how to increase non interest income - o-and-co.com winter conference 2012.pdf• susan j monti...

How to Increase Non Interest Income

•NEFMA Winter Conference 2012•January 13, 2012

IntroductionsO t ki & C I i i d h i i• Ostrowski & Company, Inc. is a recognized authority in financial, regulatory and strategic matters affecting banks, thrifts and their holding companies.• Financial

• Mergers & Acquisitions, Fairness Opinions, Valuations & Appraisals, Capital Raising, Profitability Review and Enhancement, Branch Performance Good ill impairment anal sis Options assessmentPerformance, Goodwill impairment analysis, Options assessment

• Regulatory• Feasibility Analysis, Branch Transactions, Risk Assessment &

Management, Examination Preparation and Response, De novo BankManagement, Examination Preparation and Response, De novo Bank Charters

• Strategic• Market, organizational & Management review, Plan development and

management, Market Performance and communication, Competitive analysis and peer review

• Susan J Monti Managing Director• Susan J. Monti, Managing Director

2 Ostrowski & Company, Inc.

Session Objective

• Understanding Profitability

• Return on Average Assets

• Detailed Analysis of the Components Non Interest Income• Detailed Analysis of the Components Non Interest Income

• Regulatory Influences

• Competitive Considerations

• Institutional Strategies

• Questions and Answers


Industry Group Definitions

• Industry• Industry – All major exchange listed ( NASADAQ and New York

St k E h )b k i b k d th ift i th U it dStock Exchange )banks, savings banks and thrifts in the United States

• < $1 B – Exchange listed institutions with asset less than $1 $ g $Billion at September 30, 2011

• $1 - $5 B – Exchange listed institutions with assets between $1 -$5 billion at September 30 2011$5 billion at September 30, 2011

• >$5 – Exchange listed institutions with assets greater than $5 Billion at September 30, 2011


Industry Group Definitions

• New England• NE – All major exchange listed ( NASADAQ and New York Stock

E h )b k i b k d th ift i th N E l dExchange )banks, savings banks and thrifts in the New England• < $1 B – Exchange listed institutions with asset less than $1 Billion at

September 30, 2011p ,• $1 - $5 B – Exchange listed institutions with assets between $1 - $5

billion at September 30, 2011$5 E h li t d i tit ti ith t t th $5 Billi• >$5 – Exchange listed institutions with assets greater than $5 Billion

at September 30, 2011


Historical Trends - National


Historical Trends – New England


Components of Return on Average Assets

New England IndustryNet Int.Prov. Non Int. Non Int. Inc. NetNet Int.Prov. Non Int. Non Int. Income NetI E I E T I I E I E T IInc. Exp. Income Expense Tax IncomeInc. Exp. Income Expense Tax Income

As a Percentage of Average Assets As a Percentage of Average Assets2006

All Institutions 2.98 0.10 0.89 2.95 0.29 0.51 3.35 0.13 1.07 2.87 0.45 0.97Less than $1 Billion 3.12 0.12 0.56 3.30 0.15 0.13 3.37 0.11 0.78 2.93 0.35 0.76$1 - $5 Billion 2.98 0.10 0.72 2.41 0.38 0.79 3.45 0.14 0.99 2.79 0.48 1.04G t th $5Greater than $5 Billion 2.41 0.06 3.01 3.81 0.51 0.93 3.13 0.16 1.72 2.91 0.56 1.21

2011All Institutions 3.07 0.32 0.90 3.02 0.20 0.49 3.35 0.75 0.96 3.09 0.21 0.31Less than $1 Billion 3.11 0.42 0.78 3.23 0.11 0.21 3.40 0.73 0.78 3.22 0.13 0.16$1 - $5 Billion 3.09 0.22 0.68 2.59 0.29 0.74 3.37 0.81 0.95 3.06 0.23 0.29G h $5Greater than $5 Billion 2.81 0.30 2.16 3.67 0.27 0.72 3.19 0.67 1.32 2.94 0.31 0.64

8Ostrowski & Company, Inc.

