ABA Banking Journal - June 2008 - (Page 8)

briefing will migrate away from the style-box model. “If you do solutions-based business right, you don’t even need open architecture,” he added, referring to the practice of offering investment products managed by others versus offering proprietary products. Lee cited AllianceBernstein’s private client business as an example of a solutions-based provider that succeeds with a completely closed (proprietary) architecture. The company has high-margin, extremely sticky, very wealthy individuals as clients, said Lee, and is excellent at working with these clients and setting objectives. The strategy works for AllianceBernstein, he said, because it has a very broad range of investment capabilities. But Lee emphasized that the model per se isn’t the critical success factor. Not all companies can do what Alliance does, he said, yet they can succeed using a more “open” approach. “At the end of the day,” said Lee, “It’s Exhibit 2 Noninterest Income and Net Interest Income as a % of Total Revenue 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1934 Noninterest income 82% 83% 75% 61% 76% 59% 39% 26% 17% 18% Net interest income 41% 24% 1940 1946 1952 1958 1964 1970 1976 1982 1988 1994 2000 2006 Source: FDIC through 2007. Note: Total revenues do not include securities gains really stickiness of assets that drives profitability.” If open architecture is done properly, he continued, you get very sticky assets. Even if the organization is not earning the whole fee, if it keeps the assets, it will have much better profitability [than if the assets move elsewhere]. Plus, it may not have to carry the whole overhead of an investment staff, and all the processing behind it. “When I look at a company,” said Lee, “what I’m looking at are the characteristics of that particular company and how they execute on them—and their ability to sustain earnings. Open architecture or a proprietary model in and of themselves to me doesn’t mean FEE-BASED BANKS continued on page 12 Snapshot Net interest margins vary sharply by size T he recent credit crunch has eaten through bank profitability like a team of football players at an all-you-can-eat buffet. To see how bank net interest margins have fared over the last year, SNL looked at five different asset ranges on a linked-quarter and a year-over-year basis. Each range represents different operational segments of the banking market, from the mega-banks to regional banks to the community banks. The largest banks in the country, while taking massive writedowns over the last six months, have seen their net interest margins increase on both a linked-quarter and a year-over-year basis, by 11 and 18 basis points respectively. While these margins are still off the historical marks and are well below that of smaller banks, the trend is still positive. Banks in the $100 billion to $1 trillion range, arguably the operational sweet spot for the modern financial holding company, have seen margins remain stable over the last year, at the same time well outperforming their larger rivals. As you move down the asset-size ranking, however, it is the public community banks that have been the hardest hit by the crunch. Average net interest margins for banks with less than a billion in assets contracted by 30 basis points year-over-year and 18 basis points on a linked-quarter basis. The contraction is due in no small part to intense deposit pricing pressures that have left some of these banks scrambling to secure stable funding sources. Tightness in the secondary loan markets has also forced these banks to hold what they might have sold only a year before. Despite the pressure, margins in this segment still outperformed the largest banks in the country by almost a full percentage point in the first quarter of 2008. The story here is that while the biggest of banks were one of the agents of much of the pain that the segment is now feeling, it is the smallest banks that are starting to suffer the most. The biggest banks have the clout and scale to allow them to manage through the crisis. Earnings will suffer, but there is little risk they will collapse. The smaller banks, while still performing well, will have to play the hand they are dealt, and may see tougher times ahead. —John McCune, SNL Financial jmccune@snl.com Net interest margin performance Public banks and thrifts Linkedquarter change (bps) Yearoveryear change (bps) Assets size ($) Average net interest margin (%) 2008Q1 2007Q4 2007Q1 Greater than 1 trillion 100 billion to 1 trillion 10 billion to 100 billion 1 billion to 10 billion Less than 1 billion Source: SNL Financial 2.66 3.25 3.21 3.52 3.58 2.55 3.23 3.25 3.61 3.77 2.48 3.23 3.28 3.68 3.89 11 2 (4) (9) (18) 18 1 (7) (15) (30) 8 JUNE 2008/ABA BANKING JOURNAL Subscribe at www.ababj.com http://www.alliancebernstein.com http://www.snl.com http://www.ababj.com

Table of Contents for the Digital Edition of ABA Banking Journal - June 2008

ABA Banking Journal - June 2008
Contents
Editor’s Column
Do Fee-based Services Have an Edge?
Snapshot: Net Interest Margins Vary Sharply with Size
100th Anniversary: Then & Now
Letters
ABA Resources
ABA Chairman’s Position
"What? No Annual Surprise Bonus?"
Pass the Aspirin
Cover Story: Top Community Banks: How They Did...
...And How They Did It
Charter Bank
First East Side Savings Bank
Mackinac Financial Corp.
The Peoples Bank
Managing the E-mail Monster
In Brief
Handling PEPs in the Age of "L'affaire Spitzer"
Mailbox
Banker’s Mart
To Advertise/Index of Advertisers
The Economy

ABA Banking Journal - June 2008

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