BOLI Pays Banks Before and After Executive Deaths

by Sam Eifling  on Monday, May. 3, 2010 12:00 am  

If a bank tells you its most valuable asset is its people, you might take it quite literally.

Though it's considered a "mature" financial instrument (the opposite of "new-fangled"), bank-owned life insurance, or BOLI for short, is an increasingly valuable instrument for banks to pay for executive benefits and perhaps shore up the bottom line in case of the unforeseen.

"It is widespread," said Larry J. Brandt, the chairman and CEO of First Federal Bank of Harrison. "It provides investment income, if you wish to call it that, to offset the cost of providing benefits, and benefits for financial institutions is a substantial amount."

Not every bank carries BOLI. New York Life's executive benefits affiliate, NYLEX, counts $115.9 billion in BOLI holdings among 4,025 banks nationwide as of September 2007, but even in the Southeast, the region where the greatest proportion of banks carry the insurance, only 35 percent of banks have it.

Among Arkansas banks, BOLI holdings vary widely. The cash surrender value of Bank of the Ozarks' insurance holdings was $47.4 million as of the end of 2009; Centennial Bank had $51.9 million; Simmons First National of Pine Bluff had $20.2 million of the stuff. Meanwhile, Arvest Bank of Fayetteville, which holds more assets than those three banks combined, had just $5.8 million. Jonesboro-based Liberty Bank of Arkansas, the fifth-largest bank chartered in the state, had $3.3 million. Metropolitan National Bank of Little Rock had none at all.

If the banks actually did withdraw those amounts, they'd be taxed heavily - probably near 50 percent, all told - but it's likely, said Mike Myers, a Houston attorney who has tried corporate-owned life insurance cases, that the death benefits on those policies are worth five to 10 times the cash surrender value. For a massive institution such as Bank of America to carry $17.7 billion in BOLI suggests its employees are insured for somewhere in the 10-figure range.

"It's on probably every third person at the bank," Myers said. "There must be coverage on more than just the key executives, because the numbers are just too big." (The insurance holdings line on Federal Deposit Insurance Corp. forms could include policies taken out on some larger borrowers, but those are considered a negligible portion of the total, Myers said.)

Mid-Career Deaths

Depending on the terms of those policies, banks are likely to reap a tax-free windfall even after the executives retire or leave the company. Some may not endure even that long.

Several Arkansas banks that carry BOLI have seen mid-career executives die unexpectedly in the past two years. Tom Steves, an executive vice president at Centennial Bank, died in a motorcycle accident last May, and Ron Strother, the CEO of Centennial's parent company, Home Bancshares Inc., died Jan. 31 in Little Rock from a self-inflicted gunshot wound. Mark Pennebaker, the senior vice president for lending at the Bank of the Ozarks in North Little Rock, died on vacation in Mexico last fall. On April 24, Brad Mooney, a senior vice president of Centennial, died of an apparent heart attack at age 40.

Banks filings don't disclose individuals' coverage, but occasionally an earnings report will show immediate evidence of a death benefits payout. A 2008 quarterly filing by First Federal Bancshares of Arkansas Inc. of Harrison indicated that it earned a $1.1 million profit during a quarter when it received a $1.2 million death benefit claim. Quick math says BOLI made an otherwise money-losing quarter profitable for the institution.

Brandt declined to give the name of the deceased, but did say he was a former vice president who had left to work at another bank. And when he died, First Federal's old BOLI policy paid out.



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