Interview: Eric Hilgenberg

Editor's Note: Eric Hilgenberg of Equias Alliance sat down with NorthWestern Financial Review Editor Tom Bengtson to provide an update on BOLI. Hilgenberg offices in Prior Lake, Minn..Q. Eric, could you provide an update on the BOLI market?.Many banks continue to buy BOLI. As noted in the 2013 Equias Alliance/Michael White Associates BOLI Holdings Report released earlier this year, bank BOLI holdings of institutions between $100 million and $1 billion increased by $970 million in 2013, a more than 7 percent year-over-year increase. .In a relatively mature market, where nearly 60 percent of banks have BOLI on their balance sheet, this increase represents a significant jump. The trend appears to be continuing and possibly even accelerating..Q. BOLI has been around for a long time; why do you believe so many banks are now buying BOLI?.My conversations with bank presidents seem eerily similar — I hear of loan demand being less than robust, net interest margins narrowing, and increasing levels of liquidity. Banks are challenged finding the return/risk profile they want in their investment portfolios. These are very real concerns and I guarantee you they are keeping bank presidents and CEOs up at night across the country..In general, banks are searching for options, and as such they are willing to adapt and be more creative, as long as it doesn't increase their risk exposure. That's where BOLI warrants a bank president's consideration. The unique asset offers its acquirer strong credit quality and low origination costs/maintenance costs, while still providing attractive returns. Importantly, BOLI can provide all of the foregoing without mark-to-market risk. .So what can a banker expect in return? One can anticipate BOLI to provide a yield somewhere in the 3.50 percent range on a healthy group of relatively young officers. This can equate to earnings in the upper ranges of 5 percent on a taxable equivalent basis. With yields in this range, the BOLI asset tends to fit well within most bank portfolios. .In addition, BOLI acquisitions are usually placed across a group of bank officer's lives. This enables the bank to review their benefit package and consider offering a portion of the insurance to the officer's family upon death. I've delivered some of those checks to banks and know how those death benefits can be a real and significant blessing to the deceased's beneficiary. The death benefit protection can provide a meaningful benefit to a bank officer..Q. BOLI sounds like a good earning asset, but what are some of the reasons it wouldn't make sense for a bank? Why have 40 percent of banks not invested in BOLI?.Fair question. For some, it's a psychological barrier in that it doesn't seem like traditional banking. For others, they may have analyzed BOLI and it truly might not make sense based on their existing financial position and/or business structure. .BOLI, in general, is a fairly long-term and illiquid asset. Once a bank "pulls the trigger" the BOLI asset might be on its balance sheet for the next 30 years or more. True, it has proven to be a good long-term asset during its now 30-plus year history, but if liquidity is a bank's main concern, BOLI might not be the right asset. .Remember, the intent is for a bank to hold BOLI policies until the death of the insured. At death, all proceeds are distributed income tax free. If a bank liquidates the BOLI asset prematurely, they will usually receive their funds from the carrier within 60 days, however, a combination of regular income tax plus the 10 percent MEC penalty on the gain takes a big bite out of the net proceeds. This can be a considerable amount if the asset has been on the bank's balance sheet for any significant period of time..Despite potential tax ramifications upon premature liquidation, BOLI might still prove to be a respectable asset, but it will not have provided the value the asset was originally intended to provide..Q. How are regulators viewing BOLI?.Increased regulation tends to be a "hot topic" among many community banks nowadays. Fortunately for BOLI, the regulations have never been clearer. Interagency statement OCC 2004-56 is the governing regulation. The bulletin lays out both the pre-purchase and ongoing risk management requirements necessary for a BOLI purchase. Banks complying with these requirements have not experienced any regulatory concerns.