CAST Management Consultants, Inc.

CASTing an Eye on Banking - Feb 22

1: CAST SERVICE HIGHLIGHT

Non-Earning Asset Reduction
A proven approach to quickly grow the revenues associated with Non-Earning Assets (NEA) on either an enterprise-wide or line of business basis

Over the last 15 years, CAST has observed extensive mergers and acquisitions within the banking industry, frequently resulting in underperforming and largely untapped revenue potential from overlooked assets. For banks that have not carefully addressed this potential or have unsuccessfully attempted to increase NEA revenues in the past, CAST has developed a focused and highly proven technique for realizing improvements in the order of 5 to 10 basis points on total assets.

Factors Contributing to Under-Performing Assets

Incomplete understanding of customer behavior related to various types of fees
Misaligned product structures and incentives
Insufficient tools for measuring and monitoring performance
Limited understanding of competitive practices
Inappropriate product structures and features
Lack of product alignment across organizational silos
Failure to actively manage the timing of fund inflows and outflows
Ineffective procedures and policies

Why CAST for Non-Earning Asset Improvement

Extensive experience in Cash Management, Operations, Finance
15 year successful track record in non-earning asset optimization
Proven tools for monitoring and measuring performance
Database of non-earning asset best practices
Knowledge of the inter-relationships of various insurance and financial service products
Proven, fact-based approach to analysis and implementation
Cross industry experience in non-earning asset improvement

If you would like additional information, please contact Tom Vleisides at (213) 614-8066 ext. 244 or email tvleisides@castconsultants.com.

2: AMERICAN BANKER - Bank of America to Add 2,000 Advisers

Bank of America Corp. is reportedly going on a spending spree to add more financial advisers.

B of A is looking to add 2,000 advisers, according to an article in Financial Times, which quoted unnamed sources.

Most of the additions will be in the United States, with some small additions also in Europe and Asia, the newspaper said. And many of them will be young trainees instead of more experienced advisers lured from other companies.

B of A was not available for comment.

Bill Willis, an industry recruiter, said that B of A's Merrill Lynch unit and Morgan Stanley Smith Barney are aggressively training new advisers. He said it would not be surprising if the goal of 2,000 new advisers at Merrill ultimately has a larger component of recruits and fewer trainees.

B of A's global wealth and investment management unit, which includes Merrill Lynch Global Wealth Management, U.S. Trust, Bank of America Private Wealth Management and Columbia Management, posted fourth-quarter net income of $1.3 billion, up from $1.1 billion the prior quarter. Net income from Merrill Lynch Global alone was $1.5 billion, up 22% year over year, while U.S. Trust reported net income of $174 million. Columbia posted a net loss of $7 million, which the bank blamed for dragging down otherwise positive results.

Alois Pirker, research director at Aite Group, said the plan to add 2,000 retail brokers to its 15,000-strong broker force shows the importance of head count in this business.

"B of A realizes that [its] opportunities lie within the client base of the retail banking side," Pirker said. "If this cross-selling effort is done well, Merrill's asset base could see a significant boost."

3: AMERICAN BANKER - Banks' Eureka Moment on Mobile Services

Financial companies, discovering that people who bank by phone don't always bank online, are changing how they look at mobile services.

Once considered just a component of online banking, mobile services that function independently of PCs are emerging. Banks have realized that mobile phones are a delivery channel in their own right.

"There's a whole group of customers for whom text banking is very attractive, and these are customers whose lives don't revolve around a PC," said Arah Erickson, Wells Fargo & Co.'s head of retail mobile banking.

"It's very hard for those of us whose lives do revolve around a PC to even imagine."

Like many banks, Wells initially offered mobile services as a feature of its online banking site. To access account balances and other information through text-message commands sent from a phone, customers first had to sign up online.

But the San Francisco banking company said last week that any customer can now sign up for its text-message banking services, whether they use the Web site or not.

Erickson said the shift resulted from a realization that there is far less overlap between text users and online users than the company had originally assumed.

When Wells introduced its mobile banking service three years ago, online customers "really made sense as the primary launching point," particularly as the new service was paired with a mobile version of Wells' Web site, Erickson said.

But some mobile users took to texting heavily. Erickson said the average text user sends about 19 text commands a month.

This group's habits further indicated that they did not necessarily consider themselves online banking users — if text messaging replaced anything, it was customers' use of Wells' automated voice system, not its online banking system.

As the service evolved, Wells realized that those customers considered texting to be not a useful feature of online banking but a channel all its own. "It's really been a process of listening to our customers. Launching, and then listening to our customers," Erickson said.

Today, Wells customers can sign up for the text service through a mobile Web site presented on their cell phones. This is the only time users need any kind of Web access, Erickson said. From then on, Wells customers could make simple inquiries, such as account balances, without ever touching a computer.

People who send a text message to check their balances receive the answer by text.

Text banking customers typically include anyone whose job offers them limited computer access, such as nurses, teachers or construction workers, Erickson said. It also appeals to younger customers, whose lives often revolve heavily around cell phones and text messaging.

But even those definitions are not so clear-cut, Erickson said. To many, text banking may simply be the easiest option available at the time.

