Does fee income hedge banks and credit unions from spread swings?

The drum is starting to beat again for fee income in the minds of banking executives and in financial institution strategy sessions. This week I heard "hedge" against interest rate fluctuations, a comment more common in the late 1990's to mid 2000's. So I ran some numbers, and the answer to the post title is: it depends.

Fee income comes in many sources. And for most community banks, which I define as banks with less than $10 billion in assets, fee income comprises 10%-20% of total revenue, on average. See the table for a break down of fee income sources by Call Report category for community banks.

With all the talk about fee income lines of business, much if not most of our fee income comes as additional revenue from traditional spread products, such as deposits or residential mortgages. This makes sense. It is our primary business, and fees improve the profitability of bread and butter banking.

But what about this hedge philosophy? I was skeptical. I know from my company's profitability measurement service that fee income products contributed 1% to profits at the average, and -0.8% at the median of all clients. Admittedly, this includes loss leader products such as safe deposit boxes. But, in the main, fee based products are not dropping much to the bottom line.

However, when I sorted top fee based banks and compared their Return on Average Assets to the industry, it appears as though having significant amounts of fee income does protect the institution from the ski slope decline in financial performance that plagued the industry. In effect, high levels of fee income gave financial institutions a softer landing at the bottom (see chart).

But if financial institutions want more from fee based lines of business than to soften their fall, they must focus on delivering profits. This has been a challenge. When I hear executives clamor over fee income, they more often than not focus on revenue generation, not profits. In my experience, profits have been elusive. 

I hear lots of excuses why fee-based LOBs don't make money: soft insurance market, best efforts execution on mortgages, stock market decline, high pay to keep talent, yadda, yadda, yadda. I once heard a complaint from a head of Trust about having to share the copier expense with another department that used said copier more. 

Bottom Line: Insurance, Trust, Investment Advisory, Mortgage Banking, these are all businesses that are common sense complements to traditional spread banking. Almost all of bank customers demand these services. 

Why can't we deliver them profitably?  

~ Jeff

The Danger Within: Banking Conferences

The boss goes to a banking conference and senior management worries what new idea he or she will come back to implement. Sound familiar?

I'm currently at a banking conference in Florida at a swanky hotel that I would not go to if not for work. Too pricey, too reserved, and too old. But I can't complain. I'm waiting for room service as I type. The accompanying picture was my work view yesterday.

Most conferences I attend the breakout sessions to learn from colleagues and other bankers. But there is a danger to this. Learn what? I thought of putting a couple slides from a presentation I attended but decided against it for professional courtesy. Although I doubt that courtesy would be extended by the presenter to me.

Although the trade association selects topics based on what they perceive to be the most relevant for attendees, they don't typically scrutinize the content beyond the session description.

This could be dangerous. You are giving an industry consultant free reign to say whatever they want, right, wrong, or untested. As a consultant myself, I believe you must demonstrate confidence in your subject matter to influence the audience. But presenting your philosophy as if it were emblazoned on stone tablets wreaks of arrogance. And unfortunately, this is occasionally what we get.

My purpose for this post, if you are a banker or credit union executive, is to encourage you to absorb education sessions using the lens of your personal experience and common sense to know if it makes sense for your institution. If you are an industry consultant, bring a little humility to your presentation. You're probably not as great as the Caesar you see in the mirror.

How do you distill information from conferences?

~ Jeff

More Random Stuff About Me

Last year, a tweep of mine, Ken Mueller (@kmueller62), posted an interesting bio-post titled "Random Stuff You Should Know About Me" on his Inkling Media blog. I saw his reference to it on Twitter, I read it, I enjoyed it, so I decided to copy it... with Ken's blessing of course. But there is more to me than what can be documented in that short blog post, so I thought on the day prior to Mother's Day, I should open up my proverbial tent about my upbringing and my Mom.

1. Racism Cascades Through Generations: My grandfather, an Irishman whose ancestors came over during the Potato Famine, told my mother not to marry a Dago... a widely used insult to Italian-Americans. But she did anyway, and my grand father ended up loving his son-in-law dearly.

2. Life is Hard: My father died in 1972 from Hodgkin's Disease, a form of lymphoma. My family was on the lower rungs of the socio-economic ladder at his death, and he was the bread winner, leaving my mother with three boys, ages 8, 6, and 3 and little means to support us.

3. It Takes a Village: I believe this to be true. Not the way it is portrayed in today's society, where few take responsibility for their children due to bad breaks. But my Mom, as quarterback to our upbringing, used the men in her life to provide fine examples to emulate. To name a few: My grandfather, my uncles Joe and Bob, my baseball coaches Mr. Ross and Fritch, parents of friends, and my mother's eventual husband when she remarried 11 years later, Jack. In addition to our father, my brothers and I probably exhibit a combination of traits from these fine men.

4. Life is Not All Sunshine and Rainbows. My mother's life during those years following my father's death is testament to this. And my brothers and I were not the easiest to raise. But because my Mom never gave up, always pressed forward, doing the best she could, we turned out just fine.

During times when the traditional role of mother is frowned upon as a thing of the past, we should recognize the role mother's outside of the kleig lights of the corporate world, politics, and entertainment play in shaping lives.

Here's to you Mom. Thanks for being you.

~ Jeff

A Community Banker for the Ages

On Sundays, I go old school. I pick up the Sunday paper from my sidewalk, go inside, pour a cup of coffee, and read it. On a recent Sunday, the headliner in the Business Section was about the retiring Bob Enck, a long time community banker in my hometown, Elizabethtown, Pennsylvania.

Bobby Enck is a relic of an old time era in banking, when you started and finished your career at the community bank in the center of town. Bob started at the Elizabethtown Trust Company, which was aquired in 1981 by what is now Susquehanna Bank.

Did Bob climb the corporate ladder, and pick up stakes and move to the corporate headquarters 20 miles away. No. Did he stop burning shoe leather and shaking hands in E-town. Again, no. Bob works in the same office he cleaned when he was 15 years old, the old E-town Trust Company's headquarters. He served on the school board, helped found the ambulance company, and is raising money for athletic fields.

There are precious few Bob Enck's remaining in community banking. As I often say, if you succeed in banking you move farther and farther from the customer. Recently, I was interviewing community bank Board members regarding their strategy, and one director lamented that nobody wanted to work in the branch. They all wanted to transfer to the back office. A situation I think is the rule, not the exception.

But bankers keep telling me they want to erect the foundation of their bank around customer relationships. If so, why do they foster an organizational structure that encourages distancing key employees from customers if they are to succeed? 

Susquehanna stuck with the market manager concept with Enck. I am unsure if they do it throughout their franchise, or they made exception in E-town. I suspect the latter. E-town Trust was a market leader when acquired, and the remnants of that franchise, namely Bob Enck, continue to lead the market (see table). They now have three branches in a town with 40,000 residents (one came by way of acquisition). 

Not all markets can support senior level support like Susquehanna's E-town market, where the bank boasts $190 million in deposits, larger than many community banks. But there is a case to be made that, if relationships are the core to your strategy, your bank should have senior, lifelong bankers in your market. That means you have to build compensation, incentives, and support around this strategy.

Relationship building within communities requires time. Operating your branches with an employee revolving door doesn't get the job done. That is transactional bank thinking. Does your structure support your strategy?

Do you know of other Bobby Enck's? Or should this old-school approach go the way of the rotary phone?

~ Jeff

Note: After posting this, a Susquehanna Bank executive called in a correction. They do pursue a market manager approach and work to replicate Bob Enck's throughout their franchise.