Bank Director Conference Presentation

Directors & Officers Liability:

Understanding Your Institution's Perceived Risk Profile

Dennis Gustafson,SVP & Financial Institutions Practice Leader

2

Agenda

• Introduction of A H & T

• D&O Risk Evaluation related to:

– Regulatory Exposures

– Mergers & Acquisitions

– Loan & Asset quality

– Peer benchmarking

– Securities Litigation filings by Industry

• D&O coverages & enhancements

3

About A H & T Insurance

• A H & T was established in 1921 with headquarters in the DC metro, Seattle, and NY metro areas.

• Privately held, Employee owned and Independent full service insurance brokerage and risk management consultant.

• In June, 2010 a team including the Financial Institutions Practice Leader and Management Liability Practice Leader moved to create the AH&T Northeast office managing Public Company D&O for the entire country.

• AH&T is a national leader providing solutions for Directors & Officers insurance and risk management programs to over 700 D&O clients. AH&T has also been recognized in the independent Tillinghast Towers-Perrin Directors & Officers Liability insurance survey as one of the top ten D&O insurance brokers in the nation for the last 14 years.

• The Financials Institutions Practice at AH&T Insurance focuses on providing Management Liability solutions for community and regional banks with three basic principals:

– Knowledge: With years of experience in the underwriting, brokerage, claims, and legal fields we have assembled a team of subject matter experts obtaining the best-in-class terms and conditions.

– Leverage: We obtain the most competitive pricing by leveraging the volume of placements with the Insurance Carriers that focus in the Banking Industry. These carriers include, but are not limited toChubb (A++), Travelers (A+), ACE (A+), Hartford (A), Zurich (A), CNA (A), One Beacon (A), and Chartis (A) formerly AIG.

– Service: AH&T has been an Employee owned company since 1921 so every employee is completely vested in providing unparalleled responsiveness and professionalism.

4

D&O Underwriter evaluation- Regulatory exposure

• Regulatory Exposure is still the single largest risk exposure

• FDIC updated their Professional Liability Lawsuits page (www.fdic.gov/bank/individual/failed/pls/index.html) to reflect that the number of lawsuits that it has authorized has been increased. While FDIC has up to 3 years for tort claims and 6 years for breach of contract claims, the site states that most investigations are completed within 18 months.

# failed banks

2 411

3 4 3

25

140157

0

20

40

60

80

100

120

140

160

180

2000 2001 2002 2003 2004 2007 2008 2009 2010

Year Quarter # failed banks

2000 2

2001 4

2002 11

2003 3

2004 4

2007 3

2008 25

2009 Q1 21

2009 Q2 24

2009 Q3 50

2009 Q4 45

2010 Q1 41

2010 Q2 45

2010 Q3 41

2010 Q4 30

2011 Q1 2

Authorized D&O Defendants

Total Damage Claims (000,000)

Authorized through 3rd Quarter 2010

53 $1,360

October 17 $711

November 12 $84

December 27 $335

Total 109 $2,490

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When is a Bank considered a ‘Regulatory Risk’

• Any open regulatory agreement• Open & Consent Order• C&D• MOU (relating to asset quality, earnings, or capital, not so much for Bank Secrecy)• Severe degradation of asset quality following a regulatory exam or audit where

the expectation would be a regulatory restriction on the following exam. (Texas north of or close to 100% or Tier 1 capital ratio <4%)

• Qualities of an institution taken off the Regulatory risk category include Tier 1 Capital/total loan > 6%, Positive ROA 3 quarters, Classified loans <= 45%

• D&O Policy considerations:

– Lack of Regulatory Exclusion– Named Insured = Holding Company– Side A Non-Rescindable language– Insured vs. Insured Carve-backs– Cancellation clause

6

Mergers & Acquisitions

• In the banking sector, there was an uptick of M&A activity unrelated to receivershipsand the projection is for greater M&A activity in 2011.

