Community bank viability in Wisconsin is strengthened by several innovative programs sponsored by a bank-owned correspondent bank. Actions taken by community banks several years ago are now paying off with increased capacity and profit opportunities.
This innovative approach to correspondent banking has provided several opportunities for competitive advantage - among them, three specific products that enhance profitability, improve customer satisfaction, and meet new bank operating imperatives.
Deposit Flight
As interest rates on bank deposits declined, community banks saw many of their most substantial deposit customers move funds from the bank to alternative investments.
Much of this money found its way into money market funds, annuities, or mutual funds.
Banker's Bank of Wisconsin has assisted community banks to uses the full power of Wisconsin banking law to not only pursue the vanishing deposits, but convert the process to one of new profits.
Bankers' Bank was established in 1991 by 88 Wisconsin banks. It is a state member bank and is limited to doing business only with other depository institutions.
Annuity Program Established
Wisconsin state banks are authorized for insurance agency activities.
Bankers' Bank developed a marketing program together with Great Northern Insured Annuity Corp., a subsidiary of Great Northern Capital Services, to offer annuities through bank-licensed agents.
GNA Securities provides broker-dealer access to mutual funds and variable annuities, providing additional noninsured investment products for banks to sell.
The comprehensive program designates and licenses appropriate personnel in the banks as insurance agents and securities investment representatives (dual employees with GNA).
The program provides all training and materials leading to meeting the National Association of Securities Dealers series 6, 63, and life insurance agent licensing requirements. It follows up with regular compliance and marketing training as well as targeted assistance with direct sales.
Over 80 banks currently participate in the Bankers' Bank program, appropriately called "the Independent." Monthly sales volume for all products exceeds $2 million, and nearly in $100,000 monthly fee income is shared by the banks.
Bank customer reception has been very strong as the community banks are trusted financial representatives, well trained to discuss the risks and opportunities of the various noninsured investment alternatives.
The participating banks report less than 30% disintermediation of insured deposits as much of the money comes from sources other than the participating banks.
Mutual Fund Added
With a successful retail program in place, many banks inquired about the availability of alternatives to traditional bank investments and federal funds. The banks were seeking a product with the same advantages of mutual funds for retail customers.
Banker's Bank worked with Robert W. Baird & Co., Milwaukee, to develop a bank-qualified mutual fund.
To be marketable, the fund had to provide the same investment limitations as government securities: The bank had to own a proportional share of the underlying securities and had to mark the investment to current market values monthly.
The net asset value had to be relatively stable, minimizing asset value fluctuations and allowing for quick liquidation with little or no loss. And ideally, the yield would exceed traditional short-maturity investments.
The Baird Adjustable Rate Income Fund was developed for just those constraints.
Strong Reception
Banker's Bank and Baird worked out minor impediments and entered into a marketing agreement where Bankers' Bank offered the fund to its customers through its bank-dealer department.
This joint venture was a departure for Baird, which had never before gone beyond its own marketing resources to sell a product.
Once again, customer reception has been outstanding. In the second month, the fund doubled its assets to over $100 million. The fund assets are generally floating-rate U.S. agency collateralized mortgage obligations.
The net asset value has remained virtually unchanged, and the yield to investors has been at or above comparable three-year Treasury yields, exceeding the target of 75% of the five-year Treasury.
Overnight Funds
Long before Regulation F, Bankers' Bank saw the need for banks to diversify overnight funds placed with correspondents.
Federal funds sold overnight have no investment limitation for banks. Consequently, many banks had concentrations of funds with correspondents. Diversification was expensive, due to wire transfers, account maintenance charges, and internal bookkeeping requirements.
Bankers' Bank developed an agent overnight funds program which allows the bank to effectively diversify the location and concentration of the funds. A participating bank could diversify its overnight investments without establishing multiple correspondent relationships or paying high wire-transfer fees.
Credit Analysis
To support the program, Bankers' Bank provides regular credit analysis of major banks purchasing overnight funds.
Selection of only the most creditworthy banks and the ability to spread the risk of large-dollar investments over a broad base has made the federal funds program one of vital importance.
This became even more evident with the passage of Regulation F, which regulates correspondent bank risk.
The program has grown to participation with over 200 banks, over 100 approved purchasing banks, and daily volume exceeding $300 million.
The rates earned on the funds has equaled or exceeded those rates banks were able to earn by investing directly. This yield is amplified by reduced bank overhead costs that are assumed by the program.
Varied Menu
Bankers' Bank's other services include bank stock lending, loan participations, secondary mortgage market brokerage, government and municipal securities activities, and bank auditing.
Plans for the future include expansion of several product lines - including audit services, investments, and mortgage banking - to neighboring states.
The bank is authorized to do business with other than bank depository institutions and is developing selected products for nonbank depositories, specifically Bank Insurance Fund-insured savings banks.
A Major Force
Bankers' Bank has clearly grown to be a major correspondent force in Wisconsin, with ownership by 140 banks and a customer base of over 280 banks (from a Wisconsin market of 377 independent banks).
The bank is organized for profit, although service alternatives were the original intent of the shareholders.
It has been profitable (and has paid dividends) every year of its existence, with current profitability of approximately 1% return on assets and over 13% return on equity.
The bank maintains loss reserves of over 3%, and capital meets all the definition of a well-capitalized bank.
Total assets, derived entirely from correspondent and check clearing activities, have grown to over $100 million.