"Even if you have a PC in your home … the PC's on the other side of the living room and I'm on the couch, and I'd rather check my balance right here," Erickson said.

FSV Payment Systems Inc. of Houston, a prepaid card processor that primarily offers payroll cards, has made a similar observation.

Internally it calls its product a "bank on a card," because it strives to offer its unbanked customers many of the features they might find at a bank. These include products such as a savings account and line of credit, but it also includes offering banklike levels of access to customers: online banking, online bill pay and text message inquiries.

Jonathan Palmer, FSV's president and chief executive, said that although his audience could access its balances online, "a very large percentage sign up for text messaging."

Mobile services allows the payroll card users to have the same level of control other people gets through online banking without having to hover over a computer to do so.

"They are using it to simply be notified every time the card is used," Palmer said. Text message banking is "used, simply, to manage money."

The popularity of the feature among prepaid card users might suggest that text banking is most popular among the unbanked or underbanked, but Erickson does not see it that way.

At Wells, use of text access "doesn't translate, necessarily, to customers with less products," she said. In fact, Wells Fargo has found the opposite, that text users are often among its best customers, who have multiple accounts with the bank.

"I don't think it's a clear story about just appealing to a specific group," Erickson said. "There could be a lot of pockets of folks" who prefer text access to online access, she said.

Donald MacCormick, the vice president of product and engineering at ClairMail Inc., said the Novato, Calif., financial technology vendor's text banking service is currently used by all of its customers as a feature of online banking — but that attitude is quickly changing.

Many bank clients have begun to realize that text messaging and online banking don't go hand in hand, MacCormick said.

With text message services, "people are starting to talk about it as a feature of the product, rather than a feature of online banking," he said.

Banks are taking steps to make mobile a separate channel, MacCormick said. For example, some banks want to make it possible to enroll in the text service through a call center instead of a Web site, but those discussions are in the early stages.

MacCormick was hesitant to project when such a switch would take place, but was certain some banks would make the switch by yearend.

ClairMail is also seeing signs that some features from the mobile channel are migrating to other parts of the bank. One customer, which MacCormick would not name, is testing a card product that would require customers to sign up for security and fraudulent activity text alerts.

Nicole Sturgill, the research director for delivery channels at TowerGroup, a research firm in Needham, Mass., said banks will "have mobile banking customers who are not necessarily online banking customers," so making online banking enrollment a prerequisite could be a deterrent to some people who want to bank by text.

"I've heard a lot of people talking about the fact that it's not necessarily the same crowd," she said, though Wells is among the first banks she has seen to separate the two channels.

Sturgill said it makes sense that mobile — even the text-only version of mobile — is perceived as a distinct channel. For a channel to find an audience "doesn't necessarily mean that each channel has to be all things to all people," she said.

4: AMERICAN BANKER - Banks Using CRM Tools to Improve Collections

Banks are using advanced collections systems to spot troubled loans before they go bad and to help their employees determine which borrowers might be receptive to modification offers.

"The industry has forgotten how to collect. The [boom] economy had allowed it to lose that skill," said Dennis Moroney, a research director at TowerGroup in Needham, Mass. "Today that's a bad thing."

To adjust, tech firms and banks are viewing collections as a customer relationship management-style task, using new credit decisioning technology, data aggregation and predictive modeling products, or leveraging acquisition tools repurposed for collections.

The goal is to quickly identify candidates for workouts and modifications, improve the execution and pricing of restructured loans and ensure that one loan isn't modified at the expense of another loan.

Moroney said this approach to collecting on past-due loans takes a customer's entire financial condition into account. "The challenge is that banks need to manage the full customer relationship pertaining to collections."

Some banks are also looking for specialized expertise. Zions Bancorp. of Salt Lake City has expanded its staff of SAS (Statistical Analysis System, a product from the software firm SAS) specialists by about 30% to handle the increased data management workload required by an increased focus on loss mitigation. "We've definitely stepped up our investment in data and data management," said Jason Brock, a retail lending and credit risk manager at Zions.

Zions is also asking for more data when it requests credit scores. This additional information, such as property values and other economic information, can help Zions assess borrowers' health.

The difference between the most recent downturn and prior recessions is the sheer volume of loans that are now past due or in some stage of the collection process. Collections, modifications and workouts are now a full-fledged line of business at many banks, some of which are handling delinquency volume that has climbed 1,000% since the financial crisis began.

"A year ago, you had collections departments with less than 10 people that now have 100 people just working on modifications. A typical chargeoff rate used to be 40 basis points. Now it's 4 or 5%," said Vytas Kisielius, the chief executive of Collections Marketing Center LLC, which offers a "flex mod" product, developed out of its "flex collect" platform, to automate the processing of loans in collection from initial contact through modification.

The credit decisioning tech firm Zoot Enterprises Inc. is positioning its Credit Risk Lab product as a portfolio management and collections tool as well as a customer acquisition product.

The product performs payment simulations of loan portfolios to identify risky accounts, and it leverages broad demographic data, such as whether a borrower is an auto worker or a health-care worker, or whether the borrower has had a sudden uptick in credit card balances or has recently taken out a payday loan.

