alignment of executive compensation with your bank goals

1©2015 Equias Alliance, LLC

Alignment of Executive Compensation with Your Bank Goals

Eric Johnsen, MBA, Executive Non-Qualified Benefits and BOLI Consultant(in CA office with Clark Struve, Equias Alliance)

Thursday, May 14 – CBA HR Conference

http://www.equiasalliance.com/images/PDFs/cba.pdf

http://www.equiasalliance.com/images/PDFs/cba.pdf


Agenda

Executive Compensation and Benefit Trends – 2015• Executive Compensation Market Trends • Base Salary Trends

Executive Nonqualified Benefit Plans Overview and Ties to Business Strategy

• Annual Cash-Based Incentive Plan Trends and Best Practices• Typical Non-Qualified Plans and Plan Evaluation Considerations

» Performance Based Deferred Compensation Plans» Employment Agreements & Change-in-Control Agreements» SERPs & Salary Continuation Plans: design, amounts and

prevalence» Long-Term Incentive Equity Trends and Best Practices» Other nonqualified plans

Financing Executive Benefits: Strategic Use of BOLI

Questions and Answers


Compensation Trends - 2015

Top 5 Compensation and Governance Trends

• Align compensation with business strategy, especially on incentive

and equity plans

• Continue to focus on pay for performance, and not just meeting

budget

• Further rigor in goal setting: thresholds higher, and must be to

compete

• Consider combination of long-term incentive and retention awards

• Consideration of Defined Contribution arrangements (DC-SERPs)

vs. Defined Benefit Plans (DB-SERPs/Salary Continuation Plans)

Source: Pearl Meyer & Partners, 2015, “Top 5 Compensation Governance and Pay Trends”



Merit increases: holding steady at 3%, tied heavily to NI budgets

Increased competition for key positions within credit, compliance and

commercial lending areas

Alternative to M&A activity is recruitment of “top talent” away from

other banks with used of LT incentives to attract talent

Annual/Short term Incentives

• Incentive pay as % of bonus for CEOs in 2013 was 31% • Most survey participants have short-term incentive plans in place

that allow for non-officer participation• Median target as percent of payroll expense: 8%• Median budget as percent of net income: 12.5%• New emphasis on performance goals that are more rigorous and

tied directly to strategic plan. Some banks refuse any bonuses if NI in budget and satisfactory regulatory reviews are not achieved

• Need to revisit incentive plans for lenders, business banking, to keep competitive and in line with peers

• Ensure compliance with Mortgage Loan Originator Rule

Source: Pearl Meyer & Partners, 2014 MBA Presentation



Source: CBA & Benefits Benchmark Survey, 2014



Long Term Incentive Plans• The prevalence of long-term incentives continues as it has for

past three years (approximately 30% of banks)• Less than 20% of mutual bank participants have an LTI Plan• Holdbacks and deferrals (i.e. deferred comp plans) can be

utilized to create the look and feel of an LTI plan to enhance retention and ties to performance

• Most public banks, particularly those over $2B in size, use a mix of time-vested restricted stock and performance shares

• Eligibility for performance plans and shares extending into deeper levels of management

• Development of stock ownership guidelines and holding requirements more extensive

Employee Benefits• Health care costs must be controlled and maintaining healthy

workforce is a key initiative• Balance between provision of key benefits and use of available

resources for other benefits is focus area

Source: Pearl Meyer & Partners, 2014 MBA Presentation



Source: CBA & Benefits Benchmark Survey, 2014

• Healthcare premiums per month range from $1,363 for high deductible plans to $1,861 for PPO plans

• Premiums increased by about 25% from 2013 to 2014


Five Elements of Compensation

Qualified Group Benefits

Employment Agreements

Change-in-Control

Other

Supplemental Disability

Deferred Compensation Plans

SERP/Salary Continuation Plan

Performance Driven Plan

Supplemental Life Plans – Split $ and/or DBO

Long-Term Care

Stock Options

Restricted Stock

Phantom Stock

Stock Appreciation Rights

Book Value Appreciation Rights

Total Executive

Compensation

Plan Review

Qualified PlansNonqualified

Benefit PlansEquity Plans Group Benefit

Plans &Perks

Cash

Compensation

Base Salary

Annual Bonuses

Annual Incentive Bonuses

Pension

401(k)