Components of Return on Average AssetsNew England IndustryNew England Industry

Net Int. Prov. Non Int. Non Int. Income NetNet Int. Prov. Non Int. Non Int. Income NetInc. Exp. Income Expense Tax IncomeInc. Exp. Income Expense Tax Income

As a Percentage of Average Assets As a Percentage of Average Assets2006

All Institutions 2.98 0.10 0.89 2.95 0.29 0.51 3.35 0.13 1.07 2.87 0.45 0.97Less than $1 Billion 3.12 0.12 0.56 3.30 0.15 0.13 3.37 0.11 0.78 2.93 0.35 0.76$1 - $5 Billion 2.98 0.10 0.72 2.41 0.38 0.79 3.45 0.14 0.99 2.79 0.48 1.04Greater than $5 Billion 2.41 0.06 3.01 3.81 0.51 0.93 3.13 0.16 1.72 2.91 0.56 1.21

2007All Institutions 2.93 0.10 0.96 3.02 0.26 0.50 3.22 0.24 1.06 2.92 0.35 0.78Less than $1 Billion 2.96 0.09 0.61 3.24 0.12 0.14 3.22 0.21 0.80 2.99 0.25 0.59$1 - $5 Billion 2.93 0.07 0.75 2.47 0.35 0.77 3.30 0.23 1.00 2.86 0.39 0.83Greater than $5 Billion 2.81 0.22 2.83 4.24 0.43 0.75 3.06 0.31 1.63 2.93 0.45 0.99

2008All Institutions 2.99 0.45 0.93 3.12 0.07 0.04 3.19 0.76 0.98 3.06 0.10 0.09Less than $1 Billion 2.97 0.51 0.62 3.12 -0.08 -0.18 3.18 0.60 0.72 2.95 0.05 0.10$1 - $5 Billion 3.09 0.21 0.71 2.46 0.26 0.65 3.27 0.76 0.95 3.05 0.13 0.15$ $Greater than $5 Billion 2.70 1.05 2.68 5.48 -0.09 -1.37 3.04 1.02 1.51 3.29 0.14 -0.05

2009All Institutions 2.93 0.48 0.76 2.89 0.15 0.14 3.15 1.28 1.03 3.18 0.02 -0.29Less than $1 Billion 2.89 0.41 0.45 3.08 0.07 -0.17 3.14 1.05 0.72 3.18 0.00 -0.35$1 - $5 Billion 3.10 0.50 0.71 2.52 0.24 0.58 3.22 1.32 1.00 3.22 0.01 -0.31Greater than $5 Billion 2 51 0 70 2 14 3 44 0 12 -0 26 3 02 1 63 1 69 3 09 0 09 -0 14Greater than $5 Billion 2.51 0.70 2.14 3.44 0.12 -0.26 3.02 1.63 1.69 3.09 0.09 -0.14

2010All Institutions 3.08 0.38 0.87 2.94 0.19 0.48 3.28 1.02 0.98 3.05 0.15 0.11Less than $1 Billion 3.10 0.36 0.72 3.12 0.10 0.25 3.33 0.90 0.72 3.16 0.08 -0.04$1 - $5 Billion 3.13 0.33 0.69 2.47 0.32 0.75 3.32 1.09 1.01 3.01 0.18 0.11Greater than $5 Billion 2.80 0.59 2.14 3.80 0.09 0.44 3.14 1.08 1.41 2.91 0.22 0.40

20112011All Institutions 3.07 0.32 0.90 3.02 0.20 0.49 3.35 0.75 0.96 3.09 0.21 0.31Less than $1 Billion 3.11 0.42 0.78 3.23 0.11 0.21 3.40 0.73 0.78 3.22 0.13 0.16$1 - $5 Billion 3.09 0.22 0.68 2.59 0.29 0.74 3.37 0.81 0.95 3.06 0.23 0.29Greater than $5 Billion 2.81 0.30 2.16 3.67 0.27 0.72 3.19 0.67 1.32 2.94 0.31 0.64

9Ostrowski & Company, Inc.

