The Incredible Shrinking Vault

Regional banks shed costs as their industry contracts

Back Article Dec 1, 2011 By Robert Celaschi

Big banks have been drawing heat this year. Some is focused, such as the clamor over monthly debit card fees being proposed or tested by several national banks. Some is diffused, such as that from the apparently leaderless Occupy Wall Street movement and its nationwide imitators.

Bank of America attracted much attention after announcing 3,500 layoffs and 600 branch closings earlier this year. But it is not alone. The number of bank branches nationally started flattening out several years ago, the Boston-based research firm Celent reports. Banks of all stripes are cutting costs.

“I think what has driven that has been to a great extent the Dodd-Frank legislation,” says William Martin, president and CEO of Bank of Sacramento. Known primarily as a Wall Street reform bill, the Dodd–Frank Wall Street Reform and Consumer Protection Act put tighter lending limits on big banks and took away some avenues of revenue.

“This is industry-wide, but it puts on additional compliance costs. The costs are going up, and the revenue streams are being limited,” Martin says. “So they have two courses of action: They can start raising fees on other products that aren’t as tightly legislated … or cut expenses.”

Some banks are even charging customers for parking cash in the vaults.
“When the European crisis hit in August, Bank of New York did start charging large depositors of more than $50 million 13 basis points,” Martin says. Essentially, Bank of New York and others are passing along the cost of FDIC insurance. While it has been done before, the practice is seeing a resurgence.

Small banks are trying to shave costs as well.

“What we are doing is looking at internal processes that we can centralize more. Not customer service or customer-facing things, but more of our branch processing items,” says Louise Walker, president and CEO of Dixon-based First Northern Bank.

For instance, couriers used to go from branch to branch to scan deposited checks. The branch can now capture an image through its own scanner and send it to a central location. Martin blames government regulators as much as Wall Street for the financial collapse of 2008 and beyond, but he’s more than willing to take customers who are disaffected by the large institutions.

“We always have businesses moving from Wells (Fargo) or Bank of America or U.S. Bank, but it has accelerated,” he says. “We’ve grown just this year from $370 million to $410 million in total assets. Big deposits are flowing in.”

The individual banking customer is getting antsy as well.

“Probably the No. 1 question we get when we are out in the community: ‘Does First Northern have plans to institute a debit card fee?’” says Walker. There are no such plans, she quickly adds.

Deluxe Corp., a major printer of checks, is trying to cash in on customer ire with a new product called SwitchAgent. Introduced in October, SwitchAgent is a combination of technology and live assistance that helps people move automatic deposits and payments from one bank to another. The company cites a study by J.D. Power & Associates that shows 66 percent of account holders would consider switching banks if not for the hassle.

“With the bigger banks behaving as they are, I do think it is going to drive businesses and consumers away,” says bank consultant Ruth Razook, CEO of RLR Management Consulting Inc. in La Quinta. “It’s funny, because I have talked to a lot of professionals and a lot of banks who are so upset about what the big banks are doing with the fees. I’m a little surprised that over five bucks a month people are so irate.”

But big banks, where a lot of people have accounts and loans, can lose a lot of customers and remain big. Bank of America, even after closing nearly 600 branches by 2014, would still have about 5,000. And not all the majors are following that path.

“Bank of America is taking the brunt. Wells Fargo, a little bit. U.S. Bank is almost a super-regional; they kept their skirts cleaner than some of the other banks,” Martin says.

In the Sacramento area, U.S. Bank has seen growth in both deposits and loans, confirms Tim King, president of the bank’s local market. In the next couple of years, it plans to add about five new branches to the 50 already in the region.

“I still think they have a relatively strong client base,” King says. “We’re able to differentiate ourselves against a Bank of America and a Wells because of our strength. In terms of how Wall Street looks at banks, we are No. 1 in almost every value. And clients look at it because our cost of funds is a lot lower.”

It costs U.S. Bank about 51 cents to earn a dollar, and that’s partly a function of size. For most large banks it’s between 55 cents and 60 cents, a 2009 study by consulting firm Deloitte shows. For banks with less than $1 billion in assets, it often costs 70 cents or more to earn a dollar.

