Banks Turn Up Focus on Fee Income

Fees Help Banks Offset Losses

Last updated Saturday, March 1, 2008 4:07 PM CST in Business

By Kim Souza
The Morning News

Several Wall Street banks recently jacked up ATM usage fees. J.P. Morgan Chase & Co. and Bank of America now charge non-customers $3 each time they use one of their ATMs.

Arkansas state law prohibits banks from charging more than $2 for foreign ATM usage. About half of the local bank's surveyed charge foreign ATM fees as well as their own customers who use other bank's ATMs. A few of the banks said they refund ATM charges for certain customers.

None of the area banks contacted plan to raise ATM usage fees this year.

The Fee Pool

When a bank needs to increase profits, one way is to raise fees because the extra income generally falls straight to the bottom line, Dominick said.

"Large banks have been moving toward more fee income for the last few years as a way to diversify income opportunities," said Greg McBride, economist with Bankrate.com

He said those banks are better positioned to weather market downturns when loan demand weakens.

While most banks doing business in Northwest Arkansas are considered community banks, some have been tapping into the fee income pool.

Pine Bluff-based Simmons First National Bank - $1.3 billion in assets - recently reported non-interest income of $11.8 million, up 9.7 percent in the fourth quarter, from the previous year.

As a credit card issuing bank, Simmons collected an additional $598,000 in credit card fees in the three months ending Dec. 31, a 21 percent jump in the year-over-year period.

During a recent earnings call, Simmons CEO Thomas May told investors the increase resulted from a higher volume of credit and debit card transactions.

Simmons collected an additional $103,000 in other service charges related to automated teller machine usage in the fourth quarter. The bank charges its customers $2 per transaction when they use another bank's ATM.

Little Rock-based Bank of the Ozarks - $2.5 billion in assets - recently reported its total fee income jumped nearly 12 percent in the year-over-year period thanks to record service charges on deposit accounts, up 19.3 percent. The bank collected $12 million in fees from its depositors in 2007, with $3.17 million of that collected in the fourth quarter.

Bank of the Ozarks charges its depositors $31 for each overdraft and $1 for foreign ATM usage. The bank last raised its insufficient fund fee by $1 in February 2007.

Susan Blair, vice president for Bank of the Ozarks, said most of the profits resulted from larger stipends, known as interchange fees, paid by debit card processing companies due to heavier debit card usage.

"When our customers use their debit cards the merchants accepting the cards pay a processing fee to Visa. We receive a portion of that income," Blair said.

She said debit card usage continues to increase as more merchants now accept that payment option, resulting in a boost to the bank's profits.

Several banks surveyed reported larger interchange fee collections than the previous year, Arvest Bank - $9.7 billion in assets - collected $23.7 million in checkcard fee income last year, 22 percent higher than the previous year. Liberty Bank - $2.2 billion in assets - added $2 million to its coffers from interchange fee collections in 2007, 65 percent more than the bank reported in 2006.

It wasn't just the region's billion-dollar banks who benefited from more transaction fees.

First State Bank - $318 million in assets - collected $512,000 in interchange fees compared to $324,000 in 2006, a 58 percent gain.

Overdraft Funds

Insufficient-fund fees nationwide rake in an estimated $35 billion a year, roughly 70 percent of the total fee income U.S. banks get from their customers, according to Bankrate.com.

Not all overdraft fees charged by Northwest Arkansas banks are created equal, ranging from a low $15.93 per item to a high of $33.

Bentonville-based Arvest Bank garners the lion's share of deposits - 33.9 percent- in the Fayetteville, Springdale, Rogers metropolitan statistical area, according to the latest summary by the FDIC. Aside from Rogers-based ANB Financial, no other local bank had more than 6.5 percent of the area's deposit marketshare.

Arvest Bank also has the lowest overdraft charges in the region ranging from $15.93 to $17.43 depending on account type. Even the lower fees charged by Arvest Bank helped push fee income to $246 million, up 8.8 percent over 2006 fee income, according to the FDIC.