That helps lenders determine which borrowers will go though the entire collections process (presumably to default, sale or outsourcing to an external agency) and which clients can be moved to a modification or payment plan that retains them as current borrowers.

The system evaluates, among other things, reports from credit bureaus, use of payday loans, property valuations and behaviors that might indicate a medical issue that could temporarily impair a borrower's ability to pay.

Tom Johnson, a vice president of product development for Zoot, could not say how many clients have shifted from using its technology to assess new borrowers to collections-related use. But he said that at one client, 70 of 100 credit risk analysts recently shifted to collections.

In addition to denting a bank's balance sheet, the increased volume of collections also creates obvious workflow challenges.

Matt Scarborough, managing director for international business at Bridgeforce, a U.K. consultancy, said that since collections and loss mitigation have gone from nonexistent to sometimes thousands of loans a month, workflow has become more difficult and must rely more on automation.

"Once you've had the conversations and know the best way to keep someone in their home, the customer needs to provide documentation and the bank needs to do a title search, etc. Making sure that happens is where a lot of folks fall down," Scarborough said.

CMC's product attempts to overcome workflow and document management issues by tracking loans through processes like modification and collection, providing automated reminders on the Web site for borrowers and collectors in attempt to improve execution.

"There's a great need in the financial services market to be able to deal with fresh data and do decisioning on the fly, and with a much more simple set of workflow steps for staff and consumers, stuff, like, 'Did I get a W2? And did I verify it was the right W2? And did I get the "hardship statements" with all of the blanks filled in?' " Kisielius said.

As a loss-mitigation and collections tool, CMC's product leverages a consumer's different debts and current income and the bank's current parameters for working out distressed loans.

This data is aggregated and used to help the bank formulate a modification and a series of steps such as letters and other documents needed to close the new bank/borrower loan arrangement.

Experian PLC offers its Tallyman product, a workflow and rules engine that is in wide use in Europe and was recently reconfigured to be used in North America and elsewhere.

Tallyman, which has about 50 clients, segments customers and uses business intelligence to monitor the effectiveness of a collections system, identifying areas that require further enhancement. The system is designed to be easily updated by clients. "Business users can make changes without IT participation," said Mike Sutton, the director of collections solutions for Experian and Tallyman.

Chordiant Software Inc. uses credit decisioning technology to drive its collections efforts, and uses the company's CRM expertise to allow customer information to be updated rapidly as an institution engages with a potentially troubled account in real time. Information such as employment status can be taken into consideration as a bank rep conducts a collections-related conversation to form a customer-specific profile.

It's a deeper-dive alternative to the traditional method of dealing with blanket categories such as 30- or 60-day late payments in mostly the same manner — which can result in a borrower paying off one loan while another falls behind.

"You can get a complete view not just on a delinquent account, but you can take the entire relationship into account when you do a strategy for a restructure of a loan," said Scott Andrick, a director at Chordiant.

5: AMERICAN BANKER - Big Banks Exit IT Spending Slump, Small Ones Don't

Big banks are starting to open the tech-spending spigot, but times are tight for their smaller peers.

This is a significant shift from a year ago, when the top financial companies were driving a global economic slump but many community banks (at least ones that had refrained from risky mortgage lending) continued to invest in their technology infrastructure.

Call it a "first in, first out" phenomenon, said John Kraft, an analyst at D.A. Davidson & Co. Big banks, hit first by the downturn, are now showing signs of life, so it makes sense that they are now ready to invest. Smaller banks, belatedly ensnared in the recession, are now watching their spending, he said.

Fiserv Inc.'s strong fourth-quarter results, reported late Tuesday, are one sign of big-bank spending activity. Fiserv is one of the largest banking technology vendors.

"The tone in the larger banks was not quite as dire as it was a year ago," Jeffery Yabuki, the Brookfield, Wis., vendor's chief executive, said in an interview Wednesday. "Clearly people were more willing to spend in Q4 this year than they were last year because, I think, the questions of the very survival of the industry have been put to bed."

Fiserv was not shy about highlighting its successes with larger clients in the quarter, including a payments software deal with Wells Fargo & Co. The company has long served mainly community banks but has tried to expand its big-bank client roster in recent years, notably with its 2007 purchase of CheckFree Corp., a move that Yabuki said paid off last year.

"CheckFree had relationships with 21 of the top 25 institutions on bill payment," he said. While those relationships "take time to work," many of these large financial clients are starting to show interest in new payments applications. "We find ourselves having a lot of conversations on a day-to-day basis," Yabuki said during a conference call with analysts.

Though "2009 was by any measure a challenge," Yabuki said, sales were up sharply toward yearend, and December sales results were "the highest in the company's history."

Fiserv's revenue was $1.06 billion in the fourth quarter, up 2% from a year earlier, and net income surged 90%, to $118 million. Full-year revenue fell 11%, to $4.08 billion, and net income dropped 16%, to $476 million.

Jack Henry & Associates Inc., which is focused much more on smaller financial companies, said its clients are now feeling the effects of the weak economy despite the fact their collective exposure to risky mortgage lending paled compared to that of their larger rivals.

