Pub. 2 2012-2013 Issue 5

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 March • April 2013 17 increasing costs of employee benefits, especially the seemingly endless rate increases for health care plans, banks are improving their financial metrics while maintaining safety and soundness and flexibility for future changes in rate environments. » Earnings: Most banks with BOLI capacity today can generate a 5-10% increase in their net earnings compared to their 2011 results. This increase in income compounds going forward, resulting in an increasing amount of net income each year. » Valuations: When a bank valuation is made based upon income and projected future income, the increase in bank earnings translates into increased valuations. » Performance Metrics: BOLI income can significantly improve bank EPS, ROA and ROE, as well as favorably impact other metrics such as RBC ratios (depending upon product selection) and efficiency ratios (due to the non-interest nature of the income). » Balance Sheet Stability: BOLI is held at book value, so unlike many bank securities, there is no balance sheet fluctuation due to a changing interest rate environment. Potential new rules for banks under BASEL III could make this feature more important than ever. » Sub-S AMT Considerations: For Sub-S banks that have significant Muni concentration, the fact that BOLI income is not an AMT tax- preference item is one of several advantages of BOLI over Muni’s. » Reduced Effective Tax Rates: Since BOLI generates tax-deferred income (ultimately becoming tax-free upon final payment via a death benefit), banks can lower their effective tax rates. » Interest Rate & Reinvestment Risk: BOLI mitigates interest rate and reinvestment risk because the combination of book value treatment plus a floating interest rate going forward allows for active asset management and reinvestment by the BOLI provider (insurance company) with no balance sheet fluctuations for the bank – the best of both worlds. » Safety & Soundness: Safety and soundness are key, and creating a diversified portfolio of the highest rated carriers in the industry, along with a constant monitoring of their financial condition, gives bankers real peace of mind. Credit risk can also be additionally mitigated through the use of “hybrid” products. » No Hidden Costs: There are no costs for loan loss reserves or other overhead costs that exists with other assets, nor are there any deferred tax liabilities to incur. » Icing on the Cake: In addition to the stellar performance as an asset on your balance sheet, BOLI provides a life insurance benefit for those officers and directors whom you select to participate. In some cases, this can even be accomplished without any medical exam. This benefit is generally shared between the bank and the executives/ directors, providing an additional benefit to your key group to incent, retain and reward their valuable Q BOLI  continued on page 19 O WN THE REAL ESTATE YOUR BUSINESS ALREADY PAYS FOR CEDCO S MALL B USINESS F INANCE C ORPORATION Colorado's SBA 504 Loan Expert™ 1175 O SAGE S TREET , S UITE 110 D ENVER CO 80204 ÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊÊ Office Locations — Denver, Grand Junction, Colorado Springs 1 - 8 0 0 - 8 4 3 - 8 8 5 2 www.cedco.org • More stability for your operation • A stronger balance sheet • An asset to sell when you’re ready A S A LEADING SBA 504 LENDER WE MAKE IT EASY FOR YOU • Buy, Build, Remodel or Expand Real Estate • Purchase and install long-lasting equipment • Fast, expert processing - with low loan costs • Refinance LÕÃiÃÃ real estate ÀÊiµÕ«iÌ • 7iÊi`ÊÕ«ÊÌÊfxÊ\ÊLÀÀÜÊÕ«ÊÌÊfÓäÊÊ Üi VLi`ÊÜÌÊL>Êv>V} • Interest rate as low as 5.25%, fixed for 20 years • Down payments range from 10% to 20% • Most Small Businesses are Eligible S TREAMLINED P ROCESSING • Front Range and mid-mountains call Sean or Mary Jane 303-893-8989 • Western Colorado call Pat 970-243-1861 CEDCO Small Business Finance Corporation Your Best Source for SBA Real Estate Loans New Easier Qualification Uninterrupted access to money through a monthly SBA-backed bond auction Low fixed-rate financing Low down payments O WNERSHIP M EANS