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Diamonds, Don'ts, and Dogs of fee income

Community bankers trade ideas on what works, what flops, and what muddles through.

It’s the rare banker today that can boast of a surefire competitive lock, but Jo Heckman can.

It’s in Tok, Alaska, home to 1,400. Tok lies 93 miles from the Canadian border, but up in the 49th state, that’s just next door. The community designates itself as the “Gateway to Alaska.”

Tok’s geographical distinction is being the only year-round way of getting into the state, or leaving it, by road.

Tok’s banking distinction is that it is home to one of the five offices of Fairbanks’ Denali State Bank, a branch that enjoys a special advantage—no competition.

“That’s a fun location to have a branch in,” said Jyotsna “Jo” Heckman, president and CEO of the $234.7 million-assets institution. “It’s a low-cost operation for us, and yet it does a very good job of providing full-service banking to an area where there’s no other bank for more than 200 miles.”

Do you envy Jo Heckman’s competitive environment? You shouldn’t. Isolated Tok doesn’t represent all of Alaska. Fairbanks itself is a hotbed of banking competition, much as any given market in the lower 48.

“We’re about 80,000 people,” said Heckman of Fairbanks, “and we’re overbanked.”

There are just too many financial institutions in Fairbanks, said Heckman. “We have the big ones like Wells Fargo and Key,” she said, “and we also have competitors like Alaska USA Federal Credit Union, the nation’s fifth-largest credit union, plus lots of little credit unions.”

With such advantaged competition, staying open hinges on “taking excellent care of the customer, being the hometown bank,” said Heckman. “My staff’s core group has been with the bank since inception, so we’re pretty well-known people, trusted people, whom customers can come in and feel good about working with.”

However, when people know people, they tend to want to do something for them. And Heckman said part of the “hometown bank” mantle is a tendency to waive fees for good customers.

Given the stiff competition on the rate front that Denali State faces, finding new sources of noninterest income ranks high, but stopping fee-income “leakage” on existing charges can practically be a source of fee income by itself.

“We know we have a very significant portion of fees being waived,” said Heckman, “and we are looking at that and analyzing it.”

Heckman spoke of this challenge during an ABA Banking Journal roundtable discussion, held in the spring, among five members of ABA’s America’s Community Bankers Council. Roundtable participants shared views on fee waivers and more.

Waivers, enemy of fee income
Banking fees come in many different forms, all of which the bankers discussed. These include credit-related fees; transactional fees; penalty fees; fees for traditional noncredit services, such as trust; fees for nontraditional products, such as securities brokerage; fees on convenience and courtesy services, such as overdraft protection; and fees for various specialized services.

The latter might include fees charged, not directly to customers, but to third parties with whom the bank has a working relationship. For instance, roundtable participant Al Garrett, president and CEO of Robertson Banking Co., Demopolis, Ala., $221.2 million-assets, said his bank, declining to make fixed-rate mortgages for its own portfolio, makes them instead for another lender. The bank works with the local customer, gathers information, completes the loan package, and passes everything on to the lender. In return, the bank obtains a fee for doing the legwork.

But charging fees in the first place, and avoiding waivers that erase income gained from fees, play a significant part in the entire picture.
Bankers taking part in this roundtable are members of ABA’s America’s Community Bankers Council

Albert H. Garrett
President and CEO
Robertson Banking Co.
Demopolis, Ala.
$221.2 million-assets 

Jyotsna Heckman
President and CEO
Denali State Bank
Fairbanks, Alaska
$234.7 million-assets 

Matt Packard
Chairman, President,
and CEO
Central Bank
Provo, Utah
$616.6 million-assets 

Thomas J. Romrell
President and CEO
Bank of Commerce
Idaho Falls, Idaho
$730 million-assets
Terry Zeltinger
United Community
Bank of N.D.
Minot, N.D.
$150 million-assets
Romrell There are some services you just can’t charge for, but you have to offer them, things like remote deposit capture, internet banking, debit card service, and ATMs.

I’m a lagger, by choice, in new products and services. It’s great to be first in, but often we find customers aren’t willing to pay for them. Take ATMs—you have to offer free ATMs, in our market. That’s because such things are the sticky stuff that keeps customers. Does this practice produce value? Absolutely, because you pick up other, fee-paying services and other account and loan relationships. We run an efficiency ratio of about 38%, because our plan is to be efficient with what we deal with.

So we have lines of responsibility set for the waiving of fees, so that decision isn’t in the hands of front-line staff. Some services have thresholds where certain staff can waive fees, up to certain levels, and then it goes to a higher level of authority. Typically the manager in the branch makes the decision, but there are some fees that will go all the way up to a middle-level manager before they are waived.

Packard We give our branch offices latitude on waivers, and monitor them to see how those fees are being waived.

It’s a challenge. Traditionally, banks used to charge for their checking accounts and similar services. And much of that’s gone to free. Competition forces the community banker into having to match that. Billpay is the same; we used to charge and now it’s free. Moving forward it’s going to be a continual challenge to come up with fee-based services that you actually charge for.

