Bank Board Letter — January 2016
David Doerflinger

The current financial services landscape, an industry crowded with competitive bank buyouts and consolidation, is leaving community banks at risk. Justifiably, a financial institution’s noninterest income strategy remains an important business model for these locally owned, Main Street institutions.

Not surprisingly, an analysis of the top 25 percent (as measured by return on average assets) of U.S. banks between $100 million and $10 billion in total assets shows noninterest income 17 percent higher than their lesser-performing counterparts (SNL Financial, LC). With regulations handcuffing banks from focusing on noninterest income traditionally derived from service charges on deposit accounts, banking executives must search for other income generators.

So where do community banks turn?

One method to meet and increase noninterest income is by establishing an on-site third-party investment program, which not only generates revenue for the bank, but strengthens customer relationships and client retention. Thousands of institutions have capitalized on their noninterest income potential since the first bank offered financial products and services to its customers through a relationship with a third-party brokerdealer more than three decades ago. Today, investment programs still prove to be one of the easiest to implement and most profitable solutions for a community bank.

In case studies conducted with community banks in the Northeast and South Central regions of the United States, institutions saw substantial income from their third-party broker-dealer as a result of their retail brokerage program.

As part of the study, a $900 million institution in the Northeast Metropolitan Statistical Area, with 12 branches, converted its existing investment program from one of the industry’s largest brokerage firms, to Investment Professionals Inc., one of the few remaining broker-dealers dedicated to the community bank channel. A transition to IPI resulted in first-year revenues of nearly $600,000 to the bank’s bottom line.

Today, this Northeastern community bank and its investment program are booming. But, prior to IPI, the bank faced a much different scenario.

A long-standing relationship with their broker-dealer had deteriorated, and the investment program had become stagnant. The underperforming program had fallen short of the bank’s noninterest income expectations and goals.

With the help of the firm’s dedicated marketing, compliance and recruiting teams, the bank’s on-site investment program was relaunched in their community. Through turnkey marketing, including private labeling and a well-designed advertising strategy, as well as extensive recruiting efforts that brought on two well-matched, high-performing financial advisers from a candidate pool of nearly 750, IPI created a tailored, successful program that truly fit the bank’s specific needs.

Now, the bank and its financial advisors are armed with a home office dedicated to their program’s success. With the help of the firm’s sales team, which includes a local regional director living in the Northeast region and an operations team exceeding industry standards for processing business, the bank has generated more noninterest income than at any point with its former broker-dealer. Bank-customer relationships are ever-growing, the sales culture within the bank is strong, and the bank’s and advisers’ relationship with IPI is robust.

Similarly, in the South Central region, a community bank with a network of 12 branches and approximately $750 million in total assets that had never before offered investment or brokerage services to its customers partnered with IPI to launch a program.

Though clearly a successful institution, prior to working with IPI the bank struggled in its pursuit of new customers.

It needed a solution that would help capitalize on the bank’s strong market share to attract prospects through new service lines and product offerings. Instituting an on-site retail brokerage program resulted in first-year revenues of more than $350,000 to the bank.

With no previous experience in investment programs or related products and services, the bank naturally had little to no knowledge of how or where to begin, program best practices to maximize results, or compliance and regulation requirements, among other things.

Understandably, banks that lack experience with brokerage are hesitant for many reasons: perceived associated risks and regulatory burdens, as well as supervisory responsibilities, to name a few. However, by partnering with a broker-dealer wellversed in managing successful investment programs, the institution received the guidance necessary to hit the ground running.

The bank relied heavily on IPI to launch its program, ensuring the proper structure was in place to maximize results and minimize risk. The firm’s compliance team led the effort to indemnify the bank and create a secure setup and standard operating procedures. Achieving maximum revenue results, was, in part, supported by IPI’s bank-dedicated recruiting team that assisted the bank in securing two skillful advisors. With the support of IPI’s results-driven sales department, these two top-producing advisors have generated more than $1.5 million in gross revenue to the bank’s bottom line.

Largely, the bank’s decision to partner with a community bank-focused broker-dealer to implement new products and services for customers helped expand its value proposition, which in turn helped meet client-acquisition goals. As an added advantage, these new products and services also have helped secure a higher retention rate for established bank customers. Today, IPI maintains a close relationship with the bank and financial advisors to ensure the program remains profitable and its unique goals are continuously outperforming expectations.

In a particularly competitive industry, community banks are having to utilize non-traditional means to grow their businesses. Case after case proves that increasing noninterest income strategically through an investment program can be impactful to a bank’s bottom line. The concept innovate or die cannot be any more applicable.

David Doerflinger serves as Midwest regional director for Investment Professionals Inc., based in San Antonio, Texas.