Community Banks Take a Serious Look at the Affluent

A growing number of community bankers are convinced that wealth management and private banking are the answers to replacing diminishing revenue streams.

During the latest wave of quarterly conference calls, the leaders of Iberiabank (IBKC), First Midwest Bancorp (FMBI), Webster Financial (WBS) and Wintrust Financial (WTFC) all discussed a desire to expand in those businesses, particularly with acquisitions.

Most of these banking companies have increased their assets under management in recent quarter, adding to the optimism.

Webster has doubled its team of private bankers to about 50, James Smith, the company's chairman and chief executive, said during a conference call last week. He said the Waterbury, Conn., company had recently kicked off a marketing push for Webster Private Bank.

Iberiabank's executives said during its quarterly call that its wealth management division, formed in 2011, had started to generate revenue. This year "is a year of execution," Jeff Parker, the company's vice chairman and manager of the brokerage, trust and wealth management groups, said last week. The objective is to grow "revenues commensurate with the teams that were put in place."

Veterans in wealth management have taken notice, realizing that small banks have few other options to replace revenues were reduced or eliminated by recent regulations and artificially suppressed interest rates.

Community banks "don't have the net interest income they are used to having," says Gerald Divers, the president of Tampa Banking Co. in Florida. "So they sit around the table and say, 'We've got to do something.'"

Tampa Banking launched Florida Investment Advisory in 1996; it now has $350 million in assets under management.

Divers warns that hauling in a lot of assets under management does not always lead to a lot of new income. "It costs so much to do it well. It does not leave much money on the table for the bank," he says. "You can hire some good lenders and make a lot more money" with loans.

Still, many of the larger community banks are stretching their scope into wealth management, either through acquiring firms or consolidating operations into larger wealth management divisions.

Iberiabank, in Lafayette, La., bought certain assets of Florida Trust Co. last year. Wintrust, in Lake Forest, Ill., last month bought the trust operations of Suburban Bank & Trust in Elmhurst, Ill.

Wintrust is interested in buying more wealth managers, Edward Wehmer, the $16.2 billion-asset company's president and chief executive, said last week. "We really believe it will be terribly hard for banks with $1 billion or less in [assets] in metropolitan areas to generate adequate returns," he said.

In fact, higher costs and more regulatory red tape convinced Fenn Giles, the former head of Tampa Banking's advisory unit, to leave and form an independent firm, Wealth Advisors of Tampa Bay. "It appears the trend is definitely to not support the small broker/dealer operations within community banks," says Giles, who made the switch earlier this month.

Giles is operating under a partnership with LPL Financial, a larger broker-dealer. Giles says that this relationship allows him to focus on generating business, while LPL has the capacity to handle accounting and regulation.

"Instead of having to create new regulatory compliance technology, it is built for me and there are new economies of scale in sharing" resources with LPL, Giles says.

Despite such challenges, a number of community banks seem to be making progress, even when it comes to boosting income from wealth operations.

At Iberiabank, noninterest fee income rose $2 million from the fourth quarter. The $11.8 billion-asset company' results included about $600,000 from its wealth management and capital markets groups. Iberiabank's assets under management jumped about 20% from Dec. 31, to $869 million.

Companies are also looking at ways to streamline operations to improve communication or reduce expenses.

First Midwest in Itasca, Ill, created a wealth management operation by combining its trust, retail investment platform and private banking sales team. The $8 billion-asset company wants to generate more leads between its retail and commercial teams.

"We are working to broaden our revenue streams through the expansion of our fee-based business lines," Michael Scudder, First Midwest's president and chief executive, said Wednesday during a conference call with analysts.

Scudder said the combined group, along with improved Treasury management activities helped First Midwest's fee-based income increase 4% from a year earlier.

Some of the potential growth in wealth management could come from clients who are upset with bigger banking companies, though it remains to been seen how much of a boost those customers could provide.

Some "firms are growing assets because they're finding disgruntled clients," says Doug Ralston, the president of wealth management at Trustmark National Bank, a unit of Trustmark Corp. (TRMK) in Jackson, Miss.

"Sustainability and growth over time depends on the underlying health of the economy," Ralston said. "The well-heeled traditional wealth management client is very concerned right now about the direction they perceive the economy is headed."