Traditional Sources of Fee Income

• Service Charges on Deposit Accounts• Credit Card Service Fees• Commitment Fees for Making Credit

Available• Fees for Use of Safe Deposit Boxes• Rental of Bank Property to Individuals and

Businesses

Newer Sources of Fee Income

• Commissions and Fees From Investment Banking Services

• Brokerage Commissions for Aiding in the Purchase of Securities

• Fiduciary Income – Trust Services• Commissions for the Sake of Insurance• Servicing Fees from Securitization and

Sales of Loans

34.76%31.95%24.55%Other noninterest income

1.22%0.66%0.21%Net gains (losses) on sales of other assets

0.06%0.10%0.13%Net gains (losses) on sales of other real estate

3.31%6.31%3.13%Net gains(losses) on sales of loans

1.78%2.06%4.75%Other insurance commissions and fees

0.17%0.06%0.13%Insurance underwriting income

1.95%2.12%4.88%Insurance commission fees and income

10.53%6.03%0.00%Net securitization income

6.28%4.69%8.45%Net servicing fees

0.12%0.00%0.01%Venture capital revenue

5.69%2.33%0.93%Investment banking, advisory,

9.42%0.14%0.00%Trading account gains & fees

15.36%30.66%38.47%Service charges on deposit accounts

11.31%15.01%19.24%Fiduciary activities

203428073.0012566304.001632060.00Total Non-Interest Revenue

30.06%16.30%13.95%% Non-Interest Revenue

6767347517710588411697899Total Revenue

> $1000mm$100mm -- $1000mm< $100mm

Reasons for the Drive for More Service Fees

• A Desire to Supplement Traditional Sources of Funds

• An Effort to Offset Higher Production Costs

• A desire to Reduce Overall Risk• A goal to Promote Cross-Selling of

Traditional and New Services

Investment Banking Services

• Under The Authority Of The Gramm-Leach-Bliley-Act Many Banking Firms Have Either Acquired Or Formed Their Own Investment Banking Affiliates.

• The Primary Role Of Investment Bankers Is to Serve As Financial Advisers To Corporations, Governments, And Other Large Institutions.

Principal Types of Securities Underwritten by Investment

Bankers• Government and

Federal Agency Securities

• Investment Grade Corporate Bonds

• Convertible Corporate Bonds and Stock

• Common and Preferred Stock

• Corporate Junk Bonds

• Asset Backed Securities

Additional Sources of Revenue for Investment Bankers

• Advising Clients Regarding Acquisitions and Mergers

• Creating and Trading Derivatives

• Brokering Loan Sales• Setting Up Special

Purpose Entities

• Stock and Bond Trading

• Currency and Commodity Trading

• Issuing Credit and Liquidity Enhancements

• Developing Business Plans

Mutual Funds

Companies that Offer Shares in a Pool of Securities and Flow Through Any Earnings Generated to Shareholding Customers

Two Popular Mutual Funds

• Exchange Traded Funds (ETFs) – Behave Like Index-Tracking Mutual Funds but Trade All Day on Stock Exchanges

• Hedge Funds – Private Partnerships Whose Shares are Offered Primarily to Wealthy Clients that Often Make High-Stakes Bets on the Direction of the Market

Two Different Ways of Being Involved with Mutual Funds

• Proprietary Funds Offered Through One of Their Affiliated Companies– Offer Investment Advice– Serve as Transfer Agents– Execute the Transactions of the Fund

• Nonproprietary Funds – The Offering Institution Acts as a Broker for an Unaffiliated Mutual Fund

Annuities

A Savings Instrument in Which the Customer Makes Cash Payments to an Investment Manager Who Places Them Into Earning Assets and Where Later the Purchaser Receives a Stream of Income From Those Assets

Types of Annuities

• Fixed Annuities – Promise a Customer Who Contributes a Lump Sum a Fixed Rate of Return Over the Life of the Contract

• Variable Rate Annuities – A Lump Sum of Money is Invested Into a Basket of Stocks, Mutual Funds or Other Investments Return for a Customer But is Not Promised a Fixed

• Equity-Index Annuity – Combines Features of Both Fixed and Variable Annuities

Regulations Regarding Investment Products

• Customers Must be Informed that Investment Products are:– Not Insured by the FDIC– Not a Deposit or Other Obligation of a

Depository Institution– Subject to Investment Risks

Trust Services

These Services are Centered on the Management of Property Owned By a Bank’s Customers, Such as Securities, Land, Buildings and Other Investments

Types of Trusts• Living Trusts – Allows Trust Officers to Act on Behalf of

a Living Customer without a Court Order• Testamentary Trusts – Arise Under a Probated Will

and Used to Save on Estate Taxes• Irrevocable Trusts – Allows Wealth to be Passed Free

of Gift and Estate Taxes• Charitable Trusts – Used to Support Worthwhile

Causes• Indenture Trusts – Used Collect, Hold and Manage

Assets to Back an Issue of Securities by a Corporation• Dynasty Trusts – Set Up to Avoid Paying Federal

Estate Taxes and Generation-Skipping Taxes

Offerings of Insurance Related Products

• Life Insurance Policies• Life Insurance Underwriters• Property-Casualty Insurance Policies• Property-Casualty Insurance

Underwriting

Insurance Products Disclosure Rules

• An Insurance Product is not a Deposit or Other Obligation of a Depository Institution

• An Insurance Product is not Insured by the FDIC• Insurance Products May Involve Investment Risk

and Possible Loss of Value• Depository Institutions Cannot Base Granting

Loans Based on the Purchase of Insurance

Product-Line Diversification Effect

Offering More Than One Product or Service Through the Same Company in Order to Reduce the Overall Risk of the Revenues Flows Through the Individual Firm

Risk and Return With Traditional and Nontraditional Services

TTNTNT R w R w E(R) +=

[ ] 2

1

TNTNT*TTNT2T

2T

2NT

2NT rw2w w w σσσσσ ++=

Where: NT is Nontraditional Services and

T is Traditional Services and

r is the Correlation Between Them

Customer Privacy

Protecting the Personal Information That Customers Supply to Their Financial-Service Providers So That Customers are Not Damaged By the Release of Their Private Data to Outside Parties

Example

• A bank is considering adding life insurance underwriting to the services it offers. It has estimated that the expected return and standard deviation of its traditional services are 12 percent and 6 percent respectively. It has also estimated that the expected return and standard deviation of its new underwriting services are 18 percent and 10 percent respectively. The correlation between these services has been estimated to be +.10 and the bank estimates that 90 percent of its business will be from traditional services and 10 percent from the new underwriting services. What is the expected return and standard deviation of the new combination of services? – 12.6% and 5.59%