Western Independent Banker - March/April 2009 - (Page 15)

By Philip K. Smith and John S. Seabold Is BOLI the Way to Go? BANK-OWNED LIFE insurance? The concept has swept through the banking world in recent years. Is bank-owned life insurance still a viable idea in the current economic, banking, and regulatory climates? For most banks the answer is yes, but pre-purchase and post-purchase analysis of the BOLI product is not only prudent, it is required. The reasons for BOLI are compelling. Providing bank management and key employees with competitive and meaningful compensation benefits has become an increasingly important and somewhat complicated and challenging task. There are many alternatives for providing these benefits. Long-range incentive benefits are designed to be paid in the future at death, disability, retirement, termination, change in control, or hardship. These benefits require that a current liability be booked by the employer. The prospects of offsetting the liability on the books of the employer with an asset that has a tax-free build up and having the bank be reimbursed for all of its expenditures for the benefit, provide an excellent sale pitch for the BOLI purchase. The prevalence of BOLI in the banking world has been increasing each year. A recent statistic is that 3,570 out of a total of 7,249 banks own life insurance policies to some extent. The banking regulations provide that generally a maximum of 25 percent of Tier 1 reserves can be invested in BOLI with a limit of 15 percent of Tier 1 capital invested with one carrier unless the remaining 10 percent is secured. In some cases, it may be possible to exceed the 25 percent limit. The average amount of BOLI held by banks is approximately 15 percent of Tier 1 capital. As with any other investment in the bank's portfolio, it is essential that due diligence be done on the insurance company or companies from which the life insurance policy or policies are purchased and on the type of policy or policies to be purchased. All of the due diligence should be memorialized in writing. The rating agencies, such as A.M. Best & Co., furnish ratings on all insurance companies. The rating for the company or companies chosen should be at least “A” or better, under the A.M. Best & Co. ratings or an equivalent rating from other rating agencies. A responsible review of the type of policy to be purchased can be more difficult. Obtaining more than one proposal for comparison, a review of historical performance of the type of policies being reviewed, and reviewing the policies being purchased by the bank’s peer group are a part of the examination needed to determine and minimize risk. An analysis of each policy’s features, including surrender charges, policy exclusions, and rates for inquiries in policy value are a part of the required review. There are various regulations for BOLI including OCC 2004-56, The Interagency Statement on the Purchase and Risk Management of Life Insurance (“Interagency Statement”) issued December 7, 2004 by the Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and the Office of Thrift Supervision. The Interagency Statement provides helpful guidance for banks purchasing BOLI, but requires greater due diligence than predecessor regulations. The bank board of directors must make a determination that maintaining BOLI is a safe and sound business practice and not rely solely on the representations from the insurance company. Banks should not purchase BOLI from one company that is in excess of the bank’s legal lending limit without regulatory approval. Banks should obtain an employee’s executed consent before insuring that employee. The Interagency Statement provides the outline and specific requirements for the pre-purchase review. The Interagency Statement also offers guidance for each step and assistance from consultants and vendors is usually necessary to complete and document the pre-purchase decision. Using the Interagency Statement as a guideline for continuing post-purchase due diligence is the best route for responsible compliance. Monitoring the BOLI risks on an ongoing basis after the purchase is also required. Additional purchases, the economic condition of the insurance company, policy surrenders, and changes in tax laws may change the risk involved in owning BOLI. Maintaining competitive benefits for bank management is the key to keeping a bank's operations and financial condition on an upward path. With current economic conditions and increased regulatory scrutiny, focusing on pre-purchase and post-purchase responsibilities and risks with regard to BOLI has become even more important. An increasing number of banks each year are depending on BOLI to continue stability and growth. A sound pre-purchase analysis, a meaningful ongoing monitoring program, a reliable accounting process, and accurate compliance with risk-based capital requirements are required in the risk management process and will help to meet bank regulatory agency expectations. Philip K. Smith is president and John S. Seabold is a principal, and both are members of the board of directors of the Memphis-based law firm of Gerrish McCreary Smith, PC, and its affiliated bank consulting firm, Gerrish McCreary Smith Consultants, LLC. Smith may be reached at 901-767-0900. Is bank-owned life insurance still a viable idea in the current economic, banking, and regulatory climates? For most banks the answer is yes, but pre-purchase and post-purchase analysis of the BOLI product is not only prudent, it is required. Western Independent Banker March/April 2009 15

Table of Contents for the Digital Edition of Western Independent Banker - March/April 2009

Western Independent Banker - March/April 2009
A Message from the President & CEO
Profitable Liquidity: Yes, You Can
Non-Performing Assets: The Keep Versus Sell Decision
Is BOLI the Way to Go?
The Troubled Asset Relief Program and Its Eff ect on Executive Compensation
TARP Money or Not, Secondary Offerings Belong in Your Plan
52nd Annual Conference
Private Equity: Another Capital Option
Strengthening Your Bank’s Bottom Line by Adapting to Difficult Times
Managing Your Branch Network Capital
Dealing with a Hard Insurance Market
WIB Service Corporation Report
WIB Calendar
New Members
Index of Advertisers

Western Independent Banker - March/April 2009