BOLI Historical Rates* BOLI Tax-Equivalent 5 Year Treasury 10 Year Treasury B

9 OLI ATTRIBUTES • A single premium purc
OLI 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 product

10 s that result in higher yields. • Tota
s 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 conc

11 entration of credit limit. • As of t
entration 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 PROPOSED BOLI TRANSACTION Alternative Investments PAGE 11 PROPOSED PREMIUM ALLOCATION PAGE 12 BOLI – A Key Component of Profitability • Larger banks are typically more profitable than smaller banks. • Smaller banks are typically less profita

12 ble despite having higher Net Interest M
ble 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 th

13 ey are dictated by market forces, howev
ey 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 involv

14 e ongoing expenses BOLI is a low risk st
e 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 DEATH BENEFIT ANALYSIS PAGE 16 ACTIVE BOLI CARRIER RATINGS HIGHEST TO LOWEST RATED PAGE 17 Sharing of Death Benefits – Ancillary Benefits: • Methodologies for sharing the proceeds : - Endorsement Split Dollar – Supplemental Life or G

15 roup Term Replacement (GTR) - Death Bene
roup 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

16 - efficient manner . In the event of dea
- 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 W 2 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

17 (policy owner) promises a specified ben
(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 consider

18 ed tax - deductible to the Bank when pai
ed tax - deductible to the Bank when paid . PAGE 16 Life Insurance Sharing Sample PAGE 19 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 eac

19 h quarter or year depending on the produ
h 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

20 sheets. T ax and Insurable Interest Impl
sheets. T ax 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

21 can be found in our 2018 BOLI Annual Rev
can be found in our 2018 BOLI Annual Review Binder. - Capital and BOLI Values as of June 30, 2019. 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

22 all BFS Group clients. ▪ BFS Group
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 f

23 ounded in 1994. In 1998, Bank Financial
ounded 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: (2

24 67) 352 - 9232 C: (215) 962 - 3959 F: (2
67) 352 - 9232 C: (215) 962 - 3959 F: (215) 220 - 3563 E - mail: rpearson@bfsmcgroup.com www.bfsmcgroup.com Michael Bruschini VP - Account Executive BFS - MC Group 411 South State Street Newtown, PA 18940 P: (267) 352 - 9224 C: (609) - 306 - 5324 F: (215) 220 - 3563 E - mail: mbruschini@bfsmcgroup.com www.bfsmcgroup.com Brian McCracken VP - Account Executive BFS - MC Group 411 South State Street Newtown, PA 18940 P: (267) 352 - 9231 C: (609) 917 - 4919 F: (215) 220 - 3563 E - mail: bmccracken@bfsmcgroup.com www.bfsmcmcg

25 roup.com David Schwartz VP - Account Ex
roup.com David Schwartz VP - Account Executive BFS - MC Group 411 South State Street Newtown, PA 18940 P: (267) 352 - 9234 C: (215) 805 - 0976 F: (215) 220 - 3563 E - mail: dschwartz@bfsmcgroup.com www.bfsmcgroup.com John Gianacaci Regional Managing Director Bank Financial Services Group Palm Beach Gardens, FL 33410 P: (609) 915 - 9168 E - mail: jgianacaci@bfsgroup.com www.bfsgroup.com Chuck Sloane Regional Marketing Consultant Bank Financial Services Group Atlanta, GA 30319 P: (404) 229 - 8388 E - mail: csloane@bfsgrou