Pub. 5 2015-2016 Issue 5

O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S March • April 2016 19 David Shoemaker, CPA/PFS, CFP®, is a principal of Equias Alli- ance, which through consultants has assisted over 800 banks in the design of nonqualified benefit plans, performance based compensation and (BOLI). To learn more, contact David Shoe- maker at 901-754-4924 or dshoemaker@equiasalliance.com. Ken Derks is a principal of Equias Alliance, which through consul- tants has assisted over 800 banks in the design of nonqualified benefit plans, performance based compensation and (BOLI). To learn more, contact Ken Derks at 469-252-1037 or kderks@ equiasalliance.com . Bank Director.com CHARTING A C Picking the right plan design is only part of the process plan attractive to executives but not excessively expensive to designing the benefit plan. Nonqualified plans can be custom approach by allowing flexibility in the amount of the benefit, of payments and duration of payments. For example, assum a 40-year-old executive, but provide no vesting until age 65. benefit since most 40-year-olds think they will retire long bef at age 55, the executive may not be motivated to stay past th The plan must also provide a fair benefit upon death, disabil be customized to fit the needs of the executive while remain tax code. A properly designed nonqualified plan can enh retaining top talent, but doing so in a way that is cost-e With over 30 years of history, BOLI has proven to be an effe expenses. While many public banks purchase BOLI to recov privately held banks purchase BOLI for the same reason, bu plans. BOLI is a tax-advantaged asset whereby every $1 of (CSV) on the bank’s balance sheet. The CSV is expected to as non-interest income on a tax preferred basis. From a cas accrual asset that will return cash flow to the bank upon is an investment asset that currently generates a return in th expenses are deducted, which translates into a tax equivale 38 percent tax bracket). Summary Privately held banks must compete with all types of organiza their level of success in attracting and retaining key executiv chosen and correctly designed, can make a major impact on Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIP David Shoemaker, CPA/PFS, CFP®, is a princip has assisted over 800 banks in the design of no compe sation and (BOLI). To learn more, conta dshoemaker@e quiasalliance.com. Ken Derks is a principal of Equias Alliance, whic banks in the design of no qualified benefit plan To learn mor e, contact Ken Derks at 469-252-10 Bank Director.com CHARTING A C The largest portion of BOLI assets continues to be held in va tot l BOLI assets). However, only 1.1 percent of this total wa Like hybrid separate account products, the assets in a variab creditors in the event of the carrier’s insolvency. However, ga portfolio are passed through directly to the policyholder . W separate accounts policies utilize “stable valu ” wrapp rs to the product has made it more suitable to larger banks than t It is also interesting to note that median BOLI assets rose fro million in 2013, and that the median ratio of bank BOLI asse capital in 2013 to 17.67 percent of capital in 2014. New Policies in 2014 In 2015, IBIS Associates, Inc., an independent mark t r sea purchases last year based on info mation obtained from ar report: • Life insurance companies reported placing 1,175 BOLI c premium. The 1,175 cases included banks purchasing BO by banks that already owned BOLI. • Of the $3.21 billion in new premium, $2.48 billion (77.2 p million (21.7 percent) int hybrid separate acc unt; nd $ account. • Of the 1,175 cases placed, 494 (42.0 percent) were unde between $1 million and $2 million; 242 (20.6 percent) we percent) were between $5 million and $15 million; and 23 The Market’s Future The near term trend in the marketplace is for higher general and relatively few variable separate account purchases. Fina banks is expected to increase annually by 3 percent to 4 p Tags: Boli, compens tion Ken Derks is a principal of Equias Alliance, whic in the design of nonqualified benefit plans, perfo more, contact Ken Derks at 469-252-1037 or kde David Shoemaker, CPA/PFS, CFP®, is a principa has assisted over 800 banks in the design of non compensation and (BOLI). To learn more, contact Bank Director.com CHARTING A C The largest portion of BOLI assets continues to be held in va total BOLI assets). However, only 1.1 percent of this total wa Like hybrid separate account products, the assets in a variab creditors in the event of the carrier’s ins lvency. However, ga portfolio are passed through directly to the policyholders. W separate accounts policies utilize “stable value” wrappers to the product has made it more suitable to larger banks than t It is also interesting to note that median BOLI assets rose fro million in 2013, and that the median ratio of bank BOLI asse capital in 2013 to 17.67 percent of capital in 2014. New Policies in 2014 In 2015, IBIS Associates, Inc., an independent market resea purchases last year based on information obtained from car report: • Life insurance companies reported placing 1,175 BOLI c premium. The 1,175 cases included banks purchasing BO by banks that already owned BOLI. • Of the $3.21 billion in new premium, $2.48 billion (77.2 p million (21.7 percent) into hybrid separate account; and $ account. • Of the 1,175 cases placed, 494 (42.0 percent) were unde between $1 million and $2 million; 242 (20.6 percent) we percent) were between $5 million and $15 million; and 23 The Market’s Fut re The near term trend in the marketplace is for higher general and relatively few variable separate account purchases. Fina banks is expected to increase annually by 3 percent to 4 p Tags: Boli, compensation Ken Derks is a principal of Equias Alliance, whic in the design of nonqualified benefit plans, perfo mo e, contact Ken Derks at 469-252-1037 or kde David Shoemaker, CPA/PFS, CFP®, is a principa has as isted over 80 banks in the design of non compensation and (BOLI). To learn more, contact dshoemaker@eq uiasalliance.com. Bank Director.com CHARTING A C Picking the right plan d ign is only part of the proc ss plan attractive to executives but not excessively exp nsive to designing the be efit plan. Nonqualified plans can be custom ap roach by allowing flexibility in the amount of the benefit, of ayments and duration of ayments. For example, assum a 40-year-old executive, but provide no vesting until age 65. benefit since most 40-y ar-olds think they will retire l ng bef at age 55, th executive may not be motivated to stay p t th The plan must also provid a fair benefit upon death, dis bil be customized to fit the needs of the executive while remain tax code. A rop rly designed n nqualified plan can enh retaining top talent, but doing so in a way that is cost-e With over 30 years of history, BOLI has prov n to be an effe expenses. While many public banks purcha e BOLI to recov rivately held b nks purchase BOLI for t sam r ason, bu plans. BOLI is a tax-advantaged asset whereby every $1 of (CSV) o th bank’s balance sheet. The CSV is expected to s non-interest income on a tax preferred basis. From a cas accrual asset th t will return cash flow to the bank upon is an investment asset that currently generates a return in th expenses a e deducted, which translate into a tax equivale 38 percent tax bracket). Su mary Privat ly held bank mus compete with all types of organiza their level of success in attracting and retaining key executiv chos n and correctly designed, can make a major impact on Equias Alliance offers securities through ProEquities, Inc. member FINRA & SIP David Shoemaker, CPA/PFS, CFP®, is a princi has assisted over 800 banks in the design of no compensation and (BOLI). To learn more, conta dshoemaker@equiasalliance.com. Ke D rks is principal of Equias Allia ce, whic banks i he design of nonqualified benefit plan To learn more, contact Ken Derks at 469-252-10 Bank Director.com CHARTING A C The largest portion of BOLI as ets continues to be held in va total BOLI a sets). However, only 1.1 perc nt of his total w Like hybrid separate account p oducts, the assets in a variab creditors in the event f th carrier’s insolvency. H wever, ga portfolio are passed through d rectly to the policy older . W s parat accounts policies utilize “stabl valu ” wrapp rs to the product has made it more suitable to larger b ks than t It s also interesti g o note that median BOLI assets rose fro million in 20 3, and that the median ratio of bank BOLI asse capital in 2013 to 17.67 percent of capital in 2014. New P licies in 2014 In 2015, IBIS Associates, Inc., an indep ndent ma ket resea purch ses las year based on info mati n obtained from c r report: • Life insurance compani s reporte pl cing 1,175 BOLI c premium. The 1,175 cases included banks purchasing BO by banks that already owned BOLI. • Of the $3.21 billio in ew premium, $2.48 billio (77.2 p million (21.7 percent) int hybrid separate acc unt; d $ account. • Of th 1,175 cases placed, 494 (42.0 percent) were und b tw en $1 million and 2 i i n; 242 (20.6 percent) we percent) were between $5 million and $15 million; and 23 M rk t’s Future The ne r t rm trend in th marketpl ce is for higher general and relatively few variable separate account purchases. Fina banks is expected to increase annually by 3 percent to 4 p Tags: Boli, compens tion K n Derks is a princip l of Equias Allia ce, whic in the design of nonqualified benefit plans, perfo m re, contact Ken Derks at 469-252-1037 or kde D vid Sho mak r, CPA/PFS, CFP®, i a principa has assi ted over 800 banks in the design f non Bank Director.com CHARTING A C The largest por ion of BOLI assets continues t be held in va total BOLI a sets). However, only 1.1 perc nt of his total w Like hybrid separate account products, the assets in a variab creditors in the event of the carrier’s insolvency. However, ga portfolio re passed through d r ctly to the policyholders. W sepa ate accounts policies utilize “stable value” wrappers to the product has made it more suitable to larger banks than t It s also interesti g o note that edi n BOLI assets rose fro million n 2 , and that the median ratio of bank BOLI asse capital in 2013 to 17.67 percent of capital in 2014. New Policies in 2014 In 2015, IBIS Associates, Inc., an indepe dent market r sea pu chases last year based on information obtained from car r ort: • Lif insuranc companies reporte pl cing 1,175 BOLI c premium. The 1,175 cases included banks purchasing BO by banks that already owned BOLI. • Of the $3.21 billion in ew premium, $2.48 billio (77.2 p million (21.7 percent) into hybrid separate account; and $ account. • Of the 1,175 cases placed, 494 (42.0 percent) were unde b tween $1 million and 2 i on; 242 (20.6 percent) we percent) were between $5 million and $15 million; and 23 M rk t’s Fut re The near t rm trend in th marketplace is for higher general and relatively few variable separate account purchases. Fina banks is