ESOP

Profit Sharing

Short-term focus

Long-term focus/retirement


Different Executive Compensation Opportunities

Different Executive Compensation Opportunities

Total Executive Compensation Opportunities

Qualified Benefits All Employees

Ben

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Cash Incentive - Annual

Short Term Deferred Incentive Plans

Long Term Retirement Plans

Equity Options

Employment/CIC Agreements

Short-term focus

Long-term focus/

retention/retirement

Salary, 401K, health, life, vision, disability

Annual cash bonus/incentive plan, profit sharing

Defined contribution plan (cash, equity or both)

Change in control, supplemental disability, LT care,Employment agreement, perks

SERP/Defined Benefit Plan, Salary Continuation Plan,Pension

Stock options, restricted stock, phantom stock,SARs, performance units, ESOP

Compensation/Benefit Options


Alignment with Business Strategy

Alignment of Compensation with Business Strategy• Business strategy should drive desired business outcomes, and in turn,

compensation strategies and design • Attracting and retaining executives is essential• Aligning pay and performance is no longer optional from a regulatory standpoint

Source: Adapted from Pearl Meyer & Partners, 2015 , “Top 5 Compensation Governance and Pay Trends”

BusinessStrategy

Business Goals/

Measures

Define

Prevalent Market

Practices

Shareholder & Comparable Proxy

Perspectives

Public Optics, Regulators & Governance

Concerns

Compensation Program Design • Threshold, Target,

Stretch Goals• Incentives vs. retention• ST vs. LT compensation

compensation elements

Compensation Outcomes &

Decisions

Inform

Inform

Compensation Strategies

CompetitiveMarket Conditions

“Best Practices”

Drive


Business Strategy Alignmentwith Compensation Options

Executive Compensation

Options

Qualified Benefits All Employees


Short Term Deferred IncentivePlans


LT Equity Options


• Increase EPS• Expand business lines• Enhance net margins

Stock options Restricted stock Performance shares

Strategic Plan

ObjectivesBusiness Strategies

Compensation Design

Implications

Increase shareholder value

ROA, ROE, Grow capital

Executive Retention

Net Income

Loan growth

Retain Employees

• Acquisition strategy• Reduce loan losses• Credit quality/camels

• Superior corp culture• Generous plans w/o risk

• Efficiency ratio/peers• Technology advances• Profitable business lines• Non-interest income

• Loan mix, credit quality• Expand business lines• Enhance net margins

• Retirement plans• Competitive salaries• Health, life, dental • Corporate culture• Leadership opportunities

SERPs to attract needed talent

Performance measures, clawbacks

C-suite employment agmt

CIC protections

DCPs for tax deferral strategies

Bank contribution for exceeding performance metrics

Performance metrics

Commissions for producers with holdbacks

Competitive salary Company contrib to

401K plan Mentoring, training


Annual Cash-Based Incentive Plan Trends and Best Practices

Annual Incentive Plans


Qualified Benefits All EmployeesBen

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Recovery /

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Equity Options


Short-term focus

Long-term focus/



Types of Annual Incentive Plans

• Highest prevalence is performance-based plans.

• Just over half (57%) of the banks reported having a formal and centraldocument that lists out the various incentive plan(s) and describes how eachof the incentive plan(s) work.

• Almost three-fourths (74%) of banks reported their compensationcommittee has reviewed their incentive plans for risk.

• Approximately half (56%) of respondents reported that they have modified(within the past 3 years) their incentive plan(s) due to the changing bankregulations (this decreased from 2013).

Other

We Do Not Have an Annual IncentivePlan

Currently Designing an Annual IncentivePlan

Discretionary Incentive Plan

Pooled Approach/Profit Sharing Based onProfits at the End of the Year

Formal Performance-Based Plan

4%

12%

3%

26%

13%

42%

Blanchard Consulting Group 2014 compensation trends survey


The most prevalent profitability and/or strategic incentive criteria

used for measuring strategy and financial results include:

CEO Incentive Criteria: Sr. Management (CEO Direct Reports) Criteria:

- Net income (63%) - Net income (63%)

- ROA (42%) - Loan Growth (52%)

- ROE (35%) - Deposit Growth (45%)

- Strategic Planning Goals (34%) - ROA (40%)