"A year ago, the issues seemed like they were going to be confined to a dozen very large financial institutions on Wall Street," Jack Prim, the Monett, Mo., vendor's chief executive, said in a conference call Wednesday. Though many smaller banks were not dealing in exotic mortgages, they could not avoid the fallout from those risky investments. "The reality is that 10%-plus unemployment affects everybody, everywhere."

Jack Henry's revenue for its second fiscal quarter, which ended Dec. 31, rose 11%, to $210.9 million, from a year earlier. Its net income rose 7%, to $30 million.

Prim said that much of those gains came from cost-cutting and a pair of payments-related purchases it made last fall: the payments software vendor Goldleaf Financial Solutions Inc. on Oct. 1 and Pemco Technology Services Inc., the former card processing unit of Pemco Corp., on Nov. 1.

Payments technology is one area driving investment now, said Davidson's Kraft, because such applications are customer-facing and less discretionary.

"The overall discretionary spending market is still under pressure, there's no question," he said. "What's improving is the growth coming out of the payments and transaction businesses."

Yabuki said that customers have expressed interest in person-to-person transfers, mobile banking and analytics. "There is a lot of energy around what you can do as payment types begin to converge," he said. "Payments are big news."

However, he warned that overall sales will continue to be slow through the first half of this year. "We expect financial institutions to continue to be pragmatic with their technology-spending decisions," he said. "Some institutions are spending a lot of money, and some institutions are not spending any money."

Rodney Nelsestuen, a senior research director at the TowerGroup Inc. research firm, said that large and small banks face similar challenges but if large banks seem to be a step ahead in terms of recovery, it is because they were quicker to recognize and write down losses.

Even so, they are not in the clear, he said, and "everybody's cautious about spending."

Nelsestuen said investments in payments are strong because they are a proven growth area. "It's been a bright spot and it's made more money."

Greg Smith, the managing director of the equity capital markets group at Duncan-Williams Inc., wrote in a research note published Tuesday that the market for banking technology will probably improve this year.

He wrote that he was "impressed with Fiserv's ability to grow" earnings "during these challenging times," a trend that should grow as the economy improves.

6: AMERICAN BANKER - Bill Said to Endanger Model of Independent Brokerages

The business model for independent brokerage firms is under threat, calling into question the livelihood of more than 178,000 registered representatives.

Currently, independent brokerage firms pay their reps as contractors, allowing them to work for themselves. But a piece of legislation introduced in the House in late July by Rep. Jim McDermott, D-Wash., and in the Senate in December by Sen. John Kerry could lead to high costs and extra hassle for independent broker-dealers.

The legislation, titled the Taxpayer Responsibility, Accountability and Consistency Act of 2009, would remove the safe-harbor provision of Section 530 of the Revenue Act of 1978, which could force independent broker-dealers to reclassify independent financial advisers as employees, subjecting the firms to back taxes, penalties and interest.

Dale E. Brown, the president and chief executive of the Financial Services Institute, a membership group which represents 118 independent broker-dealers, said in a phone interview last week that the FSI supports the goals of legislation to correct abuses in the independent contractor classification. But, he said, the concern is that the financial adviser community will get caught up in legislation ostensibly intended for the trucking and construction industries.

"The independent broker-dealers and the independent contractors they license have a three-decade record of compliance with applicable rules, so there is no need for the IRS to be given any reason to question whether or not our industry is appropriately classified," Brown said.

"We are an extremely regulated industry. There are no cash transactions, so everything is highly auditable, and tax compliance is not an issue."

The FSI is also worried that if the Internal Revenue Service succeeds in forcing independent broker-dealers to reclassify their advisers as employees instead of independent contractors, the excess cost would shatter their business model and take away a lot of their independence.

"Our business model is unique because instead of advisers being employees, they are self-employed and own their own advisory" businesses, Brown said.

"They decide what hours they will work, they rent their own office space, hire their own staff and assume all the risk of being a business owner. This legislation would pull the rug out from under one of the foundations of our business model."

If independent broker-dealers go out of business or are hindered in their ability to compete because of rising costs, that would mean less access to affordable financial advice for Main Street, Brown said.

A press release on Kerry's Web site states that the legislation would "provide workers with the rights they deserve" and says that the "current tax loophole, which allows employers to misclassify some workers as 'independent contractors,' denies employees valuable rights and protections."

The legislation would ensure that workers' compensation, Social Security, Medicare, overtime, unemployment compensation and the minimum wage are offered to all employees, the press release said.

7: AMERICAN BANKER - FDIC Rebukes Internet Video

Site had criticized IndyMac loss-sharing deal

WASHINGTON — The Federal Deposit Insurance Corp. issued a sharp rebuke Friday of an Internet video alleging the agency has let the new owners of failed IndyMac Bank unduly profit from the deal.

The Web clip, circulated this week by Fairfield, Calif.-based Thinkbigworksmall.com, claims among other things that the FDIC’s loss-sharing agreement with the thrift’s new owners allows them to profit from short sales and foreclosures, therefore discouraging loan modifications.

The video alleges the investors make money off the deal because loss-share claims are based on what a loan was originally worth, not what the acquirers paid for it.

