First Colonial Bankshares just can't get enough of the investment products business.
The Chicago company, which has been selling mutual funds and annuities through its 16 subsidiary banks since 1987, is now marketing the products through smaller banks in its own backyard.
First Colonial has signed up three banks since starting to beat the bushes for outside business in January.
This is a rare strategy for any sized bank, let alone a community bank like First Colonial, which has $1.6 billion of assets.
Formidable Rivals Faced
By promoting its mutual-fund marketing program to smaller banks, First Colonial is going up against some formidable rivals. The distribution business is dominated by third-party marketing firms such as GNA Corp., Invest Financial Corp., and Essex Corp., which specialize in setting up mutual-fund and annuities sales programs for banks. In addition, regional brokerage firms have carved out a niche by serving community banks.
But First Colonial believes it has an edge in placing its brokers in bank lobbies.
We're bankers talking to bankers," said Bette B. Daniels, chairman of First Colonial Investment Services, the bank's in-house broker/dealer.
"We know how we wanted things done in our own banks, and are offering the very same to other banks," she said.
A More Equitable Payout
Perhaps most important, First Colonial gives banks control of programs by having the banks approve prospective brokers and control all marketing, Ms. Daniels said.
Moreover, the payout to banks can be more equitable than marketing firms or brokerages offer, Ms. Daniels said. Banks keep a straight 30% of commission revenue, with First Colonial receiving the balance to cover operating costs and generate a profit.
Not surprisingly, profit is indeed the motivation behind First Colonial's initiative. This year, the bank company projects net income of $1.5 million from $4.3 million in gross commissions from investment product sales.
Economies of Scale
It costs First Colonial about $60,000 to bring a bank on line. This covers start-up compensation for a broker for the first six months, a computer terminal, access to on-line research materials and ongoing marketing support.
Economics of scale should increase profits as the bank signs up more clients, Ms. Daniels said. First Colonial sees more brokers generating dollars to off-set operational cost for software and automatic quotation systems.
The network arrangement with other banks is a natural for First Colonial, Ms. Daniels said.
"We supply other services to banks through correspondent agreements," she said. "Why not take that approach as a broker/dealer?"
Hinsbrook Bank Signs Up
One of the first banks to sign up with First Colonial was Hinsbrook Bank and Trust in Willowbrook, Ill.
The $58 million-asset institution approached First Colonial after having less than satisfactory experiences with independent broker/dealers during the prior two years.
Since joining with First Colonial in April, Hinsbrook's program has had its ups and downs, including the recent departure of the broker heading its program. But Hinsbrook's president, Robert Buhrke, is not discouraged.
"We like working with a community bank that knows our problems and business," he said.
A Matter of Time?
First Colonial also has marketing agreements with two institutions that are part of Hibanc Corp., a holding company First Colonial plans to buy.
Ms, Daniels believes it's only a matter of time before First Colonial's new marketing venture snares even more banks as brokerage clients.
C. Paul Johnson, chairman of First Colonial's holding company, agrees.
"There is customer demand for mutual funds and annuities, and these products are a very significant part of our non-interest income," he said.
Taking the Initiative
Mr. Johnson, a former air force fighter pilot and a dyed-in-the-wool entrepreneur, is no stranger to taking initiatives.
He used some of his fortune to buy $65 million-asset Colonial Bank in 1972. Through a series of acquisitions, he built First Colonial into a $1.6 billion asset organization.
Mr. Johnson embraced Ms. Daniels' idea of First Colonial adding another business unit. and agreed to seed it with $100,000.
Ms. Daniels joined First Colonial in 1987, with a solid background in retail and community banking under her belt.
Initially, Ms. Daniels headed programs that the bank operated with assistance from regional brokers Wayne Hummer & Co., Chicago, and Stephens, Inc., Little Rock, Ark.
Two years ago, she helped the bank company launch its own brokerage subsidiary.
"We believed there were better profits to be made and we also wanted greater control of the products we offered," Ms. Daniels said.
Challenges Will Be Faced
First Colonial's broker/dealer "is the first company I ever started," Ms. Daniels said. But the bank's entrepreneurial environment "supported me every step of the way."
Now, Ms. Daniels faces the challenges of growing a business from the foundation she's laid. And this has required constant tinkering.
First Colonial discovered early on that a securities license doesn't necessarily make a broker a good salesperson. "We made some mistakes in hiring," Ms. Daniels said. "Some people had strong product knowledge, but difficulty closing sales."
First Colonial also found out that the way brokers are compensated makes a difference in the way they sell investment products.
"Brokers were very comfortable with the base salary we initially paid them, and productivity wasn't increasing at all," Ms. Daniels said.
Now, brokers are compensated solely on their production, a change that has helped step up product sales, Ms. Daniels said.
In another measure to beef up volume, First Colonial uses incentives, giving middle managers, platform people and tellers $25 for each referral that results in an appointment with a broker.
Grappling with these and other issues has, if anything, increased Ms. Daniels' enthusiasm for the investment program.
"I'm having a great time," she said. "This has been the highlight of my career."