- Loan Growth (33%) - Strategic Planning Goals (38%)

- NPAs & Board Discretion (both 31% - NPAs & Efficiency Ratio (both 33%)

- ROE (32%)

Incentive Plan Goals



Common Incentive Plan Design

Tier Name Title

Award Opportunity Levels Award Objectives

Threshold Target Max BankDepartment/

IndividualI Executive I President & CEO X% X% X% 90% 10%

II

Executive 2 EVP X% X% X% 75% 25%



III

Executive 5 SVP X% X% X% 50% 50%

Executive 6 SVP X% X% X% 50% 50%

Executive 7 SVP X% X% X% 50% 50%Percent of Salary Weighting of Award

• Tier positioning varies by bank, but should be defensible and non-discriminatory

• Award opportunity levels will frequently vary based asset size of bank +compensation philosophy, salary levels, other available compensationprograms

• Weighting of bank and department/individual goals in this example are justa guide – these will often vary slightly from bank to bank and individual toindividual


Sample Incentive Plan Worksheet

1 Sample Incentive Plan Worksheet

PERFORMANCE

RESULT FACTORS

Payout

$120,000

Maximum

60%

TARGET $60,000

30%

Threshold

0% $0

Threshold TARGET Maximum

Factor

Weight

Indiv.

Weight

75.0%

25.0%

Notes:

A) Incentive predicated on satisfactory audit and regulatory review and individual performance evaluation.

B) The Bank will use a proportional approach to calculate incentive payouts for performance that falls in-between each

of the above criteria levels.

100%

Overall Bank - 1

(ROAA)tbd tbd tbd

Summary of Criteria Threshold

tbd tbd tbd

Target

Overall Bank - 2

(Core Deposit Growth)

Maximum

ABC BankCEO

Executive A

Salary = $200,000

November 2010


How to Reduce Risk in Annual Incentive Plans

1. Avoid “excessive” incentive payout opportunity levels and/or “uncapped”plans

Conduct market research studies to ensure award opportunities are reasonable andappropriate

2. Review Performance Measures

Use a variety of internal and external performance measures

Ensure an appropriate number of measures (not one & not too many)

Do not focus solely on single short-term financial metrics like net income and ROA

Incorporate asset and credit quality metrics

Include individual performance metrics and some level of discretionary adjustment

Ensure a link to the Bank’s strategic plan and long-term strategic goals

3. Ensure performance targets are not set too high or too low

Use historical bank and peer group information to ensure goals are appropriate

4. Use annual or multi-year performance payout periods

Remove quarterly payments and short turnarounds on awards

5. Ensure appropriate plan approval, governance, documentation, andcommunication

6. Consider implementation of a “Clawback” policy

7. Consider deferring a portion of incentives in cash or stock


Deferred Compensation Plans (DCPs)

Non-Qualified Plans



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Short-term focus

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Typical Non-Qualified Plans


• DCPs are nonqualified benefits provided to directors and/or executives

• Can be self-contributory, bank contributory, or both• The plans provide either for the voluntary or mandatory deferral of

compensation and/or cash bonuses on a pre-tax basis in exchange for the bank’s promise to pay a deferred benefit

• The deferred compensation is credited with interest by the bank• Accrued amount is paid at retirement or set time as determined by

plan design and annual election by executive or Director• Director/executive is a general creditor of the bank in the event of

insolvency



• Deferred compensation plans can allow for voluntary or mandatory deferrals (by theparticipant/employee) with or without employer contributions/match.

• Half (50%) of the participating banks that have deferred compensation plans structure itwith a voluntary employee deferral with no employer match/contribution. However,one-third provide a voluntary employee deferral with an employer match/contribution.

