Hunting For Fee Income

In the days of the ever-shrinking margins (despite a slight improvement in the fourth quarter of 2003), community banks are looking for fee income. Retail banking is a great source for such income, but pressing for more fees is a double-edged sword for community banks. While intensive retail fees may be a legitimate and effective strategy for certain banks, it can turn off community bank customers who expect otherwise from their banks. Therefore, while retail fees are always a good place to start, they may not be the entire answer.

Community banks are now looking at other businesses that compliment their market and service focus to build fee income as well as additional margin income without compromising their competitive advantage. Several such businesses come to mind:

1. Insurance.

   Some of America's largest banks have built highly successful insurance businesses through a long-term acquisition program and a commitment to the business. Smaller banks might perceive that the opportunity has evaporated for them, since such large players now roam the markets. In fact, the opportunity has even expanded, as both small and large insurance agencies, particularly with commercial insurance focus, become interested in bank capital and liquidity. Such agencies are willing to sell for an earnout, and, with the right structure, find the bank ownership to be beneficial rather than limiting. Consider banks such as Sunflower, Bancorpsouth, Chittenden, Cullen/Frost and Community First. All these banks did not have a presence in the insurance business five years ago, and today enjoy at least 10% contribution to their fee income from the business. The business has pitfalls like any other, but could be an excellent companion to a community banking strategy.

2. Premium financing.

   This is a high risk, high return business that some banks have executed extremely well, most notably Wintrust and Independence Bancorp. The business proposition is lending primarily to doctors who wish to finance their so-very-expensive insurance premiums. It is a highly specialized business that requires its own infrastructure, discipline and collections approach. It is also highly profitable if done right. This business is often under the radar screen of the megabanks, and fits perfectly into the community banking fabric, especially those with a medical and other professional lending practices.

3. SBA lending.

   The bloom is off the 7(a) rose, yet the secondary market in SBA loans is flourishing. Companies like Zions bank are in the market buying 7(a)s and 504(s) that they, in turn, aggregate and securitize. Individual community banks can use the SBA loans not only for margin income, but also as an important source of non-interest income by selling them to a willing buyer. It is prudent to understand in advance the buyer's requirements for each credit, but then the community bank is free to convert its small business loan origination network from a pure margin shop into a hybrid. Some loans can be kept on the books, and others sold for gain and on-going fee income. Any bank of any size can now do this, thanks to market makers such as Zions.

4. Niche financing.

   Lending to niche businesses has always been a profitable venture (so long as the credits are well underwritten). Being where others are not, becoming a big fish in a small pond, is a traditional community banking strategy. Picking the right niche is important since certain businesses are highly cyclical and too risky to become a major player in those arenas. At the same time, some community banks find a way to lend profitably even to hard-hit industries such as aircrafts, hospitality or contractors. With the right underwriting, there is money to be made in almost any niche. A community bank can overcome slacking loan demand in their geographic footprint by developing expertise in a specific, narrowly defined industry or market segment, and effectively execute on that focus.

The key to success in all the above businesses is commitment and effective execution. Both are necessary to grow a business that will make a difference in the bank's bottom line. Entry can be cautious, but the commitment needs to be unwavering.