Independent Banker - March 2021 - 25

Next: The ad regulations you should know about 
The credit quality of general account
BOLI is fairly high, and banks are
getting a nice spread compared with
other investments, he says, adding that
in the current market, BOLI policies
are generating tax equivalent net yields
between 3% and 4%.
How does BOLI work?
Banks typically purchase BOLI
policies for top executives or directors.
The bank is both the owner and the
beneficiary of the policy. BOLI is
frequently used to help offset and
recover the cost of employee benefits,
as well as nonqualified benefit plan
expenses, supplemental retirement
and supplemental life insurance plans
for officers and directors.
" Because the cash flows from a
BOLI policy are generally tax-deferred
income, " Derks says, " if the institution
holds the policy for its full term, BOLI
can provide attractive tax-equivalent
yields to help offset the rapidly rising
cost of providing employee benefits. "
San Antonio-based Lone Star Capital
Bank bought its first BOLI policy about
seven years ago and now holds policies
on six of its executive officers. The
$310 million-asset community bank
has purchased single policies totaling
about $5 million with proceeds that
are tied specifically to funding benefits
for each insured person.
" We have really used it to help offset
the cost of a particular retirement
plan for that person, " says chairman
Bill McCandless. Although Lone Star
QUICK STAT
$182.2 billion
The cash surrender value of all U.S.
bank-owned life insurance policies
Source: NFP-Michael White BOLI Holdings Report, Q3 2020
" You hope that it is many days and
years in the future, but one day that
[bank-owned life insurance] policy
will come back to benefit the bank. "
-BILL MCCANDLESS, LONE STAR CAPITAL BANK
Capital Bank provides 401(k) plans
for all of its employees, it offers an
additional retirement plan for those
six executives as part of their overall
compensation package. It's an extra
step to attract and retain key people,
McCandless adds.
" You hope that it is many days
and years in the future, but one day
that policy will come back to benefit
the bank, " he says, adding that the
bank earns interest on the policy. The
insurance company pays the bank a
dividend, which accrues on the policy's
cash value. On the bank's books, it's
treated as tax-free noninterest income
even though it is not cash received.
" So, I believe it has worked out very
well for our bank, " McCandless adds.
Weighing pros and cons
Experts tend to agree that one of the
main selling points of BOLI is its
tax-favored treatment. " By far the
biggest disadvantage is you pay for the
insurance policy up front, " McCandless
says. The premiums can be a sizable
capital commitment that might range
from $250,000 for an individual to
upwards of $8 million for a group of 15
bank executives.
BOLI is an illiquid asset. It works
well if the bank holds the policy until
the death of the individual, which
tends to make it a long-term asset.
Banks can surrender the policy at any
time for the cash surrender value, but
they would be required to pay taxes on
all gains received since they bought the
policy. If it's a modified endowment
contract (MEC) policy, the bank would
have to pay an additional 10% excise
tax on those gains.
Banks should consider what they are
doing strategically with their capital
before committing funds to BOLI given
its long-term nature, McMillan says.
BOLI acts as an accounting offset,
because it doesn't generate cash flow.
The cash render growth within the
policy is an " other income " earnings.
So, if a bank has a low cash flow or is
in need of cash, BOLI may not be the
right product. BOLI might also not be
a good option for a bank that is in a
negative tax situation, or if it has some
carry forward losses, McMillan adds.
Regulators require banks to
follow the interagency guidance
on purchasing and maintaining
BOLI, which includes vendor due
diligence. It's important to partner with
a provider that can provide technical
and compliance support, Derks says.
Another important component is
choosing a good insurance carrier.
" It is kind of like making a really
long-term loan, " McCandless says.
" You have to be very prudent in the
insurance companies you choose to
work with. " 
Beth Mattson-Teig is a writer
in Minnesota.
independentbanker.org Q 25
http://www.independentbanker.org
Independent Banker - March 2021

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