Community banks make a point of having local decision makers. Big banks make a point of having some longevity.

“You have to remember that prior to the meltdown you had a pretty healthy stable of community banks,” King says. Smaller institutions made up many of the 157 banks shuttered last year nationally by the Federal Deposit Insurance Corp.

“When I think about just here locally, we continue to be more and more on the radar for the business clients,” King says of his own institution.

Many people and small businesses care little about their banks’ overall standing as long as their local branch remains open and staffed, says Bart Narter, senior vice president of Celent’s banking group. Even that local affinity is less important because of online services and direct deposit.

A small business may value a local branch if it has to move a lot of cash at the end of the workday, but otherwise proximity isn’t that vital, Narter says. A large business is likely to have its own scanners installed to send the check images electronically to the bank.

“In the long term, Celent expects fewer branches that are smaller and much more highly automated in order to provide good sales and service capability with fewer staff,” a 2009 survey report states. “Branch expansion, when it occurs, will be highly targeted.”

The shrinking number of banks in the current recession isn’t unusual in itself. In good years and bad, small banks merge into bigger banks. Usually consolidation is followed by a new cycle of startups, but not this time.

The FDIC approved two new banks last year in the entire U.S. The state Department of Financial Institutions had no applications for new banks to process through the first half of this year, a significant change from a few years ago; it approved 22 new state bank charters in 2005.

One of the few organizations to show interest in starting a new bank is the state of California itself. This summer the Legislature passed Assembly Bill 750, which would have formed a special panel “to consider the viability of establishing the California Investment Trust, which would be a state bank receiving deposits of all state funds.”

As described in the bill, the trust would support economic development, provide financing for housing development, public works and educational infrastructure, provide stability to the financial sector, provide state government banking services, lend capital to specified financial institutions, and provide for excess earnings of the trust to be used for state general fund purposes.

Gov. Jerry Brown vetoed AB 750, but his stated objection was procedural rather than political: He didn’t want yet another special blue-ribbon panel.

“This is a matter well within the jurisdiction and competence of the Senate and Assembly Banking Committees,” Brown wrote in his veto message. “Rather than creating a new entity, let’s use the resources we have.”

North Dakota currently has the only state-owned bank in the country. Founded in 1919, Bank of North Dakota has been a moneymaker for the state. Other states are considering the idea, but Martin at Bank of Sacramento doesn’t want any of it.

“A state-owned bank would turn into a way for government subsidization of ventures. You’d have Solyndras all over the place,” Martin says, referring to the bankrupt San Francisco solar panel firm backed by $535 million in federal loan guarantees. “It would basically be seed capital … taking taxpayers’ money and putting it out in a venture capital sense. I think those things would be doomed to failure.”

For now, business customers will have to borrow money the old fashioned way: by meeting the bank’s terms.

“There are a lot of complaints — again, from politicians primarily — that the banks are not putting the money out,” Martin says. “Believe me, banks are all looking for business. Because of the recession, we are being careful of who we loan to because there are a lot of businesses on shaky ground financially. But believe me, the attitude in the industry is to expand the loan portfolios.”

Bank of Sacramento spent the past four years cleaning up its loan portfolio, watching it shrink from a high of about $267 million in 2009 to about $230 million today. Martin wants to get that number back up, because collecting interest on loans is how a bank earns money.

“Banks can’t create the demand. That’s like pushing on a string. Unless the economy turns more vibrant we can’t just go force the money on consumers. They’ve got to have a reason for it. That’s the first question we ask: What do you want it for?”

Whatever comes of it, there is a divide in banking right now between the Wall Street banks and the community banks, says James Beckwith, CEO of 50-employee Five Star Bank.

“You certainly saw it in the Dodd-Frank bill in how there was different treatment. There seems to be a lot of anger out in the market for a lot of the majors,” he says. “I don’t know if I speak for every community banker, but we’re doing our own thing in spite of what the majors are doing. Is it going to create opportunities for us? Possibly.”

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