Community Banking Advisor: Non-Interest Income Can Keep Your Bank on Course

Banks have to withstand the ups, downs, ins, and outs of dozens of variables that may affect their financial status year by year. To help keep the ship afloat, your institution sometimes needs to focus on non-interest income because interest income isn’t always enough to maintain a steady and secure bottom line.

What are the sources of non-interest income?

In addition to deposit account service charges, non-interest income may arise from loan origination and servicing fees, overdraft and NSF charges, and gains on sales of loans and investment securities. Non-interest income also may be derived from various products and services, including insurance and annuity products, as well as brokerage, trust, and financial planning services.

What about collections?

Community banks have a history of being easy on customers by waiving NSF fees and other penalties when they receive complaints. Although it’s important for bank personnel to have the discretion to waive these fees, high waiver rates—some estimates are greater than 50%—can quickly wipe out substantial amounts of revenue.

To keep waivers under control, set a target level for discretionary waivers and train bank personnel to understand the significance of non-interest income, make good decisions regarding fee waivers, and handle customer complaints. If you haven’t already done so, try automating the fee initiation process to ensure nothing falls through the cracks. Also incorporate waiver targets into your incentive compensation decisions. Finally, be sure to include fee waiver data in management reports, which will help you monitor results.

How can we stay ahead of competitors?

Banks often miss opportunities to charge higher fees because they fail to keep tabs on their competitors. Identify the predominant banks in your market and obtain their fee schedules. Comparing competitors’ fees to your own may uncover significant pricing opportunities.

That doesn’t mean you should increase your fees to match the highest-priced banks in your area. However, if you find your fee schedule is on the low end of the spectrum, a modest increase can have a substantial impact on your bank’s revenue. If you do increase your fees, monitor the results closely to ensure the strategy produces the desired outcome.

What about relationship value pricing?

Relationship value pricing can be a highly effective strategy for enhancing fee revenue. It sets prices based on the overall value of a banking relationship with a customer or group of customers, such as a family or a business and its employees.

In its simplest form, relationship value pricing might involve package deals for products or services. A common example is free checking accounts for customers who maintain a minimum loan balance. A more sophisticated approach is to develop customized pricing based on a valuation of the products and services a specific customer receives.

For relationship value pricing to work, your bank must carefully analyze the costs, benefits, and potential profitability of each customer relationship. It’s also critical to have systems in place to monitor the relationship. Banks often lose revenue because they’re unaware that the relationship has changed. For example, a bank might continue providing free checking even though the related loan has fallen below the minimum balance or has been paid off.

Should we consider life insurance policies?

Maintaining insurance policies on the lives of directors, officers, and other key employees can be cost-effective tools for boosting non-interest income. Your bank can buy coverage or use “split-dollar” arrangements to share the costs and benefits of these policies with employees.

Bank-owned life insurance (BOLI) is often used to fund supplemental executive retirement plans, other nonqualified deferred compensation plans, and retiree health benefits. BOLI can be a powerful planning tool because a life insurance policy’s cash value grows on a tax-deferred basis, and, if the policy is held until the insured employee dies, the death benefit is generally tax-free.

One caveat to keep in mind, however, is that to enjoy these tax benefits, your bank must comply with strict notice and consent requirements before buying a policy on an employee’s life.

To some extent you can foresee, and plan for, your bank’s financial progress. But to navigate the choppy waters of profits and losses and make sure you come out ahead, you’ll need to supplement interest income with other income streams.

We Can Help

Elliott Davis advisors stand ready to assist with this or any of your other questions.