Only two other banks in the region, Bank of Fayetteville and the Bank of Gravett charge less than $20 per insufficient-fund item. The Bank of Fayetteville's fee income jumped 24 percent in the year-over-year period, helped by loan origination fees and trust department services, CEO Mary Beth Brooks said. The Bank of Gravett was one of six banks to report lower fee income in 2007. The bank wrote fewer loans.

Industry watchers urge consumers to read the fine print when they open an account.

Bank of America, a large national bank with offices in the region, charges $20 per overdraft item for the first two days, but the rate jumps to $35 per item each day afterward. ANB also utilizes a similar step-up system, charging $24.27 per item for two days and jumping to $27.50 on day three.

Dominick said although banks often come under fire for overdraft charges, customers should realize when they overdraw their checking account they are essentially borrowing money from the bank and a fee is justified.

The Arkansas State Bank Department said overdraft fees are set by local boards and can be raised or lowered without outside regulatory approval.

Competition Favors Consumers

While banks looks for more fee income opportunities, they also run the risk of customer backlash, especially in an area with many competing banks, Dominick said.

Between 2004 and 2006, the Arkansas State Bank Department approved four new charters and dozens of new branch locations in Benton and Washington counties.

With three to four banks now located at most major intersections across the region, demand for deposits has reached an all time high.

Dominick said Northwest Arkansas consumers can benefit from a competitive marketplace if they shop around.

Almost all of the 23 banks surveyed offer some form of free checking account with no minimum balance. Many of the free checking accounts include bill payment options, online banking and a few banks provide checks at no extra charge.

"Banks in their thirst for local deposits are actually losing money on smaller accounts if they don't charge some type of monthly service charge," Dominick said. "All banks have to eventually weigh the risks associated with the rewards they are handing out."

Harrison-based First Federal Bank recently set the bar high with a free, interest-bearing checking account called Advantage checking.

The account has no minimum balance and does not charge a monthly fee. The bank advertises a 5.07 percent annual percentage yield, plus foreign ATM refunds up to $25 per billing cycle and throws in the free checks.

All the bank requires is that customers use their ATM to make at least 12 purchases per month and one direct deposit or automatic bill payment per month. Also, the bank will send electronic statements instead of a paper statement at the end of each billing cycle.

When asked how the bank can afford to give so much away, First Federal President Ross Mallioux said the bank saves money - no paper, ink, stamps, labor, etc. - using paperless statements.

The move to online banking and the increased use of debit cards over checks also saves the bank money, which the bank will pay its depositers in hopes of building new long term relationships, he said.

"When a customer goes to Target or some other merchant and uses their debit card, the bank collects a fee, but when they write a check it costs the bank money," Mallioux said.

While the bank offers consumers several full service locations, many customers are content to bank online, he said. Online banking is a more profitable way for banks to grow business without building and staffing a new branch location, according to Mallioux.

Infobox 1

Banking Fees In Northwest Arkansas

Bank Foreign ATM* Overdraft Deposit Box Rental

ANB $0 $24.27 $21

Arvest $2 $15.93 $18

Bank of America $2 $25 $45

Bank of Arkansas $0 $25.75 $15

Bank of Fayetteville $2 $18 $17

Bank of Gravett $0 $17.50 $15

Bank of Rogers $2 $20.97 $25

Bank of the Ozarks $1 $31 $22

Chambers Bank $0 $31 $15

Delta Trust Bank $1 $25 $20

First Federal Bank $1.50 $25 $14

First Security Bank $2 $25 $32

First State Bank $2 $25.65 $24

First State Bank of NWA $0 $25 $12

First Western Bank $0 $28 $20

Legacy National Bank $0 $22 $18

Liberty Bank $0 $29 $45

Metropolitan National Bank $2 $29.74 $30

Parkway Bank $0 $27.41 $30

Pinnacle Bank $0 $23.32 --

Regions Bank $2 $33 $45

Simmons First National Bank $2 $27 $20

United Bank $0 $26 $18

* Foreign ATM charges are incurred when consumers use an automated teller machine not owned by their bank.

Source: Respective banks

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