In a statement, FDIC spokesman Andrew Gray called the video “blatantly false.” He said the agency has not begun paying loss-share claims to OneWest Bank – the new thrift formed by investors in March 2009 – because OneWest has to suffer $2.5 billion in losses before the agreement takes effect. He added that the deal covers a small fraction of the loans serviced by the thrift, and the institution must follow federal modification guidelines in order to receive loss-share claims.

“This video has no credibility. Regardless of the personal or professional motivations behind its production, there is always a responsibility to be factually correct and transparent,” Gray said.

Gray objected to other claims made by the clip’s producers, including that the FDIC has borrowed from the Treasury Department to shore up its finances. While the agency has borrowing authority from the Treasury, Gray said it has not been used.

“Indeed, we continue to be funded by the banking industry through assessments, not by taxpayers as claimed in the video,” he said.

To see the full statement and an accompanying fact sheet, visit www.fdic.gov/news/news/press/2010.

To see the full video and FDIC rebuttal, visit: http://www.thinkbigworksmall.com/mypage/archive/1/32275

8: AMERICAN BANKER - Northern Trust the Real Target in BNY Mellon's PNC Deal

Sometimes the best offense is a good defense in the thinly populated and highly competitive world of big-time custody banking.

On Tuesday, Bank of New York Mellon Corp. announced a definitive agreement to buy the Global Investment Servicing Inc. business unit of PNC Financial Services Group Inc. for $2.31 billion.

The deal, some analysts said, is a defensive move to box out Northern Trust Corp. from becoming a top competitor in asset servicing.

During a conference call Tuesday, Robert P. Kelly, Bank of New York Mellon's chairman and chief executive officer, described Global Investment Servicing as "the last scale franchise in the United States for custody servicing." The business unit offers custody, fund accounting, transfer agency and outsourcing services for asset managers and financial advisers.

The business is "highly complementary," Kelly said, to his company's asset servicing and alternative investment management services and to its Pershing custody business.

In the past five years, Bank of New York Mellon has been wary about making large acquisitions, Kelly said. Though the company must raise about $800 million in capital to finance part of the transaction, forcing it to forgo dividends, the deal equips it for growth, he said.

"We are clearly hearing from shareholders that their first love is to continue to build the business," he said, "and we'd love to do that."

Nancy Bush at NAB Research LLC called the deal "clearly a defensive move." Other custody banks, specifically, Northern Trust, she said, "would like to have scale in fund accounting, and" Global Investment Servicing "was the only vehicle of any size left to them."

Kelly admitted that fund servicing has been a "bit of a weakness" for Bank of New York Mellon. The deal, which is expected to close in the third quarter, would solidify the New York company's position as the second-largest provider of fund accounting, administration and transfer agency services to fund managers globally. Bush said it continues to trail State Street Corp. by "many multiples."

Bank of New York Mellon paid an "overwhelming" price, she said, because "there clearly have been situations where [it] didn't have the product set and lost business because of it."

Bank of New York Mellon said the all-cash deal will be accretive in the first year. It would add $855 billion in assets under administration, including $460 billion under custody, and would double the number of funds serviced for accounting and administration.

Gerard Cassidy, an analyst at Royal Bank of Canada's RBC Capital Markets, said that Bank of New York Mellon "didn't pay a Filene's Basement price but they didn't pay a Nieman Marcus price either."

This is a better deal than State Street got in December, he said, when it bought a securities servicing business from Intesa Sanpaolo, a Milan banking company, for $1.87 billion in cash.

Cassidy said Bank of New York Mellon was being opportunistic, considering that PNC has been eager to sell Global Investment Servicing to help repay part of the $7.6 billion it received from the Treasury Department's Troubled Asset Relief Program.

"To me, this was not a defensive move by BNY Mellon," he said. "They have proven to be an opportunistic buyer of asset management and asset servicing businesses, similar to State Street and Northern Trust. These three companies are in the asset servicing business. They have proven that they like to complement organic growth with acquisitions. All three will continue to compete for deals."

Kelly said the deal would not preclude his company from considering other deals. It is interested in international expansion, he said, specifically in Europe.

"This is the largest deal we have done since 2005, so a deal like this is a relative rarity," he said. "We are being careful to make sure we maintain strong capital ratios and maintain our flexibility."

Based in Wilmington, Del., Global Investment Servicing has about 4,500 employees, with offices nationwide and across Europe.

9: AMERICAN BANKER - Talking About Long-term Care Is a Discussion Worth Having

Most reps don't really discuss long-term-care insurance. Perhaps they should.

"It's uncomfortable to talk about death and tragedy," said Kevin Dunnigan, an Investment Centers of America Inc. rep at the $500 million Homestate Bank in Loveland, Colo. "But having to spend $10,000 per month, for five or 10 years, on long-term care, isn't comfortable either."

Some 70% of people over the age of 65 will need long-term care at some point in their lives, and that gets very expensive if you're not prepared for it. Even if you scrimp, a semiprivate room is still $6,000 per month and if your spouse is still at home paying for all the regular household expenses, too, that can wipe out a couple's finances fast. "It's the fastest-growing cost in our economy," said Dunnigan, who has made long-term-care insurance 21% of his million-dollar-plus production. "The government can't pay for it."

