The lending landscape may not be great these days, but banks seem to be putting at least some of their cash to work buying insurance.

Bank-owned life insurance assets reached a record $140.24 billion in the third quarter of 2010—a 4.8% increase from $133.87 billion in the third quarter of 2009, according to the Michael White/Meyer-Chatfield Bank- Owned Life Insurance (BOLI) Holdings Report

“Part of the catalyst in that, in the last year or so, banks have been very heavy on liquidity,” said Chris Pezalla, senior vice president at Meyer-Chatfield, Corp., in Jenkintown, Pa. “There is a lot of apprehension about the ways they traditionally might invest.”

Against that backdrop, bank-owned life insurance can be a superior investment, said Pezalla, whose firm is a BOLI consultant for banks and thrifts.

Bank-owned life insurance is a way for financial institutions to fund certain employee benefits. A common example involves so-called split-dollar life insurance, in which a bank and top executives agree to share the costs and benefits of a life insurance policy.

Policies are also frequently used to fund general medical, long-term care and insurance costs of an entire organization. One way to do that is to purchase insurance policies on a group of top executives and use the earnings from the policy to pay the costs of employee benefits across the company.

The BOLI report, compiled by Michael White Associates, LLC, in Radnor, Pa., found that large, top-tier bank holding companies increased their BOLI holdings by 5.1%--from $123.91 billion in the third quarter of 2009 to $130.21 billion in the third quarter of 2010. Of 1,409 stand-alone banks, those without bank holding companies, 30.7% recorded $2.94 billion in third-quarter BOLI holdings—up 23.3% from $2.38 billion in the third quarter of 2009.

When it came to savings associations, the trend went in the other direction. Of 740 savings associations, 45.9% recorded $7.10 billion in BOLI holdings, down 6.2% from $7.57 billion in the third quarter of 2009.

Nearly every asset class, except banks and thrifts with assets between $100 million and $300 million, experienced a decrease in the number of banks and thrifts reporting BOLI assets, according to the Michael White/Meyer-Chatfield report.

The largest decrease occurred among depository institutions with less than $100 million in assets; their number decreased by 4.7% from 902 in third quarter 2009 to 860 in the third quarter of 2010.

Those smaller institutions typically didn’t ditch their life insurance arrangements, according to Pezalla. Instead, the declines were related to the trend of mergers and FDIC takeovers, he said.

When banks merge, their combined assets can remove them from the smaller-institution category. And when regulators step in and take them over, the BOLI policies are typically turned in for cash, Pezalla noted.