Pub. 2 2012-2013 Issue 5

16 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S FEATURE ARTICLE “By utilizing BOLI to offset the increasing costs of employee benefits, banks are improving their financial metrics while maintaining safety and soundness and flexibility for future changes in rate environments.” BOLI in Today’s Environment Current Banking Environment Slack loan demand, increasing deposits and record low yields on cash and securities port- folios have been an all-too common story for community bankers lately. In addition, banks are wrestling with concerns about the impact of Dodd-Frank, the CFPB, BASEL III, QE3, market uncertainty, and a closely contested election cycle. As a result, many are revisiting what they thought was a familiar topic - BOLI - and finding that this asset has evolved into a powerful tool for managing risk and improving the bank’s bottom line in today’s environment. Why BOLI? Page 1 of the Interagency Statement states that “…, BOLI can provide attractive tax-equiv- alent yields to help offset the rapidly rising cost of providing employee benefits.” It is important to note that there are specific reasons for pur- chasing BOLI that are regulator approved, and some of those are more flexible than others. In addition, there are also some specific rationales that do NOT qualify as an approved reason for purchasing BOLI, such as “To generate funds for normal operating expenses other than employee compensation and benefits.” It is also significant to note that a BOLI purchase does not depend upon an executive benefit plan. While many community banks do use BOLI in conjunction with some sort of non-qualified benefit plan for their key execu- tives and/or directors, the decision to purchase BOLI is completely independent of the decision to implement a supplemental benefit plan. The two can be informally lined up in a way that cre- ates a projected income stream that will offset a projected benefit expense stream, or either element (the benefit plan or the asset) can be pursued individually, or in any combination. How Can BOLI Improve the Bank’s Financial Bottom Line? There are many advantages to executing a carefully constructed BOLI portfolio strategy. The design of the portfolio should reflect the bank’s goals. By utilizing BOLI to offset the RICHARD K. BRATTEN Partner Bank Financial Services Group