• Of the 177 new securities class actions filed during 2010 (all industry groups), 37 of these lawsuits were related to mergers or acquisitions (including going private transactions, management buyouts, and/or allegations of proxy violations)

• 23 of these cases were filed in the year’s second half. These merger objection cases were a significant part of the increased number of filings in the year’s second half.

• Underwriting considerations include % of shareholder votes against the M&A in addition to evaluation of dissenting shareholders

• D&O Policy considerations:

– Mid-term acquisition threshold %– Discovery provisions– Change of Control provisions– Cancellation provision– Existence of an M&A exclusion

7

Loan & Asset Quality

Assets $500,000 $400,000 $100,000 BenchmarkOperating Income $3,500 $8,000 ($4,500) Positive

Goodwill $0 0.0% 0 $0 0.0% $0 0.0% Low

Net Loans $300,000 $400,000 ($100,000)Construction $60,000 20.0% $75,000 18.8% ($15,000) -1.3% leastCommercial $100,000 33.3% $90,000 22.5% $10,000 -10.8% least1-4 family $70,000 23.3% $75,000 18.8% ($5,000) 4.6% most

Loan Charge-offs $3,000 $500 ($2,500) LessNon Performing Loans $20,000 $16,000 ($4,000) Less

Total Deposits $350,000 $275,000 $75,000 Broker Deposits $9,000 2.6% $7,000 2.5% ($2,000) 0.0% <5%

Past Due 30-89 days $10,000 3.3% $9,000 ($1,000) Closest to 0Past Due > 90 days $500 $0 ($500) Less

Other Real Estate Owned $6,500 $88 ($6,412) Less

Total Securities $144,647 $90,000 $54,647 US Government backed

Securities$130,000 89.9% $90,000 100.0% $40,000 -10.1% More (>75%)

Mortgage Backed Securities $65,000 $53,000 $12,000

MBS Issued or guaranteed by US

$64,000 98.5% $52,000 98.1% $12,000 0.3% More (>75%)

Net Interest margin 2.50% 2.80% -0.30% 2% - 3%Return on Assets (ROA) -0.70% 50.00% -50.70% positiveReturn on Equity (ROE) -8.00% 5.75% -13.75% positive

Efficiency Ratio 95.00% 69.00% -26.00%Close to 0% (0% - 70%)

Loss Allowance to noncurrent loans

44.00% 36.00% 8.00% > 100%

Core capital (leverage) ration 8.00% 8.75% -0.75% > 5% (>6%)Tier 1 risk-based capital ratio 13.00% 11.60% 1.40% > 6% (>8%)Total risk-based capital ratio 15.00% 13.00% 2.00% > 10%

Delta2010 2009

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Peer Benchmarking: D&O Survey results

Bank Assets Market Cap Change in premium Total LimitsSeparate A Side

Purchase?Cost for $5M Primary Carrier Total Limits A Side limits?

Bank 1 $0 - $100M $0 - $100M Increase <5% $10,000,000 Y $28,332 ABA Insurance (fka Progrssive) $10,000,000 $5,000,000

Bank 2 $100M - $250M $0 - $100M Increase <5% $10,000,000 N $38,327 ABA Insurance (fka Progrssive) $10,000,000

Bank 3 $100M - $250M $0 - $100M Decrease 10% - 15% $10,000,000 N $25,007 ABA Insurance (fka Progrssive) $10,000,000

Bank 4 $250M - $500M $0 - $100M Increase 5% - 10% $20,000,000 N $35,772 Zurich $20,000,000

Bank 5 $250M - $500M $0 - $100M No Change $6,000,000 Y Chicago Underwriting Group $6,000,000 $1,000,000

Bank 6 $250M - $500M $0 - $100M No Change $10,000,000 N $25,874 Travelers $10,000,000

Bank 7 $500M - $1B $0 - $100M Increase 10% - 15% $15,000,000 Y $175,000 Chubb $15,000,000 $5,000,000