• About 1/3 of bank offer a DCP. Of the banks that don’t currently offer a DCP (68%),almost one-fourth (22%) are considering implementing a DCP for their executives.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

50%

33%

5%

12%

Voluntary deferral

without employermatch

Voluntary deferral

with employer match

Mandatory deferral

without employer

match

Mandatory deferral

with employer match

Blanchard Consulting Group 2014 Employee Benefit and Perquisite Survey


DCP Example: Combined Employee & Employer Contribution Model

Deferred Comp Plan Example

Deferred Compensation Plan - Mixed Model

% Annual Amount

Deferral Annual

Annual salary: 300,000 20% 60,000

Annual bonus: 150,000 30% 45,000

Company contribution: 30,000 10% 30,000

Total Deferral Amount Year 1 135,000

Clawback Provision: 100% for 3 years

Vesting Schedule - Five Years, 20%/Year 20%

Interest Crediting Rate: 4.5%

EVP

Age: 51 Inflation Employee Employee

3% Salary Bonus Company Accrual Interest Accrual Interest Annual Clawback

Year Age Salary Deferral Deferral Contribution Balance Credits Balance Credits Vested Amount

1 51 300,000 60,000 45,000 30,000 105,000 - 30,000 - 30,000

2 52 309,000 105,000 4,725 30,000 1,350 6,270 31,350

3 53 318,270 109,725 4,938 31,350 1,411 13,104 32,761

4 54 327,818 114,663 5,160 32,761 1,474 20,541 -

5 55 337,653 119,822 5,392 34,235 1,541 28,620 -

6 56 347,782 125,214 5,635 35,776 1,610 37,385 -

7 130,849 37,385

8

9 Balance Due 130,849 37,385

10 Total 168,235

Employee Contributions Company Contributions


Different ExecutiveComp Opportunities



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Short-term focus

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Employment AgreementsChange in Control Provisions


Employment Agreements

Employment Agreements - Trends

• More common with large banks to limit employment agreements to CEO only, may extend to top 3-5 executives with community banks as retention incentive

• Salary level, bonus and stock options potential normally explicit in agreement

• Normal vacation, qualified benefits, and “perks” defined in agreement

• Termination events and contingencies• Change-in-Control provisions normally included in agreement• Common length of agreement is 3-4 years• In lieu of employment agreements for c-suite execs, alternative LT

incentive plan or DCP may be desired for retention purposes


Employment/Change-in-Control (“CIC”) Agreements

• Of the banks that have an employment agreement for their CEO, over half (56%) have a term of three years.

• Only 9% of the banks that have a CIC agreement for the CEO have a gross-up for 280G.

• 60% of respondents who pay CIC severance benefits to the CEO base the benefit on the CEO’s salary (i.e. CICseverance benefit of 2.5x salary); almost one-fourth (22%) base the benefit on cash compensation

If a payment related to a CIC is in excess of 2.99 times the Base Amount (five year average of W2 earnings) asstatutorily defined, this will result in a 20% excise tax to the individual and a loss to the bank of deductibility for anycompensatory payments over the Base Amount. Based upon the facts and circumstances of the bank, the individualcan be made neutral to the possible 20% excise tax payment, i.e. the bank provides funds such that after payment of allassociated taxes, the officer has a net payment which is the same as if there were no 20% excise tax payment. This isreferred to as a gross up within the industry.

Yes52%

No48%

52% Have Employment Agreements with a Change-in-Control (CIC) Provision or CIC

Agreements for Their Executive(s)

Blanchard Consulting Group 2014 Employee Benefit and Perquisite Survey


Non-qualified Plans

Total Executive

Compensation

Opportunities

Qualified Benefits All EmployeesBe

nefit E

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Equity Options


Short-term focus

Long-term focus/


SERPs/Defined Benefit Plan/Salary Continuation Plan


Defined Benefit vs. DefinedContribution SERPs

Salary Continuation Plan (SCP)/Defined Benefit Supplemental Executive Retirement Plans (DB SERPs)

• DB SERPS are nonqualified benefits provided to executives• The plans are obligations of the employer• The benefit is a fixed amount or percentage of final pay paid at retirement• The plan is designed to overcome a retirement shortfall or to achieve a specific

wage-replacement ratio• Typically, the executive receives a stated amount (e.g., $60,000 per year for a

stated period of time (e.g., 10 years) beginning at separation from service or age 65.

Defined Contribution Supplemental Executive Retirement Plans (DC SERPs)

• DC SERPS are nonqualified benefits provided to executives• The plans are obligations of the employer• The benefit is based on annual target as % of salary, and annual contribution

amount is based on achieving certain performance goals• The plan is designed to overcome a retirement shortfall or to achieve a specific

wage-replacement ratio• Typically, the executive receives a stated amount (e.g., $60,000 per year for a

stated period of time (e.g., 10 years) beginning at separation from service or age 65.


