WEST PALM BEACH, Fla.- As spreads get ever tighter for corporates, they are looking to bring their fee income more in line with their net interest income. In years past it wouldn't be uncommon for a corporate to have fee income that was just a tenth of their net interest income. But that's changing. For one, net interest income is tighter just due to the rate environment. Secondly, corporates have diversified into so many different product offerings that there are more opportunities for fee income. Fee income can come from a host of areas at the modern corporate. Corporates have launched broker dealer CUSOs; started ALM services; offer bill payment; have grown to become some of the largest item processors; are becoming factors in business lending/deposit products through new CUSOs; and are even into nontraditional areas, such as one corporate offering a virtual board room product. "Corporates are becoming much more competitive with each other and with outside opportunities for investments. I think we've seen rates paid on overnight and term investments increase by 10 or 20 basis points in the last six months alone. As spreads narrow it becomes more important to diversify sources of income," said Eric Kenealy, President/CEO of SunCorp. Kenealy's corporate is a good example of one that is increasing fee income. Right now the corporate has a mix of 45% fee income vs. 55% net interest income. Incredibly, about three years ago it was closer to 10% fee income and 90% net interest income. SunCorp is budgeting for a 50/50 split between the two income streams. It's getting closer to that split. In January its fee income was $740,000 with its net interest income at $820,000. Year-to-date fee income is $1.4 million and year-to-date net interest income is $1.7 million. SunCorp's year-to-date operating expenses are $1.8 million, so the corporate is nearing the point where the more stable fee income is paying for operating expenses, an ideal situation says Kenealy. For SunCorp, by far the major source of fee income is item processing (75%). Other fee income comes from the traditional deposit processing and ACH, however a relatively new fee generator for SunCorp is electronic bill pay. "We have 60 credit unions up and running on bill pay. It's a nice income generator," he said. Tightening spreads in this environment are expected for corporates which often go above and beyond to offer their members higher investment yields in low rate environments. The more they do that, the lower net interest income will be. But they're doing this to help their natural person clients which still have weak loan demand. "Many credit unions I speak to say when they look at their payoff and new loans issued, they're just happy to break even. They need help on investment yield. They're putting pressure on us, and we're out there putting pressure on U.S. Central," said Pete Pritts, President/CEO of FirstCorp. Pritts said the decline in net interest income won't be as much as a problem for corporates that have healthy fee income, as opposed to those that don't. FirstCorp has expanded its fee income through a new business services CUSO; it partnered with Northwest Corporate. FirstCorp also added an ACH product last year that is boosting fee income. "A local clearinghouse here opted to get out of the business. We stepped in," said Pritts. He said his corporate is getting more involved in the electronic payment systems area to bolster fee income. FirstCorp is also banking on some income from CNBS to help with lower net interest income. FirstCorp and other CNBS shareholders are likely to see a healthy dividend from CNBS as the broker/dealer has set transaction records as well as revenue records. The revenue record was not surprisingly driven by fee income. Pritts said fee income for cash delivery and item processing was up 8% and 5% respectively last year. William Walby, president/CEO of CenCorp, said fee income at CenCorp is actually outpacing net interest income. (See story on Walby on page 18.) "We generate more in fee income than we do in net interest income. I haven't seen the corporate numbers, but not many do that. We think it's a very good thing. It's a much more stable source of income," said Walby. One other corporate where fee income outpaces net income is CorporateOne, a corporate known for its successful brokered CD program that brings in considerable fee income. WesCorp's VP of Portfolio Management, Dietmar Huesch, said one plus to fee income is it isn't on the balance sheet and corporates don't have to carry assets to balance it out. Mid-States Corporate President/CEO Dave Preter said the corporate network at one time was a system that survived off of spread income, but corporates can't count on that going forward. One area they are evolving is investments, an area that can generate considerable fee income. "That's why a lot of us have opened broker dealers and hopefully we'll become more of investment advisors to credit unions and sell other products to them, other than just certificates," said Preter. Fee income is definitely up, but it may look more dramatic because of declining net interest income said Victor Vrigian, SVP, Member Sales and Service for Empire Corporate. "In many cases rates have declined to the point that even if the dollar amount of fee based revenue was constant to two years ago, that amount expressed as a percentage of total revenue would show an increase," he said. [email protected]

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