Bank 8 $500M - $1B $0 - $100M No Change $6,000,000 N $10,106 Cincinnati $6,000,000

Bank 9 $500M - $1B $0 - $100M Decrease <5% $15,000,000 Y $38,445 ABA Insurance (fka Progrssive) $15,000,000 $5,000,000

Bank 10 $1B - $2.5B $100M - $250M Increase <5% $10,000,000 Y $88,760 Chubb $10,000,000 $10,000,000

Bank 11 $1B - $2.5B $100M - $250M Increase 5% - 10% $30,000,000 Y $75,520 Chubb $30,000,000 $10,000,000

Bank 12 $1B - $2.5B $250M - $500M Decrease 5% - 10% $6,000,000 N $70,701 Chubb $6,000,000

Bank 13 $1B - $2.5B $0 - $100M Increase >50% $20,000,000 Y $20,000,000 $5,000,000

Bank 14 $1B - $2.5B $0 - $100M Increase 5% - 10% $11,000,000 Y $32,450 Cincinnati $11,000,000 $1,000,000

Bank 15 $1B - $2.5B $100M - $250M No Change $15,000,000 N $17,763 Zurich $15,000,000

Bank 16 $1B - $2.5B $500M - $1B Decrease <5% $70,000,000 Y $275,000 Houston Casualty (HCC) $70,000,000 $30,000,000

Bank 17 $1B - $2.5B $1B - $2.5B Increase 10% - 15% $5,000,000 Y Chubb $5,000,000 $1,000,000

Bank 18 $2.5B - $5B $0 - $100M Increase 10% - 15% $15,000,000 Y XL $15,000,000 $3,000,000

Bank 19 $2.5B - $5B $250M - $500M Decrease 15% - 20% $40,000,000 Y $24,082 Zurich $40,000,000 $20,000,000

Bank 20 $2.5B - $5B $100M - $250M Increase 20% - 25% $20,000,000 Y $105,000 Travelers $20,000,000 $20,000,000

Bank 21 $2.5B - $5B $250M - $500M Increase 5% - 10% $20,000,000 Y $64,900 Travelers $20,000,000 $10,000,000

Bank 22 $2.5B - $5B $0 - $100M Increase 10% - 15% $15,000,000 Y $25,945 Cincinnati $15,000,000 $10,000,000

Bank 23 >$5B $100M - $250M Increase <5% $75,000,000 Y ACE Insurance $75,000,000 $20,000,000

Bank 24 >$5B $1B - $2.5B Increase 5% - 10% $35,000,000 Y $295,000 Chubb $35,000,000 $1,000,000

Bank 25 >$5B >$5B Decrease <5% $40,000,000 Y $112,100 Travelers $40,000,000 $10,000,000

Bank 26 >$5B Decrease <5% $35,000,000 Y $100,540 Chubb $35,000,000 $5,000,000

Bank 27 >$5B $1B - $2.5B Decrease 10% - 15% $45,000,000 Y $85,561 Travelers $45,000,000 $15,000,000

Bank 28 >$5B $1B - $2.5B No Change $45,000,000 Y $105,160 Travelers $45,000,000 $5,000,000

Bank 29 >$5B $500M - $1B Increase 25% - 30% $15,000,000 Y $142,780 Travelers $15,000,000 $5,000,000

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D&O Survey results- continued

Change in Premium by Industry

DecreaseNo ChangeIncrease

67%

63%35%

56%

68%

61%68%

73%

79%

21%

17%

18%

22%

18%

17%16%

24%

14%

12%

20%

47%

22%

14%

22%16%

3%

7%

Consumer Goods/Staples

Energy

Financials

Healthcare

Industrials

Materials/Utilities

Services

Telecomm

unications

Technology

0

10

20

30

40

50

60Average Price for $5M

$75,572$78,909 $89,958

$90,404 $99,188$102,609

$107,168 $117,463

$135,206

Industrials

Materials/Utilities

Healthcare

Services

Technology

Consumer Goods/Staples

Energy

Telecommunications

Financials

$0

$100,000

$160,000 Average rate for $5M• Financial Institutions showed the highest premium rate for $5M in

limits

• Financial Institutions the only industry where more respondents reported an increase in premium during the last renewal. When reviewing the data at the next level, we do see a shift in that dynamic for Q4 renewals.

