Roger is the CFO of Main Street Community Bank. Roger worries constantly about three Rs…Revenues, Risk and Regulators. Roger needs a vacation to stop worrying about his work.
Roger also loves to scuba dive. When roger goes under the sea, he forgets all about his stress. He’s going to Grand Cayman. The stress and worry is killing him.
For loans, Roger has to worry about the risk that his customers won’t pay him back on time…or even at all. And now he has to worry about implementing CECL to properly value these loans.
For customer deposits, he has to worry about how much he can pay on deposits versus how much he can earn on loans and investments.
For his bonds, Roger has to worry about rising interest rates, leaving him stuck with higher cost of funds, and a resulting loss in asset market value.
Roger also has to worry about adequate diversification of his investment portfolio. Some portfolio managers recommend holding at least 50 different securities to adequately diversify interest rate risk, credit risk, and duration risk.
Roger is also getting pressure from his CEO and Board to generate more non-interest income.
And to top it off, Roger has to make sure he can generate sufficient cash flow to pay operating expenses, occupancy and payroll.
Roger is dreading a meeting with Joe, his CEO, when he returns. Joe wants to hire a new experienced professional to replace Bill, who resigned because of compensation issues. There just isn’t enough in the budget. Roger worries Joe will blame him. Roger wishes he could just stay below with the beautiful fish and coral.
Roger finishes his dive and gets on the boat. He then hears a familiar voice. He recognizes it as Kelly Coughlin’s. Roger frequently listens to Kelly’s podcast: BankBosun.com – Helping bank C officers navigate risk and discover reward. He knows Kelly is a CPA and the CEO of BankBosun.
Roger mentions his concern about balancing bond yields, duration, liquidity, and diversification. Kelly asks Roger if he has maxed out his 25% of tier one capital BOLI capacity. Roger said his Board doesn’t like BOLI. Kelly explains that BOLI punches four of Roger’s “worry tickets”: 1) Diversification – BOLI portfolios hold hundreds of different securities; 2) Non-interest income – BOLI income increases Other non-interest income for the bank; 3) Balance sheet risk – for many of the BOLI contracts, changes in interest rates won’t trigger a decline in asset value of the insurance asset and 4) Market rate yields – BOLI interest payments float with general interest rates. While BOLI returns tend to slightly “lag ” changes in interest rates, banks will not be stuck with a low interest rate security.
Plus, Kelly adds, the real kicker you cannot get from any other asset is that since you are insuring the life of top executives at the bank, you have a built-in risk management solution too.
Roger asks Kelly about liquidity and says he thought BOLI was a challenge to exit and convert to cash.
Kelly says a bank can certainly terminate the contract, no problem, and pay the tax and penalty owed. But Kelly adds he can make a credible argument for why a bank should build a portfolio of financial assets around the BOLI asset and why it should be the last asset to be liquidated compared to munis or other bonds.
Roger goes back to the bank and meets with Joe, the CEO. Joe likes Roger’s findings. Joe and Roger recommend that the board agree to reduce their holdings in some government and municipal securities and making an allocation of assets and capital into BOLI. The Board agrees and is happy and see how valuable Roger is to Main Street.
This makes Roger happy!
Contact Kelly Coughlin, CPA and CEO of BankBosun, helping C-Officers navigate risk and discover rewards in the banking ecosystem.
Kelly Coughlin, CPA, is the CEO of BankBosun. He is the program host of the syndicated audio podcast BankBosun.com, helping bank C-Suite Officers navigate risk and discover reward in the banking ecosystem. Kelly specializes in helping community bank manage three Rs: Risk, Revenue and Regulatory challenges.
Contact Kelly Coughlin at: kellycoughlin[at]bankbosun[dot]com or 646-494-[five-four-one-two]
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