In fact, given the potential impact of a long-term illness on clients' assets, reps who do not discuss long-term-care insurance are leaving clients dangerously exposed. "Most people have a house and a car, and they think nothing of insuring both," Dunnigan said. "But there's only a one-in-1,200 chance you'll lose your house to a fire, and a one-in-240 chance that you'll have a serious car accident. There's a seven-in-10 chance you'll need long-term care."

Dunnigan's own mother received long-term care for five and a half years before she passed on, which cost about $10,000 per month. "She had LTCI," Dunnigan said. "If she didn't, the assets she wanted to leave her six kids would just have disappeared."

Dunnigan mostly serves 55-plus retirement-age clients, who are drawn to Colorado for the climate and outdoor lifestyle. His territory also includes a growing high-technology scene, which has attracted young families, and in turn grandparents wanting to be closer to the grandchildren. "The problem is that people are living longer, and Social Security isn't enough to provide people's income into their 90s," Dunnigan said. "I work with one married couple who are both over 100, and they both still drive."

Dunnigan focuses primarily on life-insurance-linked hybrid long-term-care insurance products and only works with diversified A++-rated insurers. Full-coverage long-term-care insurance is a harder sell because if you don't use it, you lose it. With the hybrid, if you don't use the money for long-term care, it goes to your heirs.

The way Dunnigan describes it, for someone with a little money lying around, buying the hybrid life/long-term-care insurance policy is a no-brainer. Take one 65-year-old client who had $50,000 sitting in a low-paying certificate of deposit that the client planned to pass on to his children. Instead he could put the money in a hybrid life insurance/long-term-care insurance vehicle that would pay $175,000 to heirs on his death.

"If he leaves the money in the CD, the client would have to wait 50 years for it to double," Dunnigan said. "With the hybrid policy, he converts it into more than three times its value."

If the client needs long-term care, the hybrid will pay out 4%, or $6,800 per month, until the entire $175,000 death benefit is gone. "The client will need long-term care, he'll die, or both," Dunnigan said. "Either way, he's turning $50,000 into $175,000, and there's zero tax. Can I say the same to clients with money in stocks or bonds? No. And they would have no long-term-care provisions."

The tax efficiency makes the hybrid life/long-term-care insurance policy a particularly good deal, he said. "If the client doesn't use the long-term-care insurance, the heirs get three times the original money tax-free." Moreover, clients who have set aside money this way for heirs can spend more of the rest of their retirement assets on themselves. That seals the deal 95% of the time, Dunnigan said. "I say, 'Tell me why you wouldn't do this!' "

Indeed, this benefit is so rich that Dunnigan expects it to be watered down in the next few years. The only reason not to buy one: the client needs that $50,000 for living expenses.

Not all clients will qualify for the insurance, which takes four to six weeks to underwrite. Indeed 30% of Dunnigan's clients get turned down, and it's embarrassing. "You can't insure a burning house," he shrugs. "I just have to tell clients it is what it is, and we did our best." But, for example, if a client has cancer surgery, they can wait five years and try again. If they can't get long-term-care insurance, clients are more likely to blame their old adviser than Dunnigan. "They look back at whom they used to work with, and they get mad that they weren't told about this when they were healthy," he said.

Clients in their 60s can buy long-term-care insurance without going bust, but it makes sense to plan ahead when the risk is lower. That's why Dunnigan, 49, and his wife, 47, are buying the policy now. "If you imagine what long-term-care costs will be in 20 years, it's pretty scary," he said. "I'm getting it while I can, and because I know I can pay in X dollars, and my children will get Y dollars." Dunnigan plans to pay $12,000 per year for 15 years into a $1 million policy. "I end up paying in $180,000, and my heirs will be paid $1 million when I die," he said.

Most of Dunnigan's long-term-care insurance sales come from existing-client referrals, and he sees this product as fertile territory for other advisers. "Most of this business is just sitting there in their books," Dunnigan said. "I think 20% of existing clients would be a good goal to shoot for. The need is there."

While insurance plays a prominent role in Dunnigan's practice, he maintains a good product mix. Most of his assets are in a mix of investments and variable annuities, which he likes for their death benefits more than their living benefits. "I've always had a broad base of products," Dunnigan said. "The only thing about the future that we know is that we don't know. Just focusing on stocks and bonds misses a huge part of what people are concerned about."

Long-term-care insurance is not for everyone. "If you don't have enough assets to comfortably afford premiums with your returns, if you have no heirs, or if you're hereditarily likely to die in your 60s, LTCI is not a good move," Dunnigan said. "But the discussion should be had with almost everybody."

Dunnigan reckons that clients with $300,000 or more of investable assets should be able to pay premiums with investment returns they will not really miss. A healthy couple in their 70s that buys a fairly high deductible long-term-care insurance policy should expect to pay around $6,000 per year for it.

The high deductible works out best in many cases because people usually do not suddenly need drastic health care. Rather, it's a steady decline. "Most people stay at home first, so I recommend a zero-day deductible for home health and a 90-day deductible for a long-term-care stay." Ninety days might take a $30,000 chunk out of a client's estate, but bear in mind that the average stay in a long-term-care facility is three years.

