Finding More Fee Income


Community banks look to replace falling overdraft protection program revenue

By Jake Anderson

In October, roughly 200 community bankers nationwide completed an ICBA Industry Report Card survey to share their thoughts about the state of their individual banks and the industry as a whole as they headed into 2014. Findings from the survey—along with a thorough analysis of trends, opportunities, and challenges in community banking—appeared in the January 2014 issue of ICBA Independent Banker. This online exclusive further explores one aspect of the results from that survey.

Fees derived from non-sufficient funds simply aren’t what they used to be, but they remain an important source of income for community banks nonetheless.

In fact, roughly half of respondents to the ICBA survey say that overdraft fees constitute their most profitable non-depository and non-lending product, despite regulatory changes that have crimped their income potential.

Bill Trezza, CEO of Bank of Agriculture & Commerce, a $496 million-asset bank with 10 branches in north-central California, says non-sufficient fund fees are profitable for his bank, but they generate about a third as much money as they did prior to the recession. While the economic downturn led to decreased consumer spending, which may account for some of the change, Trezza attributes more than half of the fee decline to new regulations.

For example, rules limiting overdraft protection programs had a significant impact. A FDIC regulation that requires banks prohibit more than six overdraft fees in a six-month period hurt Bank of Agriculture & Commerce’s overdraft protection program, which automatically moved money from one account to cover another depleted amount for a fee. Now when the customer uses this convenience more than six times, the bank is required to address that person before it happens again.

Bank of Agriculture & Commerce had “all kinds of customers that used it prodigiously, and didn’t care what it cost them because it’s convenient,” but the rules limit the income the bank can make on overdraft programs, says Trezza.

To compensate, the bank is looking to bolster its investment business, and it has expanded reward programs that entice people to spend more on their debit cards. “There’s no silver bullets out there,” Trezza says. Boosting fee income will simply require “finding more ways to get more business out of what we’re already doing.”

Kathy Grasty, chief financial officer of $50 million-asset New Horizon Bank in Powhatan, Va., says debit card and overdraft fees brought in roughly the same amount of revenue in 2013, but non-sufficient funds income is more profitable when accounting for the expenses of operating a debit card program. At the end of the day, however, interest income “is really the backbone of the bank,” she says.

That’s a common refrain among community bankers, says Tim Yeager, associate professor in finance at the University of Arkansas’ Walton College of Business in Fayetteville, Ark.

The community banks he speaks with “don’t like to nickel and dime customers,” but rather, they’re focused on sustaining loan volume and margins.

Jake Anderson is a writer in Minnesota.