What if the CEO from an $18 billion
institution walked in your door and asked to borrow a million dollars for
working capital?
Hypothetically, let's say the company’s assets consist almost entirely of government
bonds, mortgages and high grade corporate bonds. Due to their 130+ year
history, strong capital position, balance sheet and stable earnings, Moody’s,
AM Best and S&P rate them in the top 10 percent in credit quality for similar
companies. They would adjust the interest rate at least annually to keep your
loan rate in line with market rates. Due to the unique nature of the loan,
there would be no required loan loss reserve accrual or servicing requirements.
Should you ever be concerned about credit quality, you could demand payment at
any time.
Does this scenario sound too good to be
true? It’s not. What I am describing is not actually a loan, but is in fact business-owned
life insurance (BOLI). The transaction is shifting lower yielding investments
to BOLI and using the potential increase in income to offset and recover
expenses of employee benefits programs such as benefits pre-funding, 457(f)
plans, and split-dollar life insurance. Using BOLI could help your credit union
continue to offer the compensation and benefits that attract and retain top
talent in your organization. Some credit unions also use BOLI to establish or
enhance a charitable giving program. In fact, credit union BOLI investments
have increased by nearly 100 percent in the past three years.[i]
Think about it this way, in comparison to
another way your credit union generates revenue. Let’s say you would like to
build and maintain an equal sized auto loan portfolio. Assuming an average loan
size of $20,000, it takes 50 loans to build your $1 million loan portfolio. Building
the portfolio is just the beginning. Assuming an average duration on your auto
loans of 30 months, you would have to make 150 loans in five years just to
maintain your $1 million portfolio. There are costs associated with replacing
auto loans, such as the acquisition costs, staff to monitor the loan portfolio,
loan loss reserves, and charge offs.
If BOLI sounds intriguing and you would
like to learn more, check with your executive benefits specialist to see if
this funding solution is right for you.
Fred Palmer is an
Executive Benefits Specialist with CUNA Mutual Group. He can be reached at fred.palmer@cunamutual.com or 800.356.2644, ext. 665.8576.
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