Profit Improvement and Operational Review Studies
Profit & Operational Improvements
We can perform a profit improvement or operational review on a particular function, a branch, or the entire institution. In these reviews we examine or read the:
- Institution’s key policies and procedures
- Organizational charts and the professional backgrounds of employees and the Boards of Directors
- Reports of examiners, internal and outside auditors, and consultants who have issued reports on the institution within the last 12 to 24 months
- All major third party contracts with vendors and examine amounts spent with these vendors in the last 12 to 24 months
- Minutes of the Board of Directors, Asset Liability Management committee, and the Loan Committee for the last 12 months
- Asset liability management reports, loan and deposit pricing schedules, financial statements, peer group data, and other system reports
- Activity reports (i.e. number of transactions by branch) and staffing levels by location
We also interview in face to face meetings key staff, management, and members of the Board of Directors. We may also send out surveys to the institution’s employees on an anonymous basis.
The purpose of these procedures is to understand how the institution operates, its culture, the amounts paid to vendors and the nature of services provided by them, the appropriateness of staffing levels, and the pricing and maturities of loans, deposits, and investment securities. Our goal is to provide the institution with detailed recommendations on how it can become more efficient, increase its bottom line, obtain growth, and improve its risk management functions.
We give you an unbiased perspective of how your organization can improve. Our consultants have seen literally hundreds of institutions and have leaned both what works and doesn’t work and how regulators will react to any proposed changes. This service may be the best money you ever spend!
III. Bank Officer Life Insurance (BOLI)
Through our relationship with Meyer-Chatfield we have assisted banks and credit unions in improving their bottom lines by investing in bank officer life insurance (BOLI) or credit union owned life insurance (CUOLI). In the past, financial institutions used these products primarily to fund deferred compensation plans or other long-term benefit plans for senior executives. Today, over 60% of banks and 26% of credit unions invest in BOLI and CUOLI purely as an earnings enhancing strategy as the chart below indicates:
The reason that credit unions haven’t invested in CUOLI to the level banks have is that this product has only been offered to credit unions in the last 7 to 10 years.
IV. Why do so many financial institution invest in BOLI or CUOLI?
- To increase the income earned compared to traditional investments such as state and local municipal bonds, quasi-government bonds such as securities issued by Fannie Mae or Freddie Mac, or United States Treasury issued bonds. Often BOLI and CUOLI can generate yields 150 to 250 basis points above what the institution earns on these other investments. Given that the build-up of BOLI occurs on a tax-free basis, the difference on an after-tax basis can range from 230 to 375 basis points which is huge! By generating additional income, a Bank can distribute more dividends to its shareholders or increase its capital allowing the institution to continue to grow. A credit union is able to pass on the additional earnings to their members through lower interest rates on loans or paying a higher interest rate on deposits.
- It’s a relatively safe investment. In most cases, we suggest that institutions spread the total amount invested over 2 to 5 insurance carriers and along with the broker, monitor the financial performance and condition of the carrier on a quarterly basis. If a particular carrier begins to show any weaknesses you can transfer the funds held in that particular carrier to another provider normally within 30 days or less in a tax-free manner.
- It is a liquid investment. Most insurance carriers will return your funds increased for the amount of any build-up of the asset within 7 to 10 days upon request. Thus, the liquidity of the asset is very similar to a traditional investment security.
- Reduce exposure to interest rate risk. BOLI and CUOLI generate a yield that is variable in nature and moves in relation to changes in market interest rates. Most traditional investment securities either allow only one step up or change in interest rates over the life of the security or none at all.
V. How should I choose which provider I use to obtain BOLI and CUOLI?
We also suggest that you use only reputable and qualified brokers or agents. Criteria for evaluating providers should include evaluating the:
- Expertise and experience of the individuals and firm who will service your account both during the initial due diligence and the on-going servicing of the asset.
- Experience in terms of working with and gaining regulatory approval of their products.
- How the provider funds its servicing division. There has been a providers that paid out 100% of the commissions they earned to the representatives who marketed the product or company shareholders which then led to their servicing divisions going out of business. The banks and credit unions that used this provider were left in a huge hole!
- Level of regulatory compliance assistance provided. Request to see an example of their regulatory compliance packages for both the due diligence phase and the ongoing servicing of the asset.
- Internet portals provided to their clients to evaluate how you will access the account balances, journal entries needed each month, and the information on the carriers they will provide to you on an ongoing basis.
- References obtained from existing clients. We suggest you talk to regulators and other professionals in your state or region. As part of this process we also suggest you obtain a copy of the provider’s servicing division’s financial statements and SSAE 16 or internal control report provided by a certified public accounting firm to ensure they are financially viable and have sound internal controls in place.
VI. Deferred Compensation Plans
Banks and credit unions have been offering deferred compensation plans to senior executives for over 30 years. Why? They assist the institutions in recruiting, retaining, and incentivizing key senior level employees. Like professional football or baseball teams, your top performing banks and credit unions are the ones with the most talented players.
According to a 2016 study by the American Bankers Association (ABA):
- 75% of mutually owned banks offer some type of supplemental executive retirement plan (SERP) to senior executives.
- 56% of stock based banks offer a SERP plan to their senior executives.
If you offer these plans to any of your senior leaders or are considering doing so, we suggest you talk to us first. For banks, we are aware of a propriety product that can save most banks anywhere from 35% to 60% of the total expense of these plans. They also provide the plan beneficiaries with a lifetime benefit versus a benefit that pays for only a certain number of years. Therefore, both the bank and the executive are better off. If you have an existing plan we can normally reduce the existing liability by these same amounts with the offset going to net income and stockholders’ equity.
If you are a credit union, we can eliminate the cost of these plans completely. The officer or plan beneficiary obtains a loan to acquire the insurance asset used to fund the plan. The loan is collateralized by cash surrender value in a life insurance policy. Regulators view this as a very safe loan because it’s backed by cash. The beneficiary has basis in the asset so when he or she receives the future benefits they do so in a tax-free manner. Assume that a credit union wanted to give an executive $1,000,000 upon retirement. With a traditional plan the credit union would need to expense this $1,000,000 over the remaining expected career of the employee. The employee would also have to pay approximately 40% of the total or $400,000 in income taxes when they receive the benefit.
With our regulatory compliant plan the credit union would have an earning asset versus any recorded expense and the employee would not be subject to taxation when he or she obtains the benefit. Using our earlier example, that’s an additional $400,000 in the pockets of the executive.