Non Interest Income CategoriesFid i A ti iti I t d f t t d th• Fiduciary Activities – Income generated from trust and other fiduciary activities

• Invt Bank Adv and Other – Income from investmentInvt Bank, Adv. and Other Income from investment banking, advisory and management services, and other related consulting fees

• Venture Capital Income• Trading Activities – Net gain from trading activities

G i l f t G i tt ib t bl t th l f l• Gain on sale of assets – Gains attributable to the sale of loans, other real estate and other assets

• Net Servicing Fees – Income from servicing real estateNet Servicing Fees Income from servicing real estate mortgages, credit cards and other financial assets held by others


Non Interest Income CategoriesS iti ti i N t i f t ld i• Securitization income – Net gains from assets sold in securitization transactions

• Deposit Service ChargesDeposit Service Charges• Insurance Commissions and Fees• Other Non Interest Income – Other non interest income not

itemized separately


Component of Non Interest Income

New England Industry> $5

2011 LTM All <$1 B $1 - $5 B > $5 B All<$1 B $1 - $5 B$B

Fiduciary Activities 0.25 0.04 0.16 1.37 0.12 0.00 0.11 0.25Invt. Bank, Adv. And Other 0.09 0.06 0.06 0.35 0.06 0.03 0.05 0.05,Venture Capital 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.02Trading Activities 0.01 0.00 0.00 0.11 0.02 0.00 0.00 0.11Asset Sales 0.05 0.06 0.03 0.06 0.03 0.14 -0.02 -0.02Net Servicing Fees 0.02 0.02 0.02 0.02 0.02 0.01 0.01 0.04Securitization Income 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00Deposit Service Charges 0.17 0.15 0.19 0.12 0.27 0.22 0.29 0.30p gInsurance Fees & Commissions 0.03 0.07 0.00 0.00 0.06 0.05 0.06 0.06Other 0.35 0.42 0.26 0.41 0.44 0.37 0.46 0.49Total 0.90 0.78 0.68 2.16 0.96 0.78 0.95 1.32


Observations

• Size makes a difference

• Smaller institutions can create a niche• Examples

• National Top 3 with assets less than $1 B• National Top 3 with assets less than $1 B• Monarch Financial Holdings• Northeast Bancorp• Access National Corp• Access National Corp.

• New England• SI Financial Group• Salisbury Bancorp• Naugatuck Valley Financial Corp


National Examples

• Monarch Financial Holdings – Chesapeake, Virginia• Total Assets $839 million

ROAA 0 91%• ROAA 0.91%• Non Interest Income/Average Assets 6.73%• Unique sourcesq

• Secondary mortgage origination• Investment and insurance solutions• Title agencyg y• Commercial mortgage brokerage firm

• Northeast Bancorp – Lewiston, Maine Includes non recurring revenue for sale of insurance divisionrevenue for sale of insurance division

• Total Assets $587 million• ROAA 2.28%• Non Interest Income/Average Assets 4.96%• Unique sources

• Commercial loan acquisition and servicing groupq g g p


National Examples

• Access National Corp. – Reston, Virginia• Total Assets $765 million• ROAA 1.36%• Non Interest Income /Average Assets 4.68%g %• Unique sources

• National mortgage corporation• Wealth management – Registered investment advisor• Wealth management – Registered investment advisor


New England Examples

• SI Financial Group, Inc.– Willimantic, CT• Total Assets $945 million


• Mortgage banking operations• Wealth management

• Salisbury Bancorp – Lakeville CTSalisbury Bancorp Lakeville, CT• Total Assets $619 million• ROAA 0.70%• Non Interest Income/Average Assets 0.90%• Unique sources

• Trust and wealth advisory services


New England Examples - continued

• Naugatuck Valley Financial Corp. – Naugatuck CT• Total Assets $580 million


• Mortgage banking operations


Introductions

David B. Sidon, CPA, Principal

•The Navis Group is a consulting firm based in Gloucester, Massachusetts that specializes in assisting financial institutions with risk management projects such as Sarbanes Oxley and FDICIA compliance, organizational architecture strategies, b i ti it d di t l i ll t h lbusiness continuity and disaster planning, as well as technology risk assessments and systems searches.

•Mr. Sidon is a former community bank CEO and holds a B.S. in Business Administration from Merrimack College and a Masters in Finance from Bentley.

18 The Navis Group

Regulatory Influences

Basic intent of new legislation and consumer agency:

STOPCHARGING FEESCHARGING FEES

AND

DON’T CREATEANY NEW FEES

WE ARE WATCHING !!!!!!!WE ARE WATCHING !!!!!!!

