BOLI KEEPS BANK COMPETITIVE
By making good choices, BOLI can be a resourceful and tax-efficient way to finance benefit program costs.
MassMutual | May 21, 2013
Graystone Tower Bank, a fast-growing community institution with $2.6 billion in assets, views its employee benefits program as essential for attracting and retaining high performing talent. The Harrisburg, PA-based bank opened in late 2005 and has consistently been ranked as one of the best places to work in Pennsylvania (according to a statewide annual survey managed by The Best Companies Group).
In mid-2008, with rising profitability, the bank sought to establish a long-term funding mechanism for employee benefits and secondarily to grow non-interest income. The bank considered bank-owned life insurance (BOLI) because of its effectiveness in meeting long-term obligations and its ability to potentially generate more attractive yields than alternative taxable investments. (With BOLI, life insurance is purchased and owned by a bank, insuring some of its employees with their consent. Over the long-term, death benefit distributions are used to fund employee benefit programs, such as retiree healthcare and deferred compensation, that the company may not otherwise be able to offer.)
Mark Merrill, Chief Financial Officer of Graystone Tower Bank, turned to David Shoemaker, an experienced BOLI consultant who was then associated with Clark Consulting and who now is a Principal of Equias Alliance, to design Graystone’s BOLI program. According to Merrill, “experience, knowledge, and credibility of the consultant are important factors in navigating the landscape of product design and BOLI providers.” Skilled consultants help educate banks on the pros and cons of various BOLI products, as well as the growing volume of regulations governing the products. Shoemaker, whose current Equias Alliance firm boasts 35 employees, including eight CPAs and two attorneys, added, “You have to give each bank all information necessary for them to make an informed decision.”
After an extensive due diligence process, the bank selected Massachusetts Mutual Life Insurance Company (MassMutual), a leading provider of BOLI, recognized for its financial strength, expertise, and history of fairness in dealing with policyholders. The most important factor for Graystone was credit risk. “We knew it would be a long-term investment, so the carrier we went with had to have a long history of solid credit quality,” Merrill said. With surplus of more than $10 billion at the end of 2010, the 160-year-old MassMutual enjoys financial ratings* among the highest of any company in any industry. “Ultimately the BOLI death benefits that are used to fund employee benefit programs are paid out of an insurer’s general account, so it’s in the bank’s best interest to choose a carrier that has the financial strength and commitment to be in it for the long term,” noted Doug Endorf, vice president and actuary at MassMutual.
MassMutual is a mutual company, meaning it is operated for the benefit of its policy owners as opposed to shareholders, allowing it to take a long-term perspective and buffering it from the vicissitudes of Wall Street. For Graystone Tower, financial solidity was by far the most important factor in its decision to go with MassMutual. “We were willing to trade off some yield for a carrier that provided high investment-grade quality for our premium dollars,” Merrill said. Of course, it also helps that MassMutual has been in the BOLI business for over 20 years, and has over 1,300 bank clients with more than 40,000 insured lives (as of May 2011).
Graystone Tower has found its foray into the BOLI market to be both rewarding and stable, despite the decision by its previous BOLI consulting firm, Clark Consulting, to exit the community bank segment of the BOLI market. Clark’s exit inspired the formation of Equias Alliance, headed by Shoemaker and other Clark alumni, which Merrill and Graystone selected to retain as their BOLI consulting firm. “It’s our chance to do it right,” Shoemaker said, “We wanted to create a firm that feels like a step ahead.” With ongoing guidance from experienced BOLI consultants and insurance providers, BOLI has proven to be a resourceful and tax-efficient way to finance benefit program costs. Noted Merrill, “The expertise and knowledge continue today and, by maintaining the right relationships, will be there tomorrow.”
*Ratings apply to MassMutual (Springfield, MA) and its subsidiaries, C.M. Life Insurance Co. and MML Bay State Life Insurance Co. (Enfield, CT 06082). Financial strength ratings as of 5/1/11: A.M. Best (A++); Fitch (AA+); Moody’s (Aa2); Standard & Poor’s (AA+). Ratings are subject to change.