SERPs/Defined Benefit Plans

51% of participants from Pearl Meyer survey offer a defined benefit plan

• Type of plan (usually based on percentage of final salary)» Fixed dollar amount: 90% » Income replacement: 10%

For those with a DB plan

• 65% allow new employees to enter the plan• 21% have frozen the benefit amounts for existing participants• Waiting period is usually 1 year• Most have a reduced benefit with early retirement. Earliest

retirement age with no reductions is usually 63-65 years

Source: Pearl Meyer & Partners, 2014 Compensation Survey


SERPs/Defined BenefitPlans

• Prevalence of the typical annual contributions/defined benefits for the CEO’s SERP/SCP:

Annual Contribution (fixed dollar amount): Defined Final Benefit (Target Percent of Final Comp):

- Greater than $100,000 (32%) - 66%-75% of final compensation (13%)

- $60,001-$100,000 (14%) - 56%-65% of final compensation (17%)

- $30,001-$60,000 (14%) - 41%-55% of final compensation (26%

- $15,001-$30,000 (32%) - Less than 40% of final compensation (44%)

- Less than $15,000 (8%)

• Only 17% of the banks that currently have SERPs/SCPs are considering (or already have) scaling back, freezing, or eliminating theSERP/SCP. Scaling back is due to the regulatory environment (27%), shareholder scrutiny (18%), or bank performance (18%).

38%

40%

15%7%

Benefit amount calculations for the

CEO's SERP/SCP? Defined annual

contribution

amount

Defined final

benefit

Performance-

based

OtherBlanchard Consulting Group 2014 Employee Benefit and Perquisite Survey


Long-Term Incentive (Equity) Trends and Best Practices

Equity-Based Plans –Current Trends



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Omnibus plans - very prevalent, a best practice, and provide flexibility

Restricted stock (full-value awards) becoming recommended and veryprevalent

Private banks should be discussing the usefulness of long-term awards

Phantom stock, cash-settled stock appreciation rights, performanceunits

Performance-based grants are a best practice

Stock ownership guidelines and stock holding requirements for executivesand directors are becoming best practice (especially in public banks)

Some banks have moved to Concept of One Performance-Based IncentivePlan and the key is what the award opportunities will be in total and whatpart will be paid in short-term cash and what part will be paid in longer-term equity-based awards

Equity-Based Plans –Current Trends


Real Equity - Actual shares of stock, which create real equity holdings and

shareholder dilution

Incentive stock options (ISOs)

Nonqualified stock options (NSOs)

Stock appreciation rights (SARs) – stock settled

Restricted stock

“Synthetic” Equity - Value is tied to share price, but no real stock is transferred

(cash payments)

Stock appreciation rights (SARs) – cash settled

Phantom stock

Performance shares

Restricted Stock Units – cash settled

Reminders:

**Appreciation-Based Vehicles (example: stock options) - value is only created with appreciation over time

** Full-Value Vehicles (example: restricted stock) - value is immediate and is always there so long as share has value

Common Types of Equity-Based Incentives


Equity Incentives & Longer-Term Compensation

The table below shows the prevalence of equity-based compensationprograms (but clearly trend is towards more restricted stock and lesstowards stock options).*

* Respondents were allowed to choose more than one option; therefore, the percentages will not sumto 100%.

We do not currently have any equity, "synthetic equity", or deferred

compensation program(s) in place

Deferred compensation plan (with no company match or

contributions)

Deferred compensation plan (with both a company match or

contribution and an employee contribution)

Supplemental retirement program (SERP, Salary Continuation, etc.)

Phantom or synthetic stock

Stock appreciation rights (cash-settled)

Stock appreciation rights (stock-settled)

Restricted stock

Stock options

20%

17%

31%

31%

8%

5%

3%

30%

41%



Considerations in Choosing the Best Plan(s) for Execs & Directors

Key considerations

What are the specific goals of the bank in providing the plans? What are peer banks providing (public vs. private, asset size, market

segment) to executives and directors and are there unique benefits that should be considered that help retain key employees?

What benefit plans are best tied to the strategic plan and performance measures vital to the short-term and long-term objectives and value drivers of the bank?

