Educational Series

Bank Owned Life Insurance(BOLI)

Educational Series

FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 12539 - 2012/10/25 ©2012 Creative Marketing International Corp.

This report makes reference to concepts which have significant legal, accounting and tax implications. Our comments are intended to convey our general understanding of the applicable principles, but are not intended as legal, accounting or tax advice. We recommend that you consult your legal, accounting and tax advisors for application of these concepts as they relate to your specific factual situation. Securities offered through ProEquities, Inc. A registered broker-dealer, member FINRA & SIPC. National Benefits Group is independent of ProEquities, Inc. 4975-15 5.2.2012

Bank Owned Life Insurance (BOLI)What It Is and How It Works

WHY FINANCIAL INSTITUTIONS BUY LIFE INSURANCE Most Financial institutions face a wide range of ever-increasing benefit costs, from qualified plans such as pensions and group health benefit plans to supplemental benefit plans designed to attract and retain key personnel. BOLI provides a tax-efficient tool to help offset the current and future cost of these pre- and post-retirement benefits. BOLI helps a bank diversify its investment portfolio with an asset that enhances earnings while simultaneously balancing liquidity and risk factors. BOLI is also an efficient asset/liability management tool.

Bank owned life insurance is a low-maintenance asset that involves:

HOW DOES IT WORK? A financial institution purchases life insurance on a select group of key employees. The financial institution is the premium payer, the owner and the beneficiary of the life insurance policies. The insured employees have no ownership nor do they receive benefits from the insurance policies. The insurance policy values then become assets of the financial institution.

The BOLI transaction involves a reallocation of Tier I capital assets. Assume that a bank has an average Tier I capital earnings rate of 5%. If the bank has a 40% marginal tax rate, this translates to a rate of 3% on a net after-tax basis. The bank sells $1 million worth of its taxable portfolio and uses the proceeds to pay for a single premium BOLI contract with cash value of $1 million upon issue. If the BOLI contract also nets 5%, the contract would be worth $1,050,000 at the end of the first plan year. The bank has earned a 5% annual rate of return on its investment and books a non-taxable1 net gain of $50,000. This compares to a gain of $30,000 that the bank would have recognized had the assets remained in a traditional taxable portfolio. It is this $20,000 of tax-leveraged gain generated by BOLI that finances or offsets the cost of new or existing benefit plans.

1 2 3 4No collection efforts

No loan loss provision

No origination costs

No servicing by bank personnel

TAXABLE PORTFOLIO WITH 5% EARNINGSBeginning of the year balance $1,000,000

Investment gain $50,000

Marginal tax rate 40%

Net investment gain $30,000

End-of-year balance $1,030,000

BANK OWNED LIFE INSURANCE WITH 5% EARNINGSBeginning of the year balance $1,000,000

Investment gain $50,000

Tax-free1 0%

Net investment gain $50,000

End-of-year balance $1,050,000

1 If policy is surrendered, the cash values become taxable.

Educational Series

FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 12539 - 2012/10/25 ©2012 Creative Marketing International Corp.

This report makes reference to concepts which have significant legal, accounting and tax implications. Our comments are intended to convey our general understanding of the applicable principles, but are not intended as legal, accounting or tax advice. We recommend that you consult your legal, accounting and tax advisors for application of these concepts as they relate to your specific factual situation. Securities offered through ProEquities, Inc. A registered broker-dealer, member FINRA & SIPC. National Benefits Group is independent of ProEquities, Inc. 4975-15 5.2.2012

Bank Owned Life Insurance (BOLI)Frequently Asked Questions

WHAT IS THE PRIMARY ECONOMIC BENEFIT OF BOLI?

The benefit of BOLI to the underlying value of the bank is simple: it generates an increase of 150 to 200 basis points in after-tax investment yield compared with most other investments, depending on the bank’s tax rate. During the life of the policy, insurance cash values grow income tax-free1. Ultimately upon mortality, the death proceeds are received tax-free as well. This combination of economic benefits makes BOLI an excellent tool to offset a variety of new or existing benefit costs.

WHAT ARE SOME OF THE SPECIFIC BENEFIT PLANS THAT BOLI MAY INFORMALLY FUND?

Informally funding for banks will allow them to receive tax benefits that help offset the costs associated with funding different benefit plans.

1. Pre- and/or post-retirement cost associated with employee health and welfare plans.

2. Supplemental employee retirement plan (SERP), in which the bank buys enough life insurance to generate sufficient earnings to offset the entire cost of the benefit, as well as repay the bank its premium and opportunity costs.

3. True deferral plan, policy earnings covering any bank matches plus the interest on the employee’s deferred income.

4. Defined contribution plan, where plan values increase based on the actual earnings of the life insurance policy.

5. An employee stock option plan or funding a 401(k) by offsetting start up and maintenance costs.

6. In place of group term life insurance for executives, “carving” them out of the group plan and, in the process, providing the opportunity for a lifetime benefit. This allows the bank to recover all costs instead of paying the unrecoverable cost of a group term life policy.

1 If policy is surrendered, the cash values become taxable.

Educational Series

FOR AGENT USE ONLY. NOT FOR USE WITH THE GENERAL PUBLIC. 12539 - 2012/10/25 ©2012 Creative Marketing International Corp.