Couples can also buy a "shared care" rider on their long-term-care insurance policy that would pay long-term-care insurance for three years to cover each spouse. But if one spouse does not need it, then the other spouse can get six years of benefit.

10: AMERICAN BANKER - Viewpoint: Too Big and Too Much Trouble

It is populist fodder to stand up on a soapbox and say that Wall Street fat cats and bankers led the nation's economy to the edge of the abyss and grossly enriched themselves while doing it. It is also painfully and simply the truth.

And for those of us who have been ardent believers in "free market" capitalism it poses some very challenging questions.

The question of "too big to fail" is the central issue behind our economic meltdown and the most critical issue we have to solve to avoid a future one. The fact that the failure of any one of a handful of organizations could devastate the entire economy is a question of national security. This is what the current and former Treasury secretaries and the chairman of the Fed are telling us almost happened.

This issue is unique to the financial services industry. Given the interconnectedness and interdependence of money-center banks and the largest investment banking firms, the failure of one could cause the failure of all. After all, we have seen the failure of large companies before and economically survived them. A GE failure, for example, would wreak havoc on the economy and cause massive job loss, but not have the secretary of Treasury talking about financial apocalypse or paralysis.

2008 was not about survival of the fittest in the financial services industry. That would have required the entire species of the Wall Street banks to become extinct. Instead, it was a system of select intervention. The process wasn't consistent and it wasn't fair. It bet favorites and helped friends. It certainly wasn't laissez-faire capitalism. Many have criticized this, but few, perhaps none, of these critics can articulate an alternative strategy, or at least one that would not have resulted in permanent economic devastation.

Some of the loudest critics of the banks' loose lending practices were the ones who have been criticizing the banks for too-stringent lending guidelines (the same debate continues today). But the blame game offers no concrete benefit. It offers no solution that will prove to be practical in avoiding a similar catastrophe. It is time for a fix and that means reform. To have meaningful reform we need to understand what went wrong.

Many of the brightest minds in the financial services industry thought that spreading risk across the balance sheets of several companies and entities was a positive innovation of the last quarter of the 20th century. Very few people saw that if you got complacent about the risk because you relied on the fact that it was spread out, then you might begin to not understand the risk you absolutely have. And then if you had a company that was going to insure that risk, but you were funding the company that was insuring that risk … well, it just gets too complicated to really understand.

Then, there is this phenomenon of too big to fail. We know now that if the wrong institution fails, it brings down the whole industry. This is the primary problem that regulators and lawmakers should be focused on. Compensation is just a smoke screen. We need to protect the industry and its role in supporting the economy. The cause of this economic devastation on Main Street was the failure of Wall Street.

11: AMERICAN BANKER - Zions Explains How It Will Return to the Black

Some time between 2013 and 2015, Zions Bancorp. expects to be earning around $500 million a year. Last quarter it lost $184 million.

Explaining how the company arrives at this future profit, as its management sought to do at its biennial investor day on Thursday, took some doing. Weathering persistent credit losses, maintaining robust demand deposit growth, and permanently reducing its exposure to commercial real estate are all part of the Zions plan. A big capital raise probably isn't.

"We have adopted a somewhat different approach to the capital issue than most," Chief Financial Officer Doyle Arnold told attendees, reiterating the company's reluctance to dilute shareholders. "We recognize that we may be seen as one of the riskier plays out there — so be it."

A significant portion of the presentations were devoted to credit issues, which aren't dissipating as quickly for Zions as for many other regional banks. Its nonperforming assets rose to 5.9% at the end of the year, and it has been struggling with exposure to collateralized debt obligations that cost it $100 million in the fourth quarter and beat down its risk-adjusted net interest margin.

Beyond seeking to limit further losses, however, Zions acknowledged that it would be shifting much of its business away from its traditional focus on commercial real estate loans, and particularly construction. That will likely cause a short-term hit to the company's net interest margin, Zions acknowledged.

"Admittedly we were more concentrated and riskier then than we should have been," Arnold said. "The risk profile is changing for the better."

In the long term, Zions believes it will be able to place more emphasis on its increasingly prominent Texas-based energy lending business and its commercial and industrial portfolio. The number of commercial customers are up 18% since 2007, the company said, fueling optimism for when demand recovers.

Along with changes in the composition of its lending portfolio, Zions is "consciously avoiding" a buildup of low-yielding securities on its balance sheet. When the Federal Reserve ultimately raises interest rates, Arnold said, "we don't want to be caught with underwater securities."

These shifts in its portfolio composition, combined with the bank's decision "not to fight" weak loan demand, should help lower any needs for new capital. By shrinking its balance sheet, Arnold said, his company can raise its Tier One capital above 7%, a level that would put it in line with other regionals. In the meantime, the bank could issue common equity in small quantities as necessary.

"People lose sight of the fact that we have actually raised a lot of capital over the last 18 months," Arnold said. "We tried to find creative ways to get capital on the books without diluting the share count any more than necessary."

