BOLI Pays Banks Before and After Executive Deaths

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

Asked whether his relationship with his employer changes when it becomes a beneficiary of a life insurance policy - a position not unlike a family member - Brandt chuckled.

"Naturally, I signed a consent agreement, like any officer would," he said. "A substantial amount of benefit expense has been paid for me by the company. It's a very equitable way for the bank to recover some of their expenses. Naturally, you don't have 20 executives die all at once. It may be one every 20 years. But your benefit expense goes on every year." Benefit expenses tend to run about a third of the bank's total compensation costs for executives, he said.

Much of banks' affinity for BOLI are those interest payments that get plowed into executive compensation, said Chuck Dudley of Hot Springs, a vice president of Argent Financial Group who has been selling BOLI since 1996. "The money accrues tax-free," Dudley said. "If the rate's 4 percent - and they're not quite that good right now - that might be a 6.5 percent return. That's not bad."

The philosophy behind BOLI is to goose non-qualified compensation plans - which, unlike a qualified plan such as a 401(k), doesn't limit the amount the institution can offer an executive. But because it's tied to the mortality of the insured, it's literally a lifetime investment. It's long term, complicated and involves a hefty upfront investment - maybe a million dollars - that may discourage a bank from buying.

"A lot of times you have boards of directors who don't understand insurance or don't like it," Dudley said. "They may have a 90 percent loan-to-deposit ratio, and if it's not a particularly liquid investment, it doesn't necessarily make sense to do it. Some haven't understood it and don't want to get involved in it."

You must figure that if only a third of banks in the Southeast carry BOLI, there must be a catch. Bank consultant Randy Dennis makes a distinction between split-dollar policies that provide for supplemental executive benefits and what are called "key-person" policies that exist primarily to provide a bulwark in case of unexpected deaths.

The latter, he appreciates. The former, not so much. After all, a bank is in the business of lending, so why take a small return, even a tax-free return, on a lump sum that could be lent out at higher rates?

"What we find over time is, the policies don't yield anything like what they say they will," said Dennis, president of DD&F Consulting Group, a Little Rock firm that consults for and provides risk management work for banks. "I'm not against life insurance. I think it's important. It provides a benefit to the bank, to provide some time to replace people and fill the holes left as a result of an untimely passing. It can be used wisely, but it's sold probably more than used wisely."

Millions in Payouts

A tour through the FDIC reports of some of the larger banks doing business in Arkansas suggests that banks have been warming to BOLI during the past five or six years. Regions Bank of Birmingham, Ala., for one, had at the end of 2009 a cash surrender value of $2.42 billion, double what it had at the end of 2006 and up from zero a year prior to that. Bank of the Ozarks had no CSV as recently as the third quarter of 2004.

Liberty Bank, with its $3.3 million at the end of last year, didn't have any CSV until 2005, the same year Simmons First National Bank of Pine Bluff also appears to have begun investing in BOLI. First National Bank of Fort Smith, with $2.3 million in CSV at the end of '09, had none at the end of 2007.

The income works out to millions for the banks. Bank of the Ozarks reported a BOLI income of $3.2 million in 2009 ($1.9 million in CSV increase plus $1.3 million in death benefits) and $4.1 million in 2008 ($2 million in CSV increase plus $2.1 million in death benefits). Centennial Bank, lumping together all its non-interest income, saw an increase in that category from $25.8 million in 2007 to $30.7 million in 2009.



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