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How Big A Fee-fdom For Community Banks?

Posted By Vincent Valvo, CEO at Agility Resources Group, Friday, February 10, 2012
Updated: Tuesday, November 19, 2013

Are New England's community banks missing the boat when it comes to fee income? Or are they setting the standard for the rest of the nation's hometown institutions?

Fee income is one of those lightning rod issues for banks. As the pool of qualified loan borrowers (i.e., those that actually have some reasonable likelihood of re-paying their loan) has shrunk, banks have had to look at other sources of revenue to maintain profitability and keep on the right side of regulators.

The holy grail of found money for banks is in fees. The airline industry has pretty much written the bible on making everything a fee, and finding creative ways to dream up new fees. Banks have simply become apostles of the faith. But, as with any group of worshipers, some are more fervent than others.

The largest banks have been the most vocal, and most ardent, in putting up new fees. There are checking account-opening fees, overdraft fees, monthly maintenance fees and so many more. The public often quietly puts up with these little acts of extortion, all while seething through gritted teeth. The big banks get away with the fees because consumers have been beguiled by massive marketing campaigns, and because they like the convenience of the big banks' networks. Plus, once a bank has a customer, that depositor is unlikely to change institutions without provocation. Getting new checks and changing online account information is just such a hassle…

But consumers every now and then show a little mettle, especially when a fee just seems a tad too egregious. The latest and most telling example was Bank of America's ill-fated decision to start charging people for their debit cards. Consumers howled, network news anchors made great sport of the clash, and BofA backed down.

Community bankers around here will tell you they not only wouldn't have made such a blunder, but that they distinguish themselves from big banks by shying away from so many fees.

And the data bears them out.

Basis Bias

For the past five years, non-interest income as a percentage of total assets at New England banks with less than $1 billion in assets was running about 15-20 percent below that of local banks with between $1 billion and $5 billion in assets, according to an analysis by bank advisory firm Ostrowski & Co.

But should our community bankers be proud of the fact that they didn't load consumers up with additional fees, or should they be chastised for leaving money on the table?

Although being granted a banking charter brings with it an obligation to community reinvestment, a bank isn't a social services agency. Its primary mission is to make profits. While New England community banks have been averaging non-interest income/assets ratios around 70 basis points, their counterparts in the rest of the country were consistently coming in around 10 basis points higher. Community bankers in Idaho, it seems, had no trouble sticking the local farmers with a few more fees.

If financial pundits were making the call a couple of years ago, they would have said bankers in the Bay State weren't maximizing their fee revenue. But as we've moved through the economic recession, a different picture has emerged.

For banks under $1 billion nationally, non-interest fee income has been a declining revenue stream. Although the percentages were higher than what New England bankers got, the national ratio has been in an unstable decline. From about 80 basis points in 2006 and 2007, the national benchmark slid to 72 basis points in 2009, and has only moved slightly since then.

While the national average was 80 basis points, New England's was substantially lower, at 56 and 61 in those two years. It hit a local low in 2009– the height of the economic collapse– at 45 basis points. But it's since risen significantly, to 72 basis points in 2010 and 78 in 2011. Coincidentally, those are the same averages that community banks nationally sported in those two years. So it looks like New England bankers' strategies have been growing fee income in a difficult period (without overburdening their customers), while their counterparts across the country have been coming to the conclusion that maybe New England has the right mix, after all.

If that's true, though, heaven help the customers of big banks. While the 2011 fee income national average for banks over $5 billion is 132 basis points, it's 216 for New England-based banks of a similar size. They may not be charging debit card fees, but they're making up for it in a lot of other hidden charges.

Tags:  fees 

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