|Eroding revenues, rising costs (January 2011)|
Coping with Dodd-Frank: Bankers speak out
AN ABA BANKING JOURNAL ROUNDTABLE
Community bankers not only see existing income streams drying up, but hold off on exploring new ones
BY STEVE COCHEO, EXECUTIVE EDITOR
Dodd-Frank is like distant thunder,” says California banker Greg Patton. “You’re afraid of it, but you have no way to do anything about it.”
Carolyn Mroz chooses another natural analogy: “The Dodd-Frank Act is the 800-pound gorilla in the room. Everyone knows that it’s there, but no one knows what the gorilla is going to do. So you’re kind of in limbo.”
Patton is president and CEO at $100 million-assets Sierra Vista Bank, Folsom, Calif., and Mroz, president and CEO of $157 million-assets Bay-Vanguard Federal Savings Bank, Baltimore. The pair were among six bank and savings institution members of the America’s Community Bankers Council who met with ABA BJ in mid-November for a roundtable discussion regarding concerns and early strategies for dealing with the mammoth legislation.
The six leaders met before most of the first wave of Dodd-Frank proposed regulations had come out. Of those that have been published so far, such as the Federal Reserve’s debit interchange proposal, the only “satisfaction” has been confirmation that Dodd-Frank really is turning out to be as bad as community bankers expected.
“In talking to my congressional representatives, they were so excited by it, they were tone deaf,” complains Kevin McCarthy, president and CEO at $450 million-assets Newport Federal Savings Bank, Newport, R.I. McCarthy’s pleas that representatives look at the impact on community banks were ignored. “I’ve looked at community banks as the good guys through this crisis,” says McCarthy. “Yet the reward is they ram this down our throats.”
The bankers’ issues with Dodd-Frank boil down to three broad impacts: 1. in combination with other developments in 2010, a severe impact on community bank revenue at a time when banks need every cent they can make; 2. a sharp and cumulative increase in regulatory burden; and 3. alleged carveouts and considerations for smaller banks that no roundtable member believes.
(This print report concentrates on the first element. Read an expanded version, or listen to a podcast of excerpts, at www.ababj.com)
Regarding carveouts, “we’re not immune,” said Sharon Burran, president and COO, $400 million-assets Woodhaven National Bank, Fort Worth. She was referring to community bank exemptions to such Dodd-Frank features as examination by the new Consumer Financial Protection Bureau and the Durbin amendment’s restriction on debit interchange income. “If this new regulator doesn’t like what the Comptroller’s examiners do, then it can send its examiners down to examine us.”
New Hampshire banker James Tibbetts worries that elements of the Dodd-Frank Act intended to apply solely to larger institutions—such as elements of the law pertaining to compensation programs—will become “best practices.” And best practices have a way of becoming expectations, if not de facto requirements.
“It all goes downhill to the community banks,” says Tibbetts, president and CEO at $223 million-assets First Colebrook State Bank, Colebrook, N.H.
Income going, income gone
When delving into Dodd-Frank’s impact on community banks, it’s quickly apparent that while some parts hit them in new places, others hit in them where they already ache.
The Durbin amendment represents one punch that is part of a combination. Several bankers point out that debit interchange income—portrayed by some as mainly having an impact on larger banks—hits community banks hard as well.
When asked what single part of Dodd-Frank he’d remove if given the power to strike it, Richard Hoban of Frandsen Financial Corp., Arden Hills, Minn., has no hesitation: “I would want to remove the Durbin Amendment, for sure, that’d be number one on my list.”
“It’s very worrisome for me, the loss of revenue,” continues Hoban, president and CEO at the $1.3 billion-assets multibank holding company. “Interchange income is the third-largest line item on our income statement, for noninterest income. And it’s been the fastest-growing line item over three years.”
“Interchange is one of our largest noninterest income items too, and, like Rich says, it has grown,” says Sharon Burran of Texas. “More people are using debit cards and, of course, the young people, that’s all they pay with.”
Unfortunately, Burran says, there’s another side to the equation—debit card fraud continues to rise—“and we are responsible for the cost of the fraud losses.”
“So, somehow, income has to offset whatever losses we take,” Burran continues. “We really need to keep that balance intact.”
In theory, Dodd-Frank gave community banks a carveout from the Federal Reserve’s pending regulations (comment deadline, Feb. 22).
“There’s really no such thing,” insists Burran. “They say we’ve got a carveout, being under $10 billion in assets. But we have to compete in the market with the larger banks. And if we do not lower our fees and all the big banks do, then no one will come to us. We have to compete.”
“We’ll have to adapt to the price leaders,” agrees Richard Hoban.
Where will this lead?
But there’s more to the objections than immediate pain.
New Hampshire’s Jim Tibbetts worries about the precedent. “What bothers me is the idea that one of our regulators is going to set price controls on one of our products. That opens the tent door. I’ve got the very uncomfortable feeling that we’re losing our ability to price our products and services.”
Hoban sees the interchange legislation blocking further technological improvements in payments systems, through removal of income incentives. Banks won’t invest capital in activities where it lacks a decent return, he argues. “With the government taking that flow of capital away by decreasing revenue, it’s going to stagnate,” says Hoban.
Greg Patton attacks the premise of this part of Dodd-Frank. “If the objective was to help the consumer, show me where the money is going to wind up in their pockets,” he says. “It won’t. The shift will be from the entities that created the opportunity, who are responsible for fraud costs, business development, and research and development and distribution. So Robin Hood has arrived in Washington—but I don’t think the good people of Nottingham will get the benefit.”
New ventures on hold
Interchange is only the most obvious income effect of Dodd-Frank. There’s more.
Patton, for instance, says that the combination of the SAFE Act, regarding mortgage banking, and pending Dodd-Frank compliance burdens convinced Sierra Vista’s management not to launch a mortgage banking operation. “We decided that the compliance burden was too significant and outweighed the potential noninterest income stream,” Patton explains.
Indeed, the growing compliance burden affects more than the direct costs that hit the bottom line. The costs of management distraction must also be accounted for.
“I find myself getting a little bit more involved with compliance stuff,” says Newport Federal’s Kevin McCarthy. “It kind of bubbles up, and distracts you from thinking about business strategies. You’re not bringing in any revenue through it.”
The coming compliance burden has kept Carolyn Mroz’s Bay-Vanguard from launching new products. “The unknown factors—what will the accounting cost us, what will legal cost us, what will compliance cost us” holds them back, she says. “We reason, ‘Let’s not go and start anything new, because we don’t know what our budget next year will be, to cover those costs.”
Final nails in free checking
Likewise, the cumulative impact of federal overdraft restrictions, coming interchange regulations, and more have led bankers to completely rethink pricing of checking accounts.
Hoban’s organization is introducing a new e-checking account that will use a “green” angle to promote its online elements. Existing customers will be offered the option of converting to this new account or going back to paying for checking.
“One of the messages we have to drive home to Congress,” says Mroz, “is, ‘You thought you were doing something good. But here’s the real deal’.” •
The electronic version of this article available at: http://www.nxtbook.com/nxtbooks/sb/ababj0111/index.php?startid=14
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