ABA Banking Journal - January 2008 - (Page 38A) INSURANCE REPORT: DIGITAL MAGAZINE EXTRA BOLI PART I Safely dancing with the“BOLI bear” Before your bank sets out to fund its benefits programs with a “key man” policy, both the board and management must scope things out in detail W www.ababj.com/subscribe.html When a bank’s board and management analyze an institution’s appetite for bank owned life insurance (BOLI) as a strategy to help offset the costs of current and anticipated employee benefits, both must remember the old adage that when dancing with a bear, you don’t stop dancing until the bear stops dancing. In other words, BOLI is a financially significant and long-term company strategy and, good or bad, if adopted, it will remain a bank strategy for a long time and greatly impact the bank’s regulatory and financial health. Regulatory perspective To assist banks in making a prudent assessment of BOLI risks, in December 2004 the banking agencies and the Office of Thrift Supervision issued an interagency statement (OCC 2004-56) regarding the purchase and risk management of BOLI. That interagency statement provides general guidance consistent with safe and sound banking practices, and much of this article summarizes the FDIC’s prior advice on the subject. (On Nov. 9, 2007, the Treasury Department and the IRS issued temporary and proposed regulations regarding annual reporting requirements for BOLI programs subject to IRC section 101(j). The temporary and proposed regulations statement does not include any substantive guidance and indications are that final subBy Jeffrey G. Lenhart and Christopher J. Honenberger. Both are principals in the law firm of Lenhart Obenshain PC, Harrisonburg and Charlottesville, Va. Lenhart specializes in business and tax matters involving individuals, partnerships, and corporations. Honenberger, a former bank president, specializes in legal and regulatory matters affecting community banks. www.lenhartobenshain.com stantive guidance will be forthcoming in early 2008.) Among the practices covered in the interagency statement is the need for senior management and board oversight of BOLI, including both a thorough pre-purchase analysis of risk and rewards and a post-purchase risk assessment. As a general matter, the ability of state charted banks to purchase insurance is governed by state law. However, the Federal Deposit Insurance Act provides limited federal oversight in certain circumstances. Therefore, the interagency statement provides applicable oversight to the bank for entering into the BOLI plan. Further, the bank should follow generally accepted accounting principles (“GAAP”) applicable to life insurance for financial and regulatory reporting purposes. Generally speaking, Financial Accounting Standards Board (“FASB”) Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance, discusses how to account for holdings of life insurance. While proper accounting treatment for the BOLI plan is beyond the scope of this article, the board and management are encouraged to consult with the bank’s accountants regarding proper accounting treatment. The interagency statement provides that, before entering into a BOLI contract, institutions should have a comprehensive risk management process for both purchasing and holding BOLI. A prudent risk management process includes: 1. effective senior management and board oversight; 2. comprehensive policies and procedures, including appropriate limits; 3. a thorough pre-purchase analysis of BOLI products; and 4. an effective ongoing management of risk assessment, management, monitoring, and internal controls processes, including appropriate internal audit and compliance frameworks. Although the board may delegate decisionmaking author- ABA BANKING JOURNAL/JANUARY 2008 38a http://www.lenhartobenshain.com http://www.ababj.com/subscribe.html
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