N.C. Bank Boosts Brokerage with Partnership

To cut risk and turn a quicker profit, Central Carolina Bank opted about two years ago to drop its in-house brokerage business and use a third-party marketer.

The marketer, Invest Financial Corp., was brought in through a back door when the parent of Durham, N.C.-based Central Carolina merged with Security Capital Bancorp, Salisbury, N.C.

Security had been doing its brokerage business through Invest, and the deal inspired Central Carolina to reevaluate its in-house brokerage business.

So far, Central Carolina says, the results have been gratifying. It has reported a return on equity of more than 50%, about twice the typical return for bank brokerage businesses.

The earnings are also far stronger than from its in-house business. The banking company started its own brokerage and annuities businesses in 1994 and added a broker-dealer in 1995, but they haven't prospered.

Now Central Carolina is bringing all its new banking units under the Invest umbrella to boost efficiency and buying power, said Stephen Angelis, president of CCB Investor Services and an employee of both the bank and Invest.

Richard Furr, executive vice president at Central Carolina, said dealing with a third partydelivers a heftier profit while providing expertise in the brokerage business and in dealing with regulators as well as help in avoiding pitfalls.

Central Carolina has a sales mix of 44% mutual funds and unit investment trusts, 27% annuities and life insurance, and 28% individual stocks and bonds.

Though this mix is not expected to change significantly soon, Mr. Furr expects wider offerings of life insurance in coming years. Providing alternative investment opportunities is "vitally important" for the long- term future of the business line, he said.

The mutual-fund companies on the bank's preferred list include Kemper, Putnam, Dreyfus, and a handful of others.

In August, Central Carolina reported a 59% return on equity, with a pretax profit margin of 44%, according to Mr. Angelis. By comparison, industry analysts said, most banks are registering about 25% return on equity for in-house brokerage business.

In 1995, Central Carolina made more than $1 million in brokerage profit. That doubled in 1996, and the figure for 1997 has already passed last year's, Mr. Angelis said.

Income is generated through a revenue-sharing arrangement between Central Carolina and Invest. Although he would not disclose the percentage split, Mr. Angelis said Central Carolina gets the larger share of commissions. The amount that goes to Invest pays for compliance, due diligence, research, and other financial services.

For additional income, Central Carolina has begun offering Invest services to smaller regional banks. In February $1.2 million-asset Triangle Bank in Raleigh, N.C., kicked off an Invest program; Triangle is projecting up to $400,000 in annual net income, said Leigh Balance, its executive vice president.

Harold Schroeder, a securities analyst at Keefe, Bruyette & Woods in New York, said Central Carolina's Invest brokerage business is no more than "a nice add-on fee business."

In-house bank brokerage businesses usually generate scant revenue, Mr. Schroeder said; the average customer makes only one trade per quarter. And he noted that all profits must be generated from fees, because the bank doesn't clear securities or act as custodian of the assets.

Using Invest is much cheaper than setting up a full-service investment operation. "It makes a lot more sense not to bring on that additional cost until you have a predictable revenue stream," Mr. Angelis said.

The arrangement also allows community or midsize banks, such as Central Carolina, to ease into the brokerage business without fear of liability.

Some banks' brokers allegedly "didn't produce proper documentation or provide adequate disclosure," Mr. Furr said. "I'd rather not have that risk."

Though being indemnified by Invest reduces Central Carolina's risk, Mr. Furr said having Invest teach the bank how to avoid problems is key.

Though "Invest has the liability," he said, "it's our black eye and our customer."

Doing business through Invest also benefits the customer, Central Carolina executives said. Customers can get free help from certified financial planners on issues including pensions, insurance, and estate planning.

Central Carolina gets back-office support from Invest's staff in Tampa. Invest's extensive support services include handling compliance and due diligence as well as bringing in experienced portfolio managers who can network with other managers in the field.

"As a rep I can call one of the Invest estate planning specialists with specific questions while the customer is in the office," Mr. Angelis said. "Otherwise the client would have to resort to an estate planner or possibly a trust department.

The arrangement lets CCB offer more in-depth research on individual stocks than other in-house bank brokerages can, Mr. Angelis said. "Many broker-dealers lack these resources, due to the expense," he said.

Mr. Angelis said he doesn't worry about competition from discount brokerages like Charles Schwab. "Surveys show that people getting advice do better than those who do their own investments through a discount broker," he said.

Nor is he impressed with the idea of offering brokerage services by PC or at special kiosks; he hasn't noticed significant profits there, he said.

Mr. Furr said he can't predict how long Central Carolina will maintain its relationship with Invest.

"We will continue to analyze it," he said, "but think it's a good option for now."

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