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Bank Specific Survey results

Community Banks

Count % Average Median

$0 - $1B 7 2 29% $11,571,429 $10,000,000 $48,345 $28,332

$1B -$2.5B 9 5 56% $21,333,333 $15,000,000 $78,073 $54,573

$2.5B - $5B 4 4 100% $23,750,000 $20,000,000 $64,661 $64,900

>$5B 7 7 100% $33,444,444 $35,000,000 $140,190 $108,630

Total 27 18 67% $23,068,966 $15,000,000 $83,255 $67,800

Side A? Total Limits purchasedAverage Cost

for $5MMedian Cost

for $5MAsset Range

Sample size

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

0 5 10 15 20 25 30

$0 - $1B $1B - $2.5B $2.5B - $5B >$5BAssets:

Premium Rate for

$5M

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Securities Litigation filings – Industry Overview

Industry Trends:

Another method of analyzing claims trends is to review the number of securities class action filings by industry as that compares to the industry universe. The attached heat map is provided by Cornerstone and it shows what industries are being named as a percentage of the universe for the last ten years.

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Directors & Officers Coverage discussion

Top 10 D&O Coverage enhancements

– Named Insured = Holding Company

– Try to get defense costs carve-back to the Regulatory exclusion

– Limit Definition of Application to filings for just the past 12 months.

– Update Definition of Claim to include informal investigations

– Investigative Costs sub-limit

– Order of Payments

– Side A Non-Rescindable language and limit the imputation of knowledge (severability)

– Update definition of Company to include Debtor in Possession

– Insured vs Insured carve-backs for: • Creditor Committee• Bankruptcy Trustee• Whistleblower, old Board member, foreign equivalent

– Limit when Insurance carrier can cancel policy

– Limit the threshold of the conduct exclusions (fraud & personal profit) to the ‘final adjudication’ standard.

POLICY

A B C

RetentionNo

RetentionYes

RetentionYes

Claim AgainstIndividuals

Claim AgainstIndividuals

Claim AgainstThe Company

Responds WhenCompany is unable

to financiallyor legally

indemnify it'sindividuals

Responds WhenCompany has satisfied it's

policy retentionfor indemnifiable

loss againstindividuals

Responds WhenCompany is named

in a SecuritiesClaim

Personal AssetProtection

Balance SheetProtection

Balance SheetProtection

Side A Insurance protects the individual Directors & Officers for claims where the Insured company can not indemnify the D&O’s in scenarios such as insolvency and derivative actions.

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Primary Contact

Dennis Gustafson, SVP & Financial Institutions Practice Leader

p: 973.286.3572

c: 917.846.5548

e: [email protected]

Secondary Contact

Michael Tomasulo, SVP & Directors & Officers Practice Leader

p: 973.286.3570

e: [email protected]

Account Manager

Jonathan Maio

p: 973.286.3571

e: [email protected]

Claims Director

Rick Hirschoff, MA, MSW, SCLA

p: 703.737.2259

e: [email protected]

Contact Information

Contact us when… You receive notice of a claim

Circumstances occur that may give rise to a claim

Mergers or acquisitions occur

A subsidiaries or spin-off is created

Secondary, follow-on or debt offerings are planned

The SEC initiates an investigation of the Company or individuals

Asking employees to sit on the board of for profit companies

20% or more of the Company’s stock will change hands

A bad news disclosure occurs

Reviewing limits of liability and scope of coverage