1. McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Chapter Fourteen Investment Banking, Insurance, and Other Sources of Fee Income

2. 14-2 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Traditional Sources of Fee Income Service Charges on Deposit Accounts Credit Card Service Fees Commitment Fees for Making Credit Available Fees for Use of Safe Deposit Boxes Rental of Bank Property to Individuals and Businesses

3. 14-3 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Newer Sources of Fee Income Commissions and Fees From Investment Banking Services Brokerage Commissions for Aiding in the Purchase of Securities Fiduciary Income – Trust Services Commissions for the Sake of Insurance Servicing Fees from Securitization and Sales of Loans

4. 14-4 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Reasons for the Drive for More Service Fees A Desire to Supplement Traditional Sources of Funds An Effort to Offset Higher Production Costs A desire to Reduce Overall Risk A goal to Promote Cross-Selling of Traditional and New Services

5. 14-5 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Investment Banking Services Under The Authority Of The Gramm- Leach-Bliley-Act Many Banking Firms Have Either Acquired Or Formed Their Own Investment Banking Affiliates. The Primary Role Of Investment Bankers Is to Serve As Financial Advisers To Corporations, Governments, And Other Large Institutions.

6. 14-6 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Principal Types of Securities Underwritten by Investment Bankers Government and Federal Agency Securities Investment Grade Corporate Bonds Convertible Corporate Bonds and Stock Common and Preferred Stock Corporate Junk Bonds Asset Backed Securities

7. 14-7 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Additional Sources of Revenue for Investment Bankers Advising Clients Regarding Acquisitions and Mergers Creating and Trading Derivatives Brokering Loan Sales Setting Up Special Purpose Entities Stock and Bond Trading Currency and Commodity Trading Issuing Credit and Liquidity Enhancements Developing Business Plans

8. 14-8 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Mutual Funds Companies that Offer Shares in a Pool of Securities and Flow Through Any Earnings Generated to Shareholding Customers

9. 14-9 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Two Popular Mutual Funds Exchange Traded Funds (ETFs) – Behave Like Index-Tracking Mutual Funds but Trade All Day on Stock Exchanges Hedge Funds – Private Partnerships Whose Shares are Offered Primarily to Wealthy Clients that Often Make High- Stakes Bets on the Direction of the Market

10. 14-10 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Two Different Ways of Being Involved with Mutual Funds Proprietary Funds Offered Through One of Their Affiliated Companies –Offer Investment Advice –Serve as Transfer Agents –Execute the Transactions of the Fund Nonproprietary Funds – The Offering Institution Acts as a Broker for an Unaffiliated Mutual Fund

11. 14-11 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Annuities A Savings Instrument in Which the Customer Makes Cash Payments to an Investment Manager Who Places Them Into Earning Assets and Where Later the Purchaser Receives a Stream of Income From Those Assets

12. 14-12 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Annuities Fixed Annuities – Promise a Customer Who Contributes a Lump Sum a Fixed Rate of Return Over the Life of the Contract Variable Rate Annuities – A Lump Sum of Money is Invested Into a Basket of Stocks, Mutual Funds or Other Investments Return for a Customer But is Not Promised a Fixed Equity-Index Annuity – Combines Features of Both Fixed and Variable Annuities

13. 14-13 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Regulations Regarding Investment Products Customers Must be Informed that Investment Products are: –Not Insured by the FDIC –Not a Deposit or Other Obligation of a Depository Institution –Subject to Investment Risks

14. 14-14 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Trust Services These Services are Centered on the Management of Property Owned By a Bank’s Customers, Such as Securities, Land, Buildings and Other Investments

15. 14-15 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Types of Trusts Living Trusts – Allows Trust Officers to Act on Behalf of a Living Customer without a Court Order Testamentary Trusts – Arise Under a Probated Will and Used to Save on Estate Taxes Irrevocable Trusts – Allows Wealth to be Passed Free of Gift and Estate Taxes Charitable Trusts – Used to Support Worthwhile Causes Indenture Trusts – Used Collect, Hold and Manage Assets to Back an Issue of Securities by a Corporation Dynasty Trusts – Set Up to Avoid Paying Federal Estate Taxes and Generation-Skipping Taxes

16. 14-16 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Offerings of Insurance Related Products Life Insurance Policies Life Insurance Underwriters Property-Casualty Insurance Policies Property-Casualty Insurance Underwriting

17. 14-17 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Insurance Products Disclosure Rules An Insurance Product is not a Deposit or Other Obligation of a Depository Institution An Insurance Product is not Insured by the FDIC Insurance Products May Involve Investment Risk and Possible Loss of Value Depository Institutions Cannot Base Granting Loans Based on the Purchase of Insurance

18. 14-18 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Product-Line Diversification Effect Offering More Than One Product or Service Through the Same Company in Order to Reduce the Overall Risk of the Revenues Flows Through the Individual Firm

19. 14-19 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Risk and Return With Traditional and Nontraditional Services Where: NT is Nontraditional Services and T is Traditional Services and r is the Correlation Between Them

20. 14-20 McGraw-Hill/Irwin Bank Management and Financial Services, 7/e © 2008 The McGraw-Hill Companies, Inc., All Rights Reserved. Customer Privacy Protecting the Personal Information That Customers Supply to Their Financial-Service Providers So That Customers are Not Damaged By the Release of Their Private Data to Outside Parties