Why BOLI in Today's Interest Rate Environment
By David Shoemaker | September-October 2012
Banks continue to be challenged by a shrinking net interest margin as well as high liquidity. Identifying acceptable investment opportunities with high credit quality and diversification continues to challenge many banks today. In addition, most banks are affected by the increasing cost of providing employee benefits.
As we have stated before, bank-owned life insurance (BOLI), continues to be an acceptable and prevalent solution to these challenges. Pennsylvania banks continue to explore BOLI and consider the BOLI yields available today as a partial solution to these challenges. According to the FDIC and Equias Alliance research, 77 percent of Pennsylvania banks with assets greater than $100 million own BOLI assets as of June 30, 2012. In addition, highly rated insurance companies are offering very attractive BOLI yields and policy structures that many banks find acceptable for their overall portfolio strategy.
The annual yield on a BOLI investment compares favorable to other bank-eligible assets. Also, BOLI provides tax advantaged income not available with traditional bank investments. Banks earn income from the growth of the BOLI cash value and from the life insurance proceeds paid to the bank on the death of the insured employee. In addition, the income earned from BOLI is tax deferred, and, if the BOLI contract is held until the death of the insured, the bank receives life insurance proceeds tax free provided the policy complies with IRC101(j), state insurable interes laws, and has not been exchanged for value under IRC101(a)(2). Growth in cash value is recorded as "Other Non-Interest Income" on the bank's financial statements.
The bank is the owner and beneficiary of the BOLI and the policies cover the lives of bank officers who may or may not participate in any executive benefit plans. BOLI is not tied directly to the employee benefit programs, but BOLI is designed to recover a portion of the bank's overhead expenses, which includes employee benefit expenses.
Remember that BOLI must be used to offset the cost of employee benefits, including health care. Also, remember to consider the interagency guidance as outlined OCC-2004-56 regarding the purchase and administration of BOLI.
For a complementary analysis of how BOLI can impact your bottom line, or a copy of our recent ABA webinar presentation, please contact David Shoemaker, CPA/PFS, CFP, (901)754-4924 or DShoemaker@equiasalliance.com.
David Shoemaker is a registered representative of and securities are offered through ProEquities, Inc., a Registered Broker/Dealer, and member FINRA and SIPC. Equias Alliance LLC is independent of ProEquities, Inc.