Adequate net income to fund plans? Would the compensation structure be considered excessive? Does it

promote unnecessary risk-taking? Commitment of Board to close the “gap” in deferred comp available

through qualified plans? Financing the plans


Executive Benefits Financing

Executive Benefits Financing

and the Use of Bank Owned Life

Insurance (BOLI)


1. Guideline: 25% of Tier One CapitalMaximum amount of BOLI bank can acquire is 25% of Tier 1 Capital

$5m investment2. BOLI is a single premium life insurance policy.No additional premiums in future.

3. Selection of CarriersEquias and the bank evaluate the insurance carrier options based on the credit quality and projected net earnings for each carrier, then jointly select top carriers to use for insurance policies.

Insurance Policies

4. Individual Life InsurancePremium is used to purchase individual life insurance policies (need 10 or more execs and/or directors). The bank is and always will be the owner and beneficiary of the policies. Bank is limited to including the top 35% of employees by compensation + limited # of directors. To include Directors, must be < age 70 and actively employedSomewhere (not necessarily at bank).

5. Cash Value and Individual Death BenefitThe bank benefits from an ongoing increase in the cash value of the policies as well as the ultimate death benefit.

6. Increase in cash surrender value (CSV)• Non-interest income recorded to P&L monthly.

Tax-free earnings (if held to maturity).

• CSV of policies recorded on balance sheet.

• BOLI not marked-to-market, so no loan loss provisions or administrative costs.

• Yields move with the market over time

• Increased exposure to equities and mortgage backed securities by insurance companies passed on via earnings to banks.

7. Tax-Free Death Benefit• Tax free death benefit to bank upon death

of an executive or director.

• Can split portion of death benefit with a beneficiary if desired

• Death benefit can be used to replace part of bank’s group term life or individual term policies, thereby saving expenses while generating income to the bank.

BOLI Investment Overview

8. Liquidity and Exchanges• Surrender: BOLI may be surrendered at any

time before death, but results in income tax on gains and a 10% MEC penalty on the gains.

• 1035 exchange: allows banks to move BOLI to different carrier if necessary with no tax consequence, but may be exchange fee.


How do banks typically pay for the costs associatedwith the Executive Benefit Plans?

Pay out of current

earnings

• PV of total benefit amount recorded on balance sheet as liability until payout

• Reduction in current earnings on income statement

Utilize Bank Owned Life Insurance (BOLI) as source of

non-interest earnings to offset the

costs

• PV of total benefit amount recorded on balance sheet as liability until payout

• Non-interest earnings on BOLI offsets or exceeds cost of accrued liability

Benefit Expense Offset


Market Update –Existing BOLI Plans

This report groups values by the holding company level when applicable. It includes all US based holding companies, US domiciled banks with foreign holding companies, and US domiciled banks without a holding company.

BOLI remains very popular with banks. Each year the percentage of banks with BOLI has grown.

Now, over 58% of all banks have BOLI plans (72% of banks with over $100M in assets).

Total cash surrender value at 6/30/2014 was over $146 billion up 3.5% from 9/30/13.

Source: FDIC Data

# % AVERAGE % BOLI TO % BOLI

TOTAL # BANKS BANKS TOTAL BOLI AVERAGE TIER 1 TIER 1 TOTAL AVERAGE TIER 1 TO

ASSET SIZE BANKS W/BOLI W/BOLI CSV BOLI CSV CAPITAL CAPITAL ASSETS ASSETS CAPITAL ASSETS

10 Billion + 100 75 75.00% $ 114,347,857 $1,524,638 $ 974,358,586 $12,991,448 $ 11,260,333,469 $ 150,137,780 11.74% 1.02%

1 Billion to 10 Billion 547 444 81.17% $ 17,280,077 $ 38,919 $ 115,958,919 $ 261,169 $ 1,180,576,283 $ 2,658,956 14.90% 1.46%

750 to 1 Billion 226 173 76.55% $ 2,570,502 $ 14,858 $ 15,336,556 $ 88,651 $ 148,663,552 $ 859,327 16.76% 1.73%

500 to 750 Million 419 300 71.60% $ 3,048,015 $ 10,160 $ 18,787,871 $ 62,626 $ 181,468,467 $ 604,895 16.22% 1.68%

250 to 500 Million 1,154 825 71.49% $ 5,028,578 $ 6,095 $ 30,101,445 $ 36,487 $ 291,667,013 $ 353,536 16.71% 1.72%