Zeltinger We’re hoping that the cost of remote deposit technology comes down, as such things generally do over time. We’ve been offering that free to hand-picked customers who have average collected balances of over $100,000. For those kinds of dollars, we figure they are entitled to free remote deposit capture. We want to protect those customers from going somewhere else. “Sticky service,” like Tom said.

But we’ll have to see what happens when the $5,000 average collected balance business banking customer wants remote capture for free, too.

We empower quite a few employees to waive fees, especially if there is an irate customer involved. We want them to be able to take care of that situation right at their level, so that they don’t have to go away from the customer to find some other person to make that decision.

But while we empower them, we watch waivers. We can track them, and we print out reports every so often. We go over those reports, and we see which offices are most guilty. Do that a few times and all of a sudden the waivers start going down.

Romrell The larger you get, and the more complicated your branch system, the harder it is to control waivers unless you put in some structure. You do have to empower your people to waive, because waiving fees, when appropriate, is one of the areas where community banks can outperform the big banks. Because their employees can’t. It’s almost impossible to get a fee waived at a big bank. They just aren’t set up that way. That’s a big advantage for community banks.

But you have to have a balance. That’s because it’s really easy to just be the good guy and give things away. You may feel real good the rest of the day, but you gave away revenues.

Heckman We’ll have longtime customers who come in and say, “But you’ve never charged me” for this or that. Those are tough ones to overcome.

But there’s a business case you need to make at times like that and that’s a good thing to do.
Zeltinger [to Romrell] Is there a loan documentation fee for every loan that you make? And if there is, where is it, in the $50 range?

Romrell Yes, there is a fee on every loan. We just completed a study on loan document fees at our bank. We found that it costs around $400 to produce loan documents. We’re charging consumer borrowers a $150 minimum, and commercial borrowers a minimum of $350, and then it goes up significantly from there, depending on the type of credit.

Packard We’re running a minimum $250 or $500, depending on the circumstances. That basically just covers our cost of processing.

Garrett Our minimum is $75 for a consumer loan and then generally $250 for any real estate loan. Business loans are negotiable.

Going back to remote deposit capture, we’re still working on it. We’re hoping it’s something that we can charge for.

Heckman There’s opportunity there, but we don’t want to outprice ourselves, either. We are very careful to not only provide the benefit, but to make sure that the customer sees the benefit, and also sees that there is a benefit to the bank, too, a win/win on both sides. It’s all part of relationship management.

Consumer checking fees
In this magazine’s 1927 series, “The Diary of a Country Banker,” the banker keeping that record wrote:

“Yesterday, a woman called at the bank greatly peeved because a service charge of fifty cents had been made against her account for the want of an average daily balance of $50 for the month. She was greatly chagrined at ‘the conduct of the bank in making this charge,’ so the cashier sent for her ledger sheet and discovered that she was overdrawn $5.50. Before she left she discovered what it was all about. Complaints against the service charge are few-in fact, we rarely have one.”

As Utah’s Matt Packard noted in the previous section, many such balance requirements and fees have gone by the board in recent years, due to competitive factors. However, overdrafts remain a controversial topic, especially in Washington. Through the summer the banking industry has been evaluating and commenting on a pending regulatory proposal dealing with overdraft that would, if finalized as drafted, impose various measures on overdraft services. (See the Editor’s Column, p. 4, for more.)

All but one of the roundtable bankers’ institutions handle overdrafts and fees for covering them with internal programs. Alabama’s Al Garrett uses a vendor’s program.

‘It’s worked very well for us,” Garrett said. “We were afraid on the front end that we could be confusing customers, because it was so new and so different. But they adapted to it very quickly.” Garrett said the vendor program helps the bank monitor overdrafts so no customer overdoes it.

Indeed, the bank’s marketing materials—including a brochure that can be downloaded from the bank’s website—sets out, in a table, four ways that customers can handle overdrafts. First from the bottom of the table is the bank’s Bounce Protection program, at the standard NSF charge of $29 for each item or other withdrawal; next, a savings account transfer, at $2 per automatic transfer from a linked account; and, next, a link to a line of credit, at the prime rate plus 4%, plus a $50 annual fee.

The brochure’s remaining option, on the first line? “Good account management,” at $0.

The bank allows customers to opt out of overdraft service, and the balances provided to customers, both in person and through electronic banking channels, do not reflect the overdraft limit assigned to the customer’s account. Garrett told fellow panelists that some customers have chosen to opt out. “The rest of them seem to appreciate the service,” he added.

New vistas in noninterest income
Terry Zeltinger’s United Community Bank of North Dakota does business in a market of 37,000 centered around Minot. Agriculture is one of the dominant industries, and, with the relative prosperity in that sector, Zeltinger said, the bank has seen a decrease in loan demand. Area farmers, reaping extra profits, have paid down outstandings, and aren’t borrowing as much as usual.

“That’s a good thing and a bad thing at the same time,” says Zeltinger.

The evolving picture in agriculture is having other effects on the bank. For some years, United Community has rented space to a securities broker who sold stocks and other investments to bank customers.

“Recently,” said Zeltinger, “he has decided that there’s strong demand for futures and hedging, so he is reworking his arrangement with us. It will move to something more than a rental situation, and it will generate more income for us as a result.”