expected to i crease annually by 3 percent to 4 p Tags: Boli, compensation Ken Derks is a principal of Equias Alliance, whic in th design of nonqualifi d benefit plans, perfo mo e, contact Ken Derks at 469-252-1037 or kde D vid Shoemak r, CPA/PFS, CFP®, i a principa has assisted over 80 banks in the design of non compens tion an d (BOLI). To le rn more , contact dsho maker@equiasalliance.com. While some privately held banks offer stock options, restrict- ed stock or restricted stock units (RSUs), these types of plans are uncommon. Rather, privately held banks that want to provide rights of ownership to executives often use synthetic equity such as Phantom Stock Plans (PSPs) and Stock Appreciation Rights (SAR) plans. While these plans have an earnings impact to the bank, they do not have a per-share dilution as no actual shares are issued. Competition for top talent is strong. Assuming the bank offers a competitive salary and an annual incentive plan, the challenge is the ability to offer a long-term incentive/retirement plan. The following types of plans are often used to attract and retain key executives include: • Supplemental executive retirement plans (SERP) can be designed to address an executive’s shortfall that would result if the executive only had social security and the bank's qualified plan to provide retirement income. Generally, under the terms of a SERP, an institution will promise to pay a future retirement benefit to an exec- utive separate from any company-sponsored qualified retirement plan. The benefit is typically expressed as a fixed annual dollar amount or as a percentage of final compensation. • Deferred compensation plans (DCP) allow the bank to make contributions to the executive’s account using a fixed dollar amount, fixed percentage of the exec- utive’s compensation, or a variable amount using a per- formance-based methodology. The DCP can also allow the executive to defer his or her current compensation. • Split dollar plans allow the bank and the insured executive to share the benefits of a specific BOLI (Bank- Owned Life Insurance) policy or policies upon the death of the insured. The agreement may state that the benefit terminates at separation from service or it may allow the executive to retain the life insurance benefit after retirement if certain vesting requirements are met. • Survivor-income plans/death benefit-only plans specify that the bank will pay a benefit to the executive’s survivors (beneficiaries) upon his or her death. The ben- efit may be paid in a lump sum or in annual payments over a specified time period. Typically, the bank will purchase BOLI to provide death proceeds to the bank as a hedge against the obligation the bank has to the beneficiaries. The benefits are paid directly from the general assets of the bank. Picking the right plan design is only part of the process. Striking the proper balance between making the plan attractive to executives but not excessively expensive to the company are also significant factors when designing the benefit plan. Nonqualified plans can be customized to each executive, avoiding a cookie cutter approach by allowing flexibil- ity in the amount of the benefit, vesting schedule, non-compete provisions, timing of payments and duration of payments. For example, assume you provide a substantial retirement benefit to a 40-year-old executive, but provide no vesting until age 65. The executive will likely not see it as a valuable benefit since most 40-year-olds think they will r tire long before age 65. Likewise, if the executive is fully vested at age 55, the executiv may not be mot vated to stay past that age. The planmust also provide a fair benefit upon death, disabil- ity and change in control. The payment terms can be custo ized to fit the needs of the execu iv while emaini g i compliance with IRC Section 409A f he tax co e. A proper y designed nonqualified plan can enhance th a k’s bo t m lin by ttracting and retaining top talent, but doing so in a way that is cost-efficient to the bank. With over 30 years of history, BOLI has proven to be an effective tool to help offset and recover benefit expenses. While many public banks purchase BOLI to recover the cost of gener- al benefit liabilities only, many privately held banks purchas BOLI for the same reason, but also include recovering the cost of nonqualified plans. BOLI is a tax-advantaged asset whereby every $1 of pr mium equat to $1 of cash surrender valu (CSV) on the bank’s balance sheet. The CSV is expected to g ow every month and earnings are booked as non-interest income on a tax preferred basis. From a cash flow perspective, BOLI is a long-te m ccrual t t will return cash flow to the bank upon the death of the respective insured(s). B OLI is an investment asset that currently generates a return in the range of 2.50 percent to 3.50 percent after all expenses are deducted, which translates into a tax equivalent yield of 4.03 percent to 5.65 percent (assuming a 38 percent tax bracket). mary Privately held banks must compete with all types of orga- nizations f r talent. Their future is dependent on their level of success in attracting and retaining key executives. The use of nonqualified plans, when properly chosen and correctly designed, can make a major impact on enhancing long-term shareholder value.  A properly designed nonqualified plan can enhance the bank’s bottom line by attracting and retaining top talent, ut doing so i a way t at is cost-efficient to the bank.