Bank Owned Life Insurance “BOLI” as an

Earning Asset

October 2013

What is BOLI?

• An insurance product that is tailored to the specific requirements of banks

• Only available to profitable financial institutions

• A highly specialized form of a single premium insurance product with strong investment attributes

• A high-yield, low risk investment and is approved by the regulators

Note: In accordance with OCC 2004-56, BOLI provides tax-free income to assist the bank in offsetting the rapidly rising cost of providing employee benefits for the entire bank. No new benefits need to be added in order to put BOLI on the balance sheet.

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What is BOLI? According to the interagency statement on BOLI, the Bank can use BOLI to offset the following benefits:

Pre- and Post-Retirement Employee Benefits • Individual or Group Life Insurance • Health, Dental and Vision Insurance • Tuition Reimbursement • Deferred Compensation • Pension Benefits • Disability Benefits (both short term and long term) • Qualified Plan Contribution Expenses • Stock Grant Expenses

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How BOLI Works • The Policies cover a select group of Officers/Directors

– Top 35% of employees by compensation – Typically covered under guaranteed issue structure with no medical testing

• Single premium life insurance contract

• Bank is the premium payer, owner and beneficiary

• BOLI products are institutionally priced investment products and not designed like

“typical” Insurance

• No loads- 100% of premium booked as an Other Asset on Day 1

• Full cash value growth booked as Other Non-Interest Income

• Cash value grows tax-free

• No charges if policy surrendered 5

BOLI Product Types

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Category General Acct Hybrid Sep Acct PPVUL Sep Acct

Guaranteed Min Interest Rate 1.50% to 3.00% 1.00% to 2.00% None

Risk Weight 100% 20% - 100% 20% - 100%

Credit Risk Entire asset exposed to carrier

Assets held in bankruptcy remote separate account

Assets held in bankruptcy remote separate account

Mark to Market Risk, Write Down Risk None None, no stable value

wrap Yes, depends on trigger point

Default Protection Yes Yes No

Ability to Manage Investment Risk No Yes Yes

Transfer of Mortality Risk to Insurance

Carrier Yes Yes Yes

Cost Disclosure No Varies by Product Yes

Performance • Historical investment performance of BOLI

– Often one of the bank’s highest performing assets

• In a rising rate environment

– No mark-to-market – Net rate will trend up, lagging the market

• Performance of the BOLI market through the market down turn (graphs) – Treasury vs. BOLI Yields – Meyer-Chatfield client experience

Performance of Sussex Bank’s BOLI Relative to Its Investment Portfolio

During the period from 3/2012 – 12/2012 the bank did not invest in Treasuries and Agency securities.

Due Diligence • Pre-Purchase

– Management and the Board should understand the risk profile and purpose of BOLI – Board may delegate decision-making authority to management, but remains ultimately

responsible for ensuring the purchase is consistent with safe and sound banking practices • Post-Purchase

– With the assistance of management, the Board reviews the BOLI portfolio annually • Risk assessment • Identification of which employees are insured • Assessment of death benefit amounts relative to salary • Percentage of insured persons still employed • Evaluation of material changes to BOLI risk management policies • Analysis of mortality performance • Evaluation of material findings from internal and external audits and independent risk management

reviews • Identification for the reason for, and tax implications of, any policy surrenders • Peer analysis of BOLI holdings

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Regulatory View of BOLI • Well established market

– Over 60% of community banks own BOLI

• Interagency statement provides a roadmap – Pre purchase due diligence – Post purchase management, including the role of management and the board of directors

• Holdings guideline of 25% of capital, higher levels require board approval

• Recent Call Report changes, classification of BOLI into: – General Account – Hybrid Account – Separate Account

• Acceptable uses include key person insurance, split dollar life insurance, financing of other NQDC plans, and financing of general employee benefit expenses

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Regulatory View of BOLI

• Credit risk of insurance company – Regulators putting emphasis on how the bank reviews and monitors the carrier’s

financial strength. Must not just rely on credit ratings.

• BASEL III and risk weight – No impact for general account, still 100% risk weight – Likely no impact for hybrid and separate account, OCC 2004-56 dictates look through

approach, still applies

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For additional information on this presentation, please contact:

Charlie Hicks Senior Managing Director Meyer-Chatfield 256.547.9527 charlie.hicks@meyerchatfield.com Anthony Labozzetta President/Chief Executive Officer Sussex Bank 973.827.2914 alabozzetta@sussexbank.com

This material constitutes our confidential information, and by reviewing it you agree to maintain it in strict confidence. If you do not agree to maintain this material in strict confidence, then you are not authorized to review it and are instructed to return it to us immediately. This material is for informational purposes only and does not constitute an offer to sell, a solicitation of an offer to buy, or a recommendation for any securities or other financial instruments. You should not construe any portion of this material as legal, tax, investment, financial or other advice. The statements contained herein are based upon information that we believe to be reliable as of today’s date, but we cannot represent that such statements are complete or accurate. Past performance is no guarantee of future results. There is no guarantee that any investment strategy referenced herein will work under all market conditions. Prior to making any investment decision, you should evaluate your ability to invest for the long-term, especially during periods of downturns in the market. You alone assume the responsibility of evaluating the merits and risks associated with any potential investment or investment strategy referenced herein. To the extent that this material contains reference to any past specific investment recommendations or strategies which were or would have been profitable to any person, it should not be assumed that recommendations made in the future will be profitable or will equal the performance of such past investment recommendations or strategies. IRS Circular 230 Disclosure Notice: Meyer-Chatfield and its affiliates do not provide tax advice. Accordingly, any discussion of tax matters contained herein (including any attachments) is not intended to or written to be used, and cannot be used, in connection with the promotion, marketing, or recommendation by anyone unaffiliated with Meyer-Chatfield of any of the matters addressed herein or for the purpose of avoiding tax related penalties.

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