100 to 250 Million 1,967 1,132 57.55% $ 3,470,922 $ 3,066 $ 20,167,643 $ 17,816 $ 189,436,227 $ 167,346 17.21% 1.83%

Less than 100 Million 1,771 666 37.61% $ 846,531 $ 1,271 $ 4,642,232 $ 6,970 $ 41,954,130 $ 62,994 18.24% 2.02%

TOTALS/AVERAGES 6,184 3,615 58.46% 146,592,482$ 40,551$ 1,179,353,252$ 326,239$ 13,294,099,141$ 3,677,482$ 12.43% 1.10%

Dollar Amounts are in Thousands (000 omitted) Source: FDIC 6/30/14

Averages/Totals for Banks with BOLI


Strategic Uses of BOLI

Offset the cost of qualified employee benefit plans

• Healthcare plans• Group term insurance• Retirement plans• 401(k) contributions

Informally fund the cost of nonqualified deferred

compensation plans

• Supplemental executive retirement plans• Deferred compensation plans• Director deferral/retirement plans• Salary continuation plans• Performance-driven retirement plans• Endorsement split dollar life insurance plans


Hypothetical $5 Million Purchase

Traditional Bank Investment vs. BOLI Investment

Bank Investments $5,000,000 BOLI Purchase $5,000,000

10 Yr Treasury/Agency Yield @ 1.81% 90,500 Annual Yield @ 3.5% 175,000

Tax on Earnings @ 39.28% 35,548 Tax on Earnings -

Net After-Tax Income 54,952 Net After-Tax Income 175,000

Net After-Tax Treasury 1.10% Net Yield 3.5%

Tax Equivalent Yield @ 40% 5.8%

Net Yield from BOLI Investment 3.50% Net Income - BOLI Investment 175,000

Bank Investment After-Tax Yield 1.10% Net Income - Bank Investment 54,952

% Yield Gain on BOLI Investment 2.40% BOLI Net Income Advantage (Annually) 120,048

Assumptions:

Rate on 10-year treasury as of 2/10/14 1.8%

BOLI yield based on current average of top three carriers in February, 2015.

Example is a hypothetical illustration to be used strictly as an educational tool.


Healthcare Cost Recovery Example

Healthcare Expense Analysis and BOLI Offset

Assumptions:

Pre-tax annual healthcare premium per employee: 7,032$

Full-time equivalent employees: 50

Tax rate: 40%

Annual healthcare cost growth rate: 8%

After-tax Healthcare Cumulative

Annual Benefit Impact on

Year Expense Earnings

1 (210,960) (210,960)

2 (227,837) (438,797)

3 (246,064) (684,861)

4 (265,749) (950,609)

5 (287,009) (1,237,618)

6 (309,969) (1,547,588)

7 (334,767) (1,882,355)

8 (361,548) (2,243,903)

9 (390,472) (2,634,375)

10 (421,710) (3,056,085)

11 (455,447) (3,511,532)

12 (491,883) (4,003,415)

13 (531,233) (4,534,648)

14 (573,732) (5,108,380)

15 (619,630) (5,728,010)

16 (669,201) (6,397,211)

17 (722,737) (7,119,948)

18 (780,556) (7,900,503)

19 (843,000) (8,743,504)

20 (910,440) (9,653,944)

