Community bank investment programs had a bumper year in 2012.

Both total program income and average program income hit highwater marks in 2012 since banks began reporting these numbers in 2007.

In all, 1,501 community banks offered investment programs to clients. They produced an aggregate $521.6 million in income, up 11.8% from $466.5 million in 2011, according to research from Michael White Associates and Securities America. Meanwhile, average program income was $347,528 in 2012, up 9.1% from $318,456 in 2011.

Consistency was one of the themes of the year as all four quarters of 2012 were strong for community banks. Indeed, program revenue generated in each quarter exceeded that of any prior quarter since the third quarter of 2007, according to the Michael White-Securities Americas Report: Community Bank Investment Programs. (It defines community banks as those institutions with less than $4 billion in assets.)


To be sure, it is reassuring that program revenues reached a record high. Better still is the hope for the future, which is underscored by the fact that hundreds of bank programs have been growing as they begin to put some distance between them and the "great recession."

However, there is a lingering question that has continually surfaced. Why are there so many community banks that don't sell investments at all? Is there a certain size threshold below which banks are just too small?

This is complicated and depends largely on the mind-set of bank management. The truth is, some banks have explored the possibility of establishing a program, and even gave it a dry-run, but then decided it wasn't for them. They might be more comfortable with another type of non-bank fee income activity like commercial insurance sales. However, there are many other reasons, unfortunately, that the percentage of banks with investment programs has gone relatively unchanged since the 1980s.

There are four such reasons that I describe with the acronym HI-FI. Remember the original hi-fi? (High-fidelity sound from a record player.) It went the way of the dinosaur as stereo systems took its place. Vinyl albums were replaced by cassette tapes, then CDs, then downloaded MP3 audio files. It's hard to stop progress and just like those old sound systems, progressive community banks are ditching their HI-FI reasoning about retail investment programs. The components of my HI-FI description overlap and blend with one another a bit.

H: The habit of inertia is great. As I learned long ago in high school physics, inertia is the greatest force in the universe. During the good times senior management is too busy with positive momentum in an existing core business. During bad times it is too busy putting out fires. Meanwhile, the board of directors is not necessarily knowledgeable enough on its own to consider an in-depth proposal to start an investment program. So the mind-set is: "Let's stick to our knitting and do what we know." Moreover, on a personal level, the risk-reward equation can become unbalanced. Some bank officers of the baby-boom generation do not want to jeopardize their bank stock and bonuses on a new business line just as they're about to retire.

I: Ignorance as to how to get into the business prevents many banks from properly evaluating the opportunity or even knowing where to get answers. It's tough for community banks to find time and sufficient resources to investigate and evaluate any business idea—especially an investment business.

First, an officer is designated to find a little time and use as few resources as possible to research the subject. As information is gathered, it moves up the chain of command for an initial decision of "go" or "no-go." If approved, it is presented to the board for more discussion (where it may be tabled due to a full agenda). If the board wants further investigation, the designated officer must figure out a process for evaluating third-party marketers and solicit proposals. A request for a proposal is critical these days since regulators have been stressing the importance of adequate due diligence on unaffiliated companies with which the banks will do business.

But, how to evaluate a TPM? More investigation, analysis, reporting and recommendations to senior management. A short list of finalists is prepared and TPMs are invited to present to senior management. Then, the postmortem on the finalists' presentations takes place. Then comes the recommendation to the board. Assuming approval, then management invites the winning TPM back, reviews contracts, negotiates terms and then commits by signing contracts.

That's the short view of what it takes just to get to the starting line. And it's still a lot of force to have to bring to bear on the resistance of an object to change in its state of motion (or rest). To overcome inertia and ignorance, we recommend examining industry research literature; reading industry newspapers, journals and magazines; considering an experienced consultant; talking to banks already in the investment business; or getting input from a compliance officer or the bank's attorney.

F: Fear of change inhibits progress and adoption of new business lines. It reflects lack of understanding of products, brokers, financial advice and even the purpose and benefits of establishing an investment program. There is fear of the risks involved, as well as the customers' reaction. There is fear of how the employees will relate to the new broker and whether customers will be approached with proper, compliant explanations of the bank's investment services.

I: Improvident behavior by banks is simply not acceptable anymore. Fortunately, many observers are learning this lesson. Banks in general, and community banks in particular, can no longer simply stick with what they know from days of yore. These days, not foreseeing and providing for the future cannot be done with impunity. Spread income is not enough these days. And when it is the overwhelming source of net operating revenue, it can constitute a potentially dangerous concentration of bank revenues, as we have seen the last few years.

Generations of closely held owners of community banks are proud of decades of presence in their communities, satisfied with what their banks are doing. But little or no market pressure to improve ROE will result in community banks stagnating, a disappointing result of the habit of inertia.

In 2012, non-interest income at the smallest commercial banks, those under $100 million in assets, accounted for just 21.7% of bank net operating revenue. Average ROE was 6.15% for these smallest banks. For these banks, the revenue share of a modest managed program would have increased average pretax net operating income by nearly 20%, and ROE by 18% to 7.26%. To paraphrase one of the most famous quotes of all time: That's one small step for non-interest income, one giant leap for banking.

So get with the program. Or just like that old hi-fi and all your old records that were replaced, your bank could become a thing of the past too.

Michael White is president of Michael White Associates, a consulting and research firm in Radnor, Pa. For more information, visit

Read More: HI-FI: 5 Reasons Community Banks Opt Out of Wealth Management