12: ANNOUNCEMENT - Bank of America Settles with SEC and the North Carolina Attorney

Bank of America today announced that it has entered into a proposed settlement with the Securities and Exchange Commission (SEC) to resolve all cases filed by the SEC related to the Merrill Lynch merger. The proposed settlement will be submitted for approval to the Honorable Jed S. Rakoff of the United States District Court for the Southern District of New York. Bank of America has also entered into an agreement with the Office of the Attorney General for the State of North Carolina (NC AG) to resolve all matters that are the subject of an investigation by the NC AG related to the Merrill Lynch merger.

Bank of America is pleased to have come to these agreements with its regulators, and the company looks forward to continuing to pursue its primary mission of providing high quality financial solutions to help customers meet their goals and help the economy grow.

LINK TO FULL ARTICLE: http://newsroom.bankofamerica.com/index.php?s=43&item=8628

13: ANNOUNCEMENTS - ING Closes Sale of Three of its U.S. Broker-Dealers

ING announced today that it has closed the sale of three of its U.S. independent retail broker-dealer units, which comprised three-quarters of ING Advisors Network, to Lightyear Capital LLC. ING did not disclose the terms of the agreement, which was previously announced on 3 November 2009.

The divested units include Financial Network Investment Corporation, based in El Segundo, Calif., Multi-Financial Securities Corporation, based in Denver, Colo., PrimeVest Financial Services, Inc., based in St. Cloud, Minn., as well as ING Brokers Network LLC, the holding company and back-office shared services supporting those broker-dealers, which collectively did business as ING Advisors Network.

ING will retain the remaining broker-dealer from the ING Advisors Network, ING Financial Partners, Inc., based in Des Moines, Iowa along with its other broker-dealer, ING Financial Advisers, Inc., based in Windsor, Conn. These broker-dealers are closely-affiliated and play a key role in ING’s strategy in the U.S.

The sale will not have a material impact on ING’s 2010 earnings.

14: BANKINSURANCE.COM - BB&T’S Rising Insurance Revenue Passes $1 Billion

And Comprises 26.7% of Year's Noninterest Income

NEWS IN BRIEF - FEBRUARY 1 - 7, 2010

Winston-Salem, NC-based, $165.8 billion-asset BB&T Corp. Chairman and CEO Kelly King said, “We enjoyed record net revenues for 2009, driven by strong mortgage banking income and record insurance income, which exceeded $1 billion.” In the fourth quarter, insurance earnings grew 5.3% to $260 million, up from $247 million in fourth quarter 2008, bolstered by increased property and casualty fees and the acquisition of a Fort Myers, FL-based insurance agency. Income from bank-owned life insurance (BOLI) rose 13.6% to $25 million, up from $22 million. Trust and investment advisory earnings increased 18.8% to $38 million, up from $32 million. But, investment brokerage fee income fell 13.5% to $83 million, down from $96 million. Insurance earnings comprised 26.8% of noninterest income, which jumped 20.2% to $970 million, up from $807 million. Investment brokerage fee income comprised 8.6% of noninterest earnings, while trust and investment advisory earnings and income from BOLI comprised, respectively, 3.9% and 2.6% of that revenue. Net interest income on a 3.8% net interest margin rose 11.4% to $596 million, up from $537 million, despite an almost $200 million increase in loan loss provisions to $725 million. But, net income dropped 36.8% to $194 million, down from $307 million in fourth quarter 2008, hit by net charge offs and loan loss provisions tied to “continued deterioration in housing-related credits.”

For the year 2009, insurance earnings grew 12.8% to $1.05 billion, up from $928 million in 2008, and income from bank-owned life insurance climbed 15.5% to $97 million, up from $84 million. In contrast, trust and investment advisory revenues slid 5.4% to $139 million, down from $147 million, and investment banking and brokerage fee income slipped 2.3% to $346 million, down from $354 million. Insurance earnings comprised 26.7% of noninterest income, which jumped 23.1% to $3.93 billion, up from $3.2 billion. Investment banking and brokerage fee income comprised 8.8% of noninterest earnings and trust earnings and BOLI comprised, respectively, 3.5% and 2.5% of noninterest income. Net interest income fell 27.2% to $2.03 billion, down from $2.79 billion, as loan loss provisions almost doubled to $2.81 billion, and net income dropped 41.5% to $877 million, down from $1.5 billion in 2008, reflecting both the FDIC assisted August 2008 purchase of Montgomery, AL-based, $22 billion-asset Colonial Bank and increased loan provisions and charge offs tied to housing-related credit issues. BB&T Chairman and CEO King touted “record insurance income,” “strong mortgage banking income” and “a significantly slower growth rate in nonperforming assets in the fourth quarter” and said, “We are encouraged by very strong growth of $1.5 billion in client deposits in former Colonial branches.”

In 2008, BB&T Corp. reported $847.3 million in insurance brokerage fee income, which comprised 27.7% of its noninterest income and 11.6% of its net operating revenue. The company ranked 4th in insurance brokerage earnings among U.S. bank holding companies (BHCs) with over $10 billion in assets and 4th among all U.S. BHCs, according to the Michael White-Prudential Bank Insurance Fee Income Report.