A bonus will be that some area farmers that the bank finances who don’t currently hedge will be introduced to its protective possibilities. “We’re hoping our bank personnel will also become educated about ways that this can benefit the producers that we finance,” said Zeltinger.

Several members of the roundtable reported that their institutions have, or are considering, expanding into wealth management services, in order to generate more noninterest income.

“There are many people who are very wealthy, but they tend to migrate to larger banks,” said Utah’s Matt Packard.
“But a group that often is overlooked are people with under $1 million net worth. There are lots of school teachers and others who want to do some financial planning and build up retirement funds.”

Heckman said that her bank is also interested in this business. “This group is underserved,” she said.

“You have to deal with many more people to make the same revenue that you would from a program for the very wealthy,” Packard continued. However, Packard said he’s convinced that a success can be made in this line over the long term. The bank has devoted a specialist to wealth management for about five years. “We think it’s headed in a good direction,” he said. “It just takes a long time to build up your clientele.”

Remote deposit capture, as it is implemented, is stimulating thinking about noninterest income in some banks. Terry Zeltinger of North Dakota, for instance, said that when his bank added remote capture a few years ago, it started offering ACH origination, as well, and, more recently the bank moved into payroll processing.

Denali State’s Heckman has been pleased with the results of remote deposit capture at her bank, but finds that cash management service is tougher to profit from.

As more and more individuals and companies focus on cost-cutting, she pointed out, there is pressure on how much a bank can charge for certain services. Cash management is one of those services that customers begin to expect gratis.

“It’s an interesting concept, that our customers would want everything free,” said Heckman. “I don’t blame them, except that I have to keep reminding them that we’re not a nonprofit. I also have a payroll to make.”

However, as more and more gets pushed into self-service formats on the web, added Heckman, the harder it will be to charge for many banking services. On the other hand, she pointed out, such automation could help reduce the costs of running branches, by reducing lobby traffic, and trimming item processing costs.

Juice left in old grapes
While the bankers are exploring areas of new or expanded fee-income potential, some continue to garner noninterest income from older efforts that, though nothing new, continue to deliver.

A good example of this is the escrow business, where the bank acts as go-between and processor of loans between private individuals. Heckman’s bank has offered the service for years. In exchange for fees, the bank sets up the credit contract between the customer-lender and the customer-borrower, processes monthly payments, renders annual statements, and produces federal tax reports such as 1099s.

Two other panelists—Idaho’s Tom Romrell and Utah’s Matt Packard—had had experience with escrow, and both noted that there are risk and liabilities involved that must be weighed against the potential fees. In Romrell’s case the service used to be provided through the bank’s trust department.

“We looked at it real hard,” says Romrell, “and we decided to discontinue it, because it just wasn’t profitable for the risk we were accepting. We sold the operation off to one of the area’s title companies.”

The desirability of offering the service may depend on the market. In Alaska, said Heckman, there is still a “last frontier” mindset and that may help make escrow service more attractive.

“People do what they want to do, with whom they want to do it,” she explains. The bank facilitates that.

Getting out of “dogs”
Tom Romrell’s comment about exiting escrow underscores one of the challenges of noninterest income generation: knowing when to hold, knowing when to fold. Not every attempt to bolster fee income lives up to its promise, and some of the bankers spoke of lines of business that their banks either dropped or cut back.

At Robertson Banking, for instance, Al Garrett said that a once-promising asset-based-finance program that the bank obtained from a vendor is being allowed to run off. He found that the risks of the service weren’t worth the potential gain.

“We still have it,” said Garrett, “but we don’t solicit new business.”

Utah’s Matt Packard said that his bank formerly offered Section 125 “cafeteria plan” medical claims processing and related accounts for business customers.

“It’s a very high-volume business,” said Packard. “If you have some sizeable numbers, you can make really good money at it. But we just weren’t at a level where what we were making on it was worth the expense and the liability we had to take on. So we sold it.”

Jo Heckman had a similar experience when the bank tried providing payroll processing services for smaller, mom-and-pop businesses.

“We got out of it because it was a nightmare,” said Heckman of Denali State Bank. Too often, data provided to the bank turned out to be incorrect or incomplete. This left the bank the task of dealing with the aftermath of mistakes that frequently involved the Internal Revenue Service.

“The IRS would be sending the customers notices, they wouldn’t know how to handle it, and they didn’t hand the information off to us,” Heckman relates. Sometimes, by the point a problem came to the bank’s attention, it was too late to fix the matter or to help the customer avoid trouble with the government. 
Steve Cocheo

Steve Cocheo’s career in business journalism has taken him to all 50 states and nearly every corner of banking in institutions of all sizes. He is executive editor of ABA Banking Journal, digital content manager of, and editor of ABA Bank Directors Briefing. He coordinates the popular Pass the Aspirin and First Person features and wrote the booklet series Focus On The Bank Director. He is the only journalist to have sat in on three federal banking exams, was a finalist for the Jesse H. Neal national business journalism awards, and a winner of multiple awards from the American Society of Business Publication Editors.

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