As breaking news to absolutely nobody, the events last spring with the spread of COVID-19 in the United States threw a curveball to virtually every business industry and banking was not an exception. Lobbies closed, the number of employees coming into the bank was minimized at best and working from home became an immediate area of adjustment. Couple those changes with the Fed’s decision to bottom out rates, and the business forecasts for many banks were now pretty much useless. Throw the budgets you made one year ago out. With the CARES Act and the Paycheck Protection Program soon following, the focus of banks shifted. Despite little initial guidance and a few hiccups along the way, community banking came together and tackled PPP to help their customers and communities.

The first half of 2020 surely was a crazy few months. The Bank Owned Life Insurance (BOLI) industry was no different. In mid-March, while the world was spinning, equity markets were plummeting and the Fed was cutting rates, many BOLI carriers (but not all) hit the pause button on the sale of their products. When banks wire BOLI premium funds to a carrier, those carriers must invest those funds in accordance with their general account guidelines. When rates fell so fast, carriers paused on accepting more funds not only because of a lack of investment opportunities but also not to dilute the yield of their current policyholders. As late spring and summer rolled in, the BOLI landscape began to change and when it did, the banking landscape seemed to change as well. As things began to stabilize, most BOLI products were again available to banks. Banks were in the process of distributing their PPP funds and awaiting forgiveness guidance. Unfortunately, due to the coronavirus and the nation’s response, we started to see the closure of small businesses. Some reports suggest over 100,000 small businesses have already permanently closed due to this crisis. This naturally leads to a decrease in loan demand for many community banks whose specialty is serving the small business market. With the combination of anticipated PPP repayment/forgiveness, decreased loan demand and increased deposits, banks began to see an increase in excess liquidity. In such an environment, BOLI continues to be a valuable asset to banks. BOLI is a common bank asset with tax-preferred earnings that banks use to offset increasing benefit expenses such as health insurance or 401(k) expenses. But from a yield perspective, BOLI is as competitive, if not more so, than most other bank investments. Add into the mix the anticipation of decreased tax revenues for municipalities and how that would affect the municipal bond market, and BOLI started to become an even more popular use of excess funds.

Banks are permitted to use BOLI for the purpose of offsetting employee benefit expenses paid by the bank. Historically banks have purchased BOLI in conjunction with executive benefit plans, which remains a common practice. But now, with BOLI historically being a less volatile asset than other bank investments and with guaranteed minimum crediting rates and tax-preferred growth, many banks are now reaching out to us to use BOLI to offset their already existing benefit expenses. From a pure yield perspective, banks with excess liquidity are hard-pressed to find better-earning assets. With Taxable Equivalent Yields typically between 2.50% and 4.00%, and with guaranteed gross minimum crediting rates between 1.50% and 2.50%, banks with liquidity are asking us to analyze what might be the best BOLI options for their institution and how to strategically use it to enhance their bottom line. Of course, one of the most beneficial characteristics of BOLI in this interest rate environment is the regular repricing of the asset. If interest rates rise, General Account BOLI is not subject to mark to market, and BOLI yields can increase with the annual rate reset. The good news is even when the interest rate environment changes in the future, the quality of the BOLI asset remains. With most BOLI carriers having AA or better credit ratings, from multiple agencies, BOLI also remains a stable asset from a credit risk perspective. If, in 2021, we continue to see an increase in excess liquidity for community banks, expect also to see more and more banks take advantage of the earnings and quality of Bank Owned Life Insurance.