Take a Look at BOLI
2020 has seen a significant drop in interest rates with several cuts by the Fed over the past several months. While these dramatic steps work to ward off an economic recession, it is also creating major issues on bank margins by shrinking yields on the short-end of the yield curve. The spread between the short-end of the curve and the moderate (five to seven-year) range is causing margin challenges. This margin compression will be a primary challenge for banks in 2020 as they look to increase net interest margins.
CFOs have been quoted indicating they are looking for investments that provide a stable front-end return along with a higher long-end return on the curve. Until the shape of the curve changes, banks will be under pressure on both sides of the balance sheet. To effectively push back against net interest margin compression, banks must deploy strategies to address issues on both sides of the balance sheet. On the investment side, Bank Owned Life Insurance (BOLI) is a tried and true alternative that banks have utilized for decades.
While many banks are looking at ways to improve the returns on their assets and leverage their investment portfolio, BOLI can be put into place as an investment and remain on autopilot to serve the bank well over challenging times. Many banks, not all, set and forget their investment portfolio. They would benefit by reviewing the portfolio more frequently to see if they can get more yield and protect against risk and improve margins.
BOLI yields provide a steady, healthy return coming out around 3% non-taxable yield in year 1. With the proper carriers, these yields can be designed to increase overtime regardless of interest fluctuations.
In addition, BOLI grows on a non-taxable basis and will provide tax-free death benefits to the bank in the form of keyperson benefits and as a cost recovery mechanism for benefit plans provided to covered executives. Looking at the healthy early yields coupled with healthier and improving long term yields and removing taxes from the equation, BOLI can be that perfect solution banks are looking for in 2020 to fight net interest margin compression.