This report makes reference to concepts which have significant legal, accounting and tax implications. Our comments are intended to convey our general understanding of the applicable principles, but are not intended as legal, accounting or tax advice. We recommend that you consult your legal, accounting and tax advisors for application of these concepts as they relate to your specific factual situation. Securities offered through ProEquities, Inc. A registered broker-dealer, member FINRA & SIPC. National Benefits Group is independent of ProEquities, Inc. 4975-15 5.2.2012

Bank Owned Life Insurance (BOLI)Frequently Asked Questions (cont.)

WHAT IF THE BANK CURRENTLY HAS LIFE INSURANCE ON EMPLOYEES WHO ARE NO LONGER EMPLOYED?

If the intent of the life insurance was to be an informal funding vehicle for a pre- and/or post-retirement benefit and the liability of the benefit still exists, then the bank is free to maintain or surrender that policy. If the intent of the life insurance was to recoup the risk of loss from the death of a key person and that key person is no longer with the bank, the risk of loss has been eliminated. In this situation the bank may be required to surrender the policy on that individual or transfer it to another key person. For more guidance on this question, please review OCC 2004-56.

IS BOLI LIQUID?

Although BOLI is purchased as a long-term asset, BOLI policies may be surrendered at any time and the cash surrender value will be paid to the financial institution. The insurance carrier pays the cash surrender of the policies to the financial institution. The financial institution must pay income taxes on any gain, thus reducing the overall after-tax returns that are attributable to BOLI transactions.

ARE THERE LIMITS ON HOW MUCH BOLI A BANK CAN PURCHASE?

Yes. There are two basic tests: one based on benefits and one based on capital. The Interagency Agreement has indicated that the gains from BOLI cannot exceed the costs they are intended to offset. In addition, the regulatory guidelines say that as a general rule, a bank could not invest more than 15% of its Tier I capital with any one company and no more than 25% of its Tier I capital plus 25% of the allowance for loan and lease losses in BOLI as a whole.

WHAT RISKS NEED TO BE EVALUATED WHEN BUYING BOLI?

The regulators require that a bank evaluate six specific risks in its pre-purchase analysis: transaction risk, credit risk, interest rate risk, liquidity risk, compliance risk and price risk. While the bank is ultimately responsible for its due diligence process, NBG can assist you in evaluating and documenting the analysis of each of these risks.

Bank Owned Life Insurance (BOLI)Client Fact-Gathering Questionnaire

Name: ______________________________________________ Date: __________________________________

Yes No

Yes No

Yes No

__________%

Yes No

Yes No

Yes No

Term Variable Universal Life Universal Life Whole Life

Yes No

Broker or consultant Internal review by employee

Yes No Don’t Know

Yes No Don’t Know

1. Is the bank owned by a holding company?

2. Does the bank or the holding company own life insurance? If so, which one or both?Holding company owns life insurance

If Yes, and holding company owns insurance or you would work directly with the holding company on new opportunities, then proceed like any other corporation. If the bank owns the insurance, then continue to Question 4.

Bank owns life insurance

3. Ifthebankdoesnotcurrentlyownlifeinsurance,hasthatoptionbeenconsideredorlookedinto? Yes No If Yes, why didn’t the bank purchase?: ________________________________________________

4. Whatpercentageofthebank’sTier1capitaliscurrentlytiedtoinsurance?Can have as much as 25% of Tier 1 capital tied to insurance; more may be obtained subject to applicable regulations

5. Istheinsurancewithoneormultiplecarriers?A bank may have no more than 15% of Tier 1 capital tied to one carrier. Carriers: _______________________________________ _________________________________________

6. What is the purpose of the current insurance program?Benefits expenses or liabilities are required to establish a need to purchase BOLI. ____________________________________________________________________________ ____________________________________________________________________________

7. Ifthebankhasadditionalinsurancecapacity,doesithaveotherliabilitiesthatcanbeusedtojustifyanadditionalinsurancepurchase?i.e. Health and welfare benefits or deferred compensation

If Yes, is the bank interested in pursuing its options?

8. When did the bank purchase its insurance?Policy: ____________________________________________________________ Year: __________________Policy: ____________________________________________________________ Year: __________________

9. What type of insurance does the bank own?

10. Has the bank reviewed its insurance? If Yes, date of last review: ______________________________________________________________________If No, why not? _______________________________________________________________________________

11. If the bank reviewed its insurance, who performed the review?

12. Did the bank review follow regulatory guidelines?

13. As part of the bank review, was the insurance carrier or product reviewed?

12539 - 2012/10/25

Thisreportmakesreferencetoconceptswhichhavesignificantlegal,accountingandtaximplications.Ourcommentsare intended to convey our general understanding of the applicable principles, but are not intended as legal, accountingortaxadvice.Werecommendthatyouconsultyourlegal,accountingandtaxadvisorsforapplicationoftheseconceptsastheyrelatetoyourspecificfactualsituation.SecuritiesofferedthroughProEquities,Inc.Aregisteredbroker-dealer,memberFINRA&SIPC.NationalBenefitsGroupisindependentofProEquities,Inc.4975-155.2.2012