Traditional Sources of Fee Income

1
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

2
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

3
(No Transcript)
4
(No Transcript)
5
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

6
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.

7
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

8
Additional Sources of Revenue for Investment
Bankers

• Stock and Bond Trading
• Currency and Commodity Trading
• Issuing Credit and Liquidity Enhancements
• Developing Business Plans

• Advising Clients Regarding Acquisitions and
  Mergers
• Creating and Trading Derivatives
• Brokering Loan Sales
• Setting Up Special Purpose Entities

9
Mutual Funds

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

10
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

11
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

12
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

13
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

14
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

15
Trust Services

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

16
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

17
Offerings of Insurance Related Products

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

18
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

19
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

20
Risk and Return With Traditional and
Nontraditional Services
Where NT is Nontraditional Services and T is
Traditional Services and r is the Correlation
Between Them
21
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

22
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