19 The Navis Group

Competitive Considerations

CREATE NEW FEESINCREASE EXISTING FEES IRATE CUSTOMERS

PUBLIC REACTIONMEDIA REACTION

COST OF DISCLOSURE

“REPUTATION”REPUTATION

The Navis Group20


ENFORCING THE EXISTING FEE SCHEDULE

•Approximately 5-10% of fees are currently waived by community institutions – are all these customers irate or threatening to leave?

•Are we waiving fees because it’s good business, or because we just can’t say “NO”

•How do we measure fees that were never charged in the first place? Cannot reverse what was never chargedCannot reverse what was never charged

•Do we, and if so, how do we track and measure our fee waiver

•Is customer irate or director’s brother’s niece or teller’s brother-in-law?

The Navis Group21


AN IMPROMPTU FEE WAIVER SURVEY

1. Does your institution track waived fees? How?2. In 2011, what was the amount and/or percentage of fees

waived?3. Could 2012 fee income be enhanced by a more hard-

d h?nosed approach?4. Are we too soft, forgetting that this is a business?

40 requests, 20 responses

The Navis Group22


DOES YOUR INSTITUTION TRACK WAIVED FEES? HOW?

Mixed response – focus on NSF charges

Most track (however 3 banks > 1 bil In assets have no reportingMost track – (however 3 banks > 1 bil. In assets have no reporting mechanism in place)

Few seemingly use the reporting as a “hammer” holding branches accountable

Key to reporting is separate GL account for waived fees

Tracking late payment fee waivers on loans – lesser focus

The Navis Group23


IN 2011, WHAT WAS THE AMOUNT AND/OR PERCENTAGE WAIVED?

“typical” = 7% to 10%

In one case bank reported reporting “hammer” and increased “process”In one case, bank reported reporting “hammer” and increased “process”around fees reduced fee waivers from $175,000 to $57,000

Or:

“ ff f“It was difficult to obtain this information and to maintain a tracking process, as both Branch personnel and Commercial Lenders, along with some management members, did not want to acknowledge or discuss the fact that we waive fees”

The Navis Group24


COULD 2012 BENEFIT FROM A MORE HARD-NOSED APPROACH?

G l i bGeneral response is yes, but …..

But Customer is upsetBut …. Customer is upset

But …. Customer might close accounts

But …. What about goodwill? We are a community institution?

“I think most sales staff does not have the will or ability to service challenging customers so the easiest way out is to waive a fee. I can tell g g yyou from experience that whenever there is a crack down on fee waiving we immediately see a noticeable boost to income.”

The Navis Group25


ARE WE TOO SOFT, FORGETTING THAT THIS IS A BUSINESS?

Al ll dAlmost all respondents agree

But Again but!But ….. Again, but!

“our CSRs and loan folks sometimes forget they work for the Bank not the customer”

“due to human nature in which it feels empowering to waive a fee anddue to human nature, in which it feels empowering to waive a fee and satisfy a customer”

The Navis Group26


CASE STUDY

E l $ 00 il i i i 4 b h i i $60 000/Example - $500 mil institution – 4 branches – waiving $60,000/yr

If all waivers based on irate customers threatening to leave then:If all waivers based on irate customers threatening to leave, then:

If average fee (NSF and all other) is $30, then total is $1,200/week, $300 per branch/week, 10 events/week, 2 each day, each branch, every day, all year long, no let up

What are we doing to tick our customers off at such a rate?

The Navis Group27

Competitive ConsiderationsCASE STUDY, continued

Why do we waive?Why do we waive?

Community – goodness – competitive reasons – compassionCo u ty good ess co pet t e easo s co pass o

What would the 99% say?

Is “nice” a fatal flaw?

The Navis Group28

Are There Any Answers?Ideas:

Increase “captive” customer fees safe deposit box fees as exampleIncrease captive” customer fees – safe deposit box fees as example

Fees for relationship benefits – offset the “con” with perception of more ees o e at o s p be e ts o set t e co t pe cept o o o e“pro”

A ill b i liAncillary business lines

How about an annual regulatory compliance fee to cover the cost of theHow about an annual regulatory compliance fee to cover the cost of the privacy letter and so on and so on?

The Navis Group29

Are There Any Questions?

Thank YouThank You

Susan Monti [email protected]

David Sidon [email protected]

30

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