Case Study: Impaired lending capability yields an annuity sales opportunity

The difficult lending environment has caused loan-to-deposit ratios to reach non-optimal levels for many community banks. This case study features a bank that was ordered by the FDIC to stop lending and improve capital ratios by shedding deposits.

Despite the recent decrease in bank failures, many smaller community banks are under stress. While there might not be a single solution to aid these troubled institutions, many may be overlooking an opportunity to raise non-interest income at the holding-company level. Some community banks are overfunded with expensive CDs that were sold when interest rates were higher. By offering fixed annuities, banks with impaired lending capabilities can reduce deposits, improve leverage ratios and build a source of non-interest income.

Situation

The challenging lending environment caused this community bank to enter a cease and desist agreement with the FDIC. The bank’s lending capacity was weakened, affecting its leverage ratio; the balance sheet had too many deposits to loans. The bank needed to reduce deposits to bring them in line with slow-growing asset base; retain clients while maintaining customer satisfaction; and generate non-interest income.

The bank was able to address this problem by offering fixed annuities to customers. After entering the cease and desist agreement with the FDIC, this privately owned bank faced a significant challenge. It was ordered to reduce exposure to commercial real estate, land development and acquisition, and construction loans. This order significantly impaired its overall lending capacity. An inability to lend to its developed customers left the bank overfunded with deposits and with an immediate need to improve its Tier 1 capital ratio.

Solution Description

In an effort to improve its leverage ratio, the bank offered fixed annuities to clients that had CDs reaching maturity. This program allowed the bank to shed its most expensive deposits, some of which were brokered deposits, while improving its capital levels.

As a new entrant into the annuity marketplace, the bank licensed existing employees at each of its branches to sell annuities. The LBEs contacted bank clients with CDs that were reaching maturity. Any surrender charges were waived if the client moved out of a targeted CD to an annuity.

Quarterly contests were created to reward top selling LBEs (e.g., the top selling LBE received an iPad). The bank designed an internal referral program that rewarded employees for asking customers if they would be interested in discussing annuities with the bank’s LBE. For every “no” a teller received, the teller earned $1 and for every “yes” the teller earned $25. The annuity program had the support and participation of senior management.

Results/Benefits

• The bank sold $5 million of annuities in the first two months of the program.
• The reduction in the bank’s deposits and increased annuity fee income improved Tier 1 capital, ROE, ROA and non-interest income.
• Customers received a higher return and living benefits (penalty-free withdrawal, tax deferral).
• The new product offering increased customer retention.
• Employees received career expansion opportunities.
• The program provided a base for expansion into additional insurance products, including wealth transfer and protection offerings.

Getting Started

Offering an entirely new line of business to customers may seem daunting. An insurance marketing organization can provide a head start in the implementation process. It is essential to choose a partner firm that has proven annuity experience, knowledge and expertise. To significantly increase speed to market, enhance the probability for success, and offer clients the expertise they need, look for an organization that provides:

• A clear understanding of your situation and challenges.
• Product expertise.
• Education and training programs for employees.
• Carrier compliance and suitability guidelines.
• Marketing materials approved for use in banks that meet FDIC guidelines.
• Website availability to support employees 24/7.
• Product manufacturer relationships and support.
• Sales campaign support.
• Business processing (e.g., illustrations, application processing, problem resolution).
• Contracting and licensing support.
• Monthly production and reporting procedures.

In today’s environment, there are still many opportunities for banks to generate non-interest income. Consider a program that can help your clients earn a higher rate of return on their money and increase the opportunity to maintain their loyalty.

Doug Allenbaugh is director of strategic development for The Marketing Alliance — a nationwide network of independent insurance agencies. Allenbaugh can be contacted at 314-275-8713 or dallenbaugh(at)themarketingalliance.com.

Copyright (c) November 2011 by BankNews Media.