Pub. 3 2013-2014 Issue 2

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 September • October 2013 17 in a 5-year government agency bond yielding .93 percent would generate $46,500 in income, before taxes. Thus, the investment in BOLI would generate more than $116,000 in additional income for the bank which would enhance return on assets, return on equity and shareholder value.* • Help diversify the bank’s balance sheet by investing 2 percent to 3 percent of its assets in a BOLI policy since investment in the general assets of an insurance company through a BOLI policy would be a new asset class for most banks. In addition to these benefits, a BOLI policy can enable a bank to earn tax-free income and receive death proceeds frompolicies when they are held to maturity. A bank may also decide to share a portion of the life insurance coverage with its key executives and directors. Over the years, BOLI has proven to be a valuable asset since now more than 50 percent of the banks in the U.S. have BOLI on their balance sheet. Pre-Purchase Analysis What does a bank need to consider in deciding whether to purchase BOLI? The joint banking regulatory Interagency State - ment of 2004 identified the factors a bank should consider in making such a decision including why the purchase is being made, the qualifications of the vendors (financial ratings, BOLI experience), the key risks (li - quidity, credit, interest rate, etc.), an evalu- ation of the policy types available (variable separate account, hybrid separate account, general account) and a review of the bank’s capital position as well as risk tolerance. Market Trends For the reasons shown above, the num- ber of banks purchasing BOLI for the first time or making an additional purchase of BOLI continues to grow year by year. Hy - brid separate account and general account polices (where the general assets of the in- surance company support the policyholder’s cash surrender value, but are not protected from claims on the insurer), have been the most popular BOLI product in recent years. Although BOLI is not suitable for all banks, the statistics show that an increasing number of banks appreciate the benefits it does offer and are making it a part of their investment portfo - lio. n *The projected yield is based on an average of the interest rates offered by three carriers in the BOLI market as of April 1, 2013 and assumes the bank is in the 38 percent tax bracket. Ken Derks is a registered representative of, and securities are offered through, ProEquities, Inc., aRegistered Broker/Dealer, andmember FINRAand SIPC. Equias Alliance is independent of ProEquities, Inc. Ken Derks is a managing director at Equias Alliance, which has assisted more than 800 community banks in the design and implementation of bank-owned life insur- ance (“BOLI”) as well as nonqualified benefit plans for selected executives. He can be reached at 469-252-1037.