Small banks are struggling, too
Cincinnati.com - by Alexander Coolidge
Date: November 13, 2011
New rules cut fees that financial institutions traditionally rely upon
The nation's largest banks aren't the only financial institutions struggling to regain millions of dollars lost in falling fee income.
More than 3,600 smaller banks have watched their profits plunge in the past three years as new rules have limited fees that can be collected on customer accounts, servicing of mortgages and investment management.
While these banks counted on 25 percent of their revenue coming from fees in 2008, that percentage is now down to 20 percent, according to an Enquirer analysis of latest Federal Deposit Insurance Corp. data.
Fewer fees may please some customers, but they carry wider implications: Less profitable community banks have less money to lend to small businesses, which limits their recovery from recession.
Also, less profitable community banks are more vulnerable to takeover by stronger rivals.
"These banks are part of the backbone of our economy," says Steve Wyatt, chairman of the finance department at Miami University.
"These are important institutions because they finance small businesses and start-ups that create half to 90 percent of new jobs."
Greater Cincinnati and Northern Kentucky have a major stake in the small bank struggles. The 45 smaller banks in our region currently have $5 billion in loans invested in the local economy.
They also employ nearly 4,400 people - or one of every five local bank employees.
Small banks are a big deal, especially here
Greater Cincinnati and Northern Kentucky is notable for the large number of smaller banks - known as "community" banks, or those with $1 billion or less in assets - doing business here.
They range from the relatively large LCNB National Bank, with 26 branches in six counties, to tiny New Foundation Savings Bank, with a single branch in Colerain Township. All told, they solidify the region's robust financial services sector that accounts for 6 percent of total employment.
Local bankers say the region's multitude of small banks trace their origin back to German immigrants more than a century ago. They preferred to do their banking with smaller institutions.
Wyatt notes that analysts predict that thousands of small banks will be gobbled up in industry consolidation as banks struggle to comply with a host of new regulations under the Dodd-Frank financial overhaul passed last year.
The sweeping law was intended to reign in abuses that led to the financial crisis of 2008 and protect consumers from unscrupulous industry practices. Among thousands of pages of new rules are elevated standards for everything from mortgage policies to capital requirements.
"This is one of the hidden costs of Dodd-Frank," Wyatt says. "Maybe half the community banks in the nation will disappear through mergers due to the cost of regulations and the inability to generate fee income."
Less cash from fees isn't the end of the world
Steve Wilson, chief executive of LCNB National Bank and the former chairman of the American Bankers Association, is slightly more optimistic than Wyatt. He predicts that up to 2,000 small banks will disappear in mergers - or about one-fourth of today's total.
Wilson also says small banks may be forced to make hard choices to remain competitive. Free checking may go away at more banks. Hiring could be postponed.
"Smaller banks have been reluctant to increase fees, but ultimately may have to," Wilson says. "We're not public utilities, we're for-profit corporations."
Wilson's own bank mirrors the national pattern. While fee revenue has grown 0.5 percent in three years, it has lagged the thriving bank's overall revenue growth of 19.4 percent, according to FDIC data. As a result, fee income in the first half of 2011 slipped to 20.9 percent of total revenue versus 24.8 percent of revenue in the same period in 2008.
Ryan McCurley, president of Peoples First Savings Bank in Mason, says his bank's fee income took a hit from the regulations capping overdraft charges last year. Now, he's worried about the impact of Dodd-Frank's caps on debit card processing fees charged to merchants.
His bank's fee income has slid 19 percent in the past three years. Still, fees account for only 5 percent of his bank's total revenues, so the slide isn't causing major problems.
"We're growing our overall business, so it's not something we can't recover from," he said.
Mark Weber, president of New Foundation Savings Bank, says his institution has deliberately not relied on fee income for revenue. The region's smallest bank with just $19.4 million in assets, it made a modest $4,000 in fee income in the first half of 2008. This year, fee income was wiped out by $26,000 in losses on sold-off foreclosed properties.
"Dodd-Frank bothers me - but it doesn't scare me," he says. "We're never generated our profit off fees."
Tighter regulations are the bigger problem
So far, most of the public outcry about fees has centered on the nation's largest banks. Bank of America, for example, had tried to charge its customers $5 a month to use their debit cards, in an attempt to make up for revenue lost from other falling fees. As consumer advocates cheered, the giant bank rescinded those plans earlier this month.
Government data shows that smaller banks are less reliant on fee income overall: Fees provide 20 percent of all revenue for small banks, compared to almost 39 percent for large banks. But larger banks collect revenues from a wider range of fee-generating lines of business. For example, the nation's largest banks with more than $10 billion in assets make more money in currency and derivative trading than all their fees charged on consumer deposit accounts.
As a result, smaller banks are more dependent on traditional fee income, such as overdraft fees and other service charges that increasingly are being capped by regulators. Large banks get an eighth of their fee revenue from charges on customers' deposit accounts, while small banks get a third of their fee income from similar charges.
Wilson warns that the cost of the new regulations in both additional expenses and lost revenues are very real challenges. As small banks struggle to comply, there will be a ripple effect in the communities they serve.
"When any community loses their community bank they lose an economic engine and a cheerleader - they're not the same town on the other side of losing their local bank," he says.