With the mortgage and credit markets in shambles and banks reining in lending, any income is welcome income. So community bankers should take note that they’re trailing their bigger brethren when it comes to offering a product rich in fees that consumers increasingly desire in uncertain times: annuities.
According to a report released by Michael White Associates and Symetra Financial, commissions and fees from annuities rose 18.6 percent to $263.5 million at banks in the first quarter compared to a year earlier. Still, many community banks are holding back. Only 9.9 percent of community banks sold annuities in the first quarter of 2008, in-line with historical participation, according to White. “I’m less than optimistic that many will get into this activity only because there have been some really good years and the percentage of participation really hasn’t changed significantly [among community banks],” White says. “But it ought to. They’re making a mistake by not doing this.”
According to White, while annuity commissions among community banks rose 10 percent to $19 million, that lagged behind banks with more than $10 billion in assets, whose commissions rose 18 percent to $211 million, and trailed their mid-tier brothers (those banks with $1 to $10 billion in assets), which saw a 30 percent increase in annuity commissions to $26 million.
The reason community bankers tend to stay away from annuities—and mutual funds as well—is two fold. First, many management teams of smaller banks don’t have the experience in investment products and consolidation among third-party marketers have left fewer players geared toward institutions their size, White says. Independent Financial Marketing Group was acquired by LPL Financial; DFC was acquired by BNP Paribas; and PFIC was sold to Invest Financial.
The other concern among community bankers is that brokerage will eat into the bank’s deposit base, says Francis Evanitsky, president and CEO of The Juniata Valley Bank. His Mifflintown, PA-based bank is a top-five producer among community banks for annuity income.
“Typically what you encounter with smaller banks is that the branch folks are so protective of their deposits and concerned about the deposits leaving their base that they are very reluctant [to offer these products],” he says. “But, if the program is run properly, the funds that constitute more than 90-plus percent of these sales are not internal funds, they’re external funds,” and the profits more than justify any possible deposit loss.
Evanitsky’s bank is not the only one taking advantage of consumers’ turn to annuities. In a time of economic uncertainty, consumers are looking to cut back on their risk, says James Delamater, president and CEO of Northeast Bank. Among community banks, the Lewiston, ME-based bank made the most annuity commissions in the first quarter, garnering $235,000 in fees.
“We are saying to them, basically if you want no risk, you’ll have to pay more internal fees...but one of your options is to consider a variable annuity program where you can diversify your portfolio, invest in the market, but you’ll have insured your principle so you can’t lose what you’ve invested,” Delamater says. “And we find more and more people saying, ‘That’s what we want.’”
Community banks still reluctant to jump into the annuity fray might consider a profitability test run by White on insurance brokerage income. He separated the population of banks that reported insurance brokerage income from those that reported none or had negative income and says it was “striking” how strongly having an insurance brokerage was associated with profitability. “I can’t say whether the smart banks get into insurance or they’re smart and they do well because they get into insurance,” he says. (c) 2008 U.S. Banker and SourceMedia, Inc. All Rights Reserved. http://www.us-banker.com http://www.sourcemedia.com