Risk Management for Executive Benefit Programs and BOLI Financing

Bank Owned Life Insurance Audit

Background

Bank Owned Life Insurance has been widely used for over twenty years, allowing banks to reward and retain key executives and directors, as well as offset the increasing costs of general employee benefit obligations.

In many ways, a BOLI program operates like a bond portfolio and like such an investment; it must be managed to ensure optimal performance and the best available bank protection.

Concerns

Certain older BOLI arrangements no longer provide current market returns, resulting in lower realized net bank earnings. Further, BOLI products have evolved significantly in recent years, offering even smaller banks important new product innovations in areas such as:

Investment Allocation
These designs allow the bank to effectively mimic the structure of their existing trading account with the tax advantages of a BOLI program.
Credit Risk Reduction
Some new products remove the BOLI asset from a general creditor risk category by holding the cash value within a separate account. In the unlikely event of carrier insolvency, such assets are only accessible by separate account policyholders, not by general creditors of the company.
Risk Based Capital Treatment
Certain new products allow the BOLI asset to receive preferential risk based capital treatment, in some cases as low as 20%.

Market Developments

With the economic downturn in recent months, many banks have seen their relative capital position negatively impacted.

Even though profitable and fully liquid, regulatory authorities may direct the bank to improve their capital position. Separate account and hybrid BOLI products may be available to allow the bank to reduce risk based capital treatment on its existing level of BOLI assets, thus freeing up more of their existing capital base.

The BOLI market has also experienced a substantial re-alignment in the last few months. The industry's two largest BOLI providers have been sold to new owners and it is unclear at this time what impact these sales will have on their client banks and the ongoing management of their existing BOLI transactions.

In response to these issues, we have established a Bank Owned Life Insurance Audit Program. This program is designed to help client banks better understand their existing programs and make more effective risk management decisions regarding those programs.

The audit program is provided in three distinct and independent components.

Benefit Plan Review
An analysis of the existing benefit program (if any), identifying key design attributes, compliance and suitability. The bank is also provided with industry trends in similar benefit programs among peer banks.
Financing Review
An analysis of the existing BOLI financing arrangement, identifying key design elements and determining whether the financing arrangement is meeting market expectations. The bank is also provided with an analysis of current BOLI market alternatives and performance grids.
Plan Administration Review
An analysis of the existing plan administration services in light of recent disruptions among service providers and a review of available alternatives.

What is Required?

The Bank Owned Life Insurance Audit involves minimal intervention by the bank itself. We simply require access to certain information regarding your existing program. This information should be readily available from the bank's existing plan service files and includes:

Plan Documents
Most recent benefit accrual statements (annual and accrued liabilities)
Current period and prior period cash asset accounting.
Insurance policies for existing BOLI plan (if available).
Any plan administration agreements in effect.
Original BOLI or Non-qualified benefit presentation (if readily available).

Audit Process

We review the above information and provide an analysis of the three identified components of your existing program (benefit program, plan financing and administration). Each analysis is provided on an independent basis, allowing the bank to more effectively understand and manage the separate aspects of the program.

Once the required data is consolidated, the audit process typically takes between two to three weeks to complete.

What is the Cost?

The Bank Owned Life Insurance Audit is provided on a no cost basis.

Why Use the BOLI Audit?

We are uniquely positioned to provide this service. Our experts have designed and implemented hundreds of BOLI transactions spanning a twenty year time horizon, as well as participated in the development of many of the industry's most innovatinve products.
A BOLI audit is consistent with regulatory directives to maintain an independent program review process.

PRINCIPLES

Robert (Bob) Green, CEO, MS, MA, is the founding member and Chief Executive Officer of Greenhouse Financial, LLC. Bob has over twenty-five years in the life insurance industry with emphasis in the BOLI/COLI marketplace. The experience he brings to the table in negotiations with the life insurance industry on clients behalf is admired by his peers and competitors. He has helped place over 2 billion dollars of insurance in corporate and financial institutions.

David Carter, CFO, brings over 30 years of senior executive and financial experience to GHF. Prior to joining our team he served for two years as President of The Bank, and six years as EVP/CFO for the Banc Corporation (TBNC); a $1.4 billion publicly traded financial institution headquartered in Birmingham, Alabama. Its primary subsidiary, The Bank, is comprised of 19 branches in Alabama and seven in the panhandle of Florida. Mr. Carter also served for 14 years as EVP/CFO for Trustmark Bank (TRMK), a regional publicly traded financial institution headquartered in Jackson, Mississippi. During his tenure with Trustmark and The Banc Corporation he was instrumental in acquiring and merging 22 financial institutions. He has vast experience in dealing with the SEC and Banking regulatory agencies. He also led the acquisition teams that raised capital on numerous occasions in order to complete multiple mergers.

Bob Elliott, president of Elliott & Associates, LLC, is a board certified CPA and brings over 30 years of accounting, legal, and investment experience and specializes in tax protection, company pensions, and investment management. Mr. Elliott constantly keeps up with the latest IRS regulations and guidelines, protecting clients by attending continuing education and staying current on the latest changes in tax law.

Robert Green and Stephen Speirs offer Securities and/or Investment Advice ONLY to residents of AL, AR, FL, LA, or WA. Securities and Investment Advice are offered through G. A. Repple & Company, A Registered Broker/Dealer & Investment Advisor, Member FINRA & SIPC. Home Office: 101 Normandy Rd., Casselberry, FL 32707, Phone: (407) 339-9090.