Healthcare Expense Analysis and BOLI Offset

BOLI Amount: 5,000,000

After-tax Total After Tax Annual % of Healthcare

Annual Benefit Income from Opportunity Incremental Costs Offset

Year Expense BOLI Policies* Cost (1%) Income by BOLI Earnings

1 (210,960) 181,000 (30,000) 151,000 72%

2 (227,837) 179,002 (30,180) 148,822 65%

3 (246,064) 174,739 (30,361) 144,378 59%

4 (265,749) 172,745 (30,543) 142,202 54%

5 (287,009) 169,738 (30,727) 139,011 48%

6 (309,969) 166,878 (30,911) 135,967 44%

7 (334,767) 167,431 (31,096) 136,335 41%

8 (361,548) 171,386 (31,283) 140,103 39%

9 (390,472) 175,520 (31,471) 144,049 37%

10 (421,710) 180,945 (31,659) 149,286 35%

11 (455,447) 185,870 (31,849) 154,021 34%

12 (491,883) 191,387 (32,040) 159,347 32%

13 (531,233) 197,149 (32,233) 164,916 31%

14 (573,732) 204,349 (32,426) 171,923 30%

15 (619,630) 210,824 (32,621) 178,203 29%

16 (669,201) 210,080 (32,816) 177,264 26%

17 (722,737) 212,090 (33,013) 179,077 25%

18 (780,556) 206,884 (33,211) 173,673 22%

19 (843,000) 194,954 (33,411) 161,543 19%

20 (910,440) 191,997 (33,611) 158,386 17%

* Income from example assumes $5 million BOLI purchase.


Should Our Bank Purchase BOLI Now?

Each bank will need to evaluate its own position to decide whether to purchase or purchase additional BOLI.

Some key considerations are whether:

• The bank has any BOLI purchase capacity available (25% of Tier 1 capital)• The bank has sufficient income/profits• The tax equivalent yield offered by BOLI is more attractive than other

investments available to the bank • BOLI would be helpful to the bank in offsetting future employee benefit costs• BOLI would assist the bank in recruiting and retaining key executives by

possibly sharing part of the death benefit with its executives• The bank has been satisfied with its existing BOLI program


Equias Alliance has 18 consultants located in 14 offices that provide services to over 800 banks across the nation. Equias Alliance has been exclusively endorsed for BOLI and Executive Benefits by the American Bankers Association through its Corporation for American Banking as well as by the California Bankers Association. Equias Alliance provides leadership in industry education through webinars, publications and presentations at various banking conventions on nonqualified benefits for executives and directors, BOLI and succession planning.

During the past 24 years, our consultants’ experience in developing this industry has allowed us to work with the full spectrum of products available in the market and be a trusted advisor to banks and insurance companies. Our consultants are regarded as experts in the field, and work with banks in understanding the needs of the banks, providing analyses and best practices for our banks, and preparing financial impact models to help facilitate Board understanding and approval.

Eric Johnsen frequently presents seminars on BOLI and nonqualified benefits at various state banking trade associations. Clark and Eric bring combined experience of more than 25 years working with BOLI and executive benefits in partnership with Boards and Executive teams, financial and insurance products, and banking institutions.

Eighteen professionals and 46 staff with more than 300 years combined experience assisting over 800 banks nationwide. Equias Alliance focuses on the financial and compensation

goals of its clients while enhancing shareholder value.

About Equias Alliance, Eric Johnsen and Clark Struve

Why Equias Alliance?• 20+ years industry

experience• Long-term and lasting

relationships• In-depth industry

knowledge• Focus on educating bank

executive and boards• Educate clients• Focus on creative solutions• Industry leader, robust

reporting using state-of-the-art IT systems


Why Work with Equias Alliance?

Personal integrity, strong involvement with local non-profit agencies, Rotary, and local churches, community-minded and involved

Leading authority in the nonqualified benefits and BOLI marketplace – 19 consultants 47 team members to serve our clients

Seasoned team of BOLI and benefit consultants with national coverage

Over 800 bank clients served, 2,000 BOLI placements and 1,200 benefit plans

Strong relationships with the majority of BOLI carriers

Sustainable business model that makes Equias a long-term, reliable partner to bankers nationwide

ABA and CBA exclusive endorsements and 11 state banking association endorsements -obtained through due diligence conducted on behalf of their member banks

Contributions to the banking industry through participation in industry associations, sponsorship of industry events & many educational activities

Turnkey approach reduces compliance risk and minimizes the time the client must allocate

In-house, qualified technical support and resources within our team (lawyers, accountants, etc.)

High level of client service and satisfaction demonstrated by Equias consultants, high retention of clients through the transition from Clark Consulting

State-of-the-art technology (SSAE 16 SOC1 Type II Audit Maintained) utilized to maintain client data


Eric Johnsen, MBA & Clark Struve, CLU

Equias Alliance

25560 Meadowview Circle

Corral de Tierra, CA 93908

(831) 373-4614 x1 (Eric) x2 (Clark)

[email protected]

[email protected]

www.equiasalliance.com

Why Contact Information?

mailto:[email protected]

mailto:[email protected]

http://www.equiasalliance.com

alignment of executive compensation with your bank goals

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