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Banks make moves to deal with fallout of regulatory changes

By Danielle Douglas
Monday, October 25, 2010

As the banking community wades through the murky waters of regulatory changes, Washington area institutions are forging ahead with strategies to offset compliance costs, falling fee income and tepid loan demand.

Bankers across the region are ramping up the promotion of product lines to existing customers while expanding business offerings, such as corporate cash management and retirement planning, that are not heavily reliant on lending.

That's not to say local institutions are not eager to lend, especially to small businesses with good credit. Yet there is tension between what borrowers want, such as a credit line to pay bills, and what banks are willing to lend for, such as expansion of a business.

Bank of America announced plans to hire 1,000 bankers over the next two years to help increase small-business lending in a number of major markets, including D.C. As a part of the new initiative, bankers will offer guidance on retirement planning, cash management and accounting.

Broadening the scope of small-business offerings has become an attractive proposition for a number of banks. Capital One, for instance, is marketing its call center capabilities to mom-and-pop shops. The McLean bank doubled its staff of small-business bankers in the mid-Atlantic, where it recorded a 20 percent year-over-year increase in small-cap lending in the third quarter, according to James Jackson, head of the bank's branch distribution.

At Wachovia, the emphasis has been on educating mom-and-pop shops on opportunities in the market. One of the bank's recent loan transactions involved a doctor in Leesburg, who was counseled on the advantages of purchasing his office space in a down market. Those kinds of deals "puts money back in circulation," said George Swygert, Wachovia's regional president for greater Washington.

With more than 80 business lines to promote, Swygert expects to increase the cross-selling of products to customers, with a particular focus on insurance offerings in the coming year. And starting this quarter, Wachovia plans to kick off its "regional bank private bankers" initiative, offering a suite of financial planning services to wealthy Washington area customers.

Swygert expects these efforts will help counterbalance the toll that reform may have on the bank's balance sheet. Pressure is already being felt from the new restrictions on overdraft fees. Revenue for Wells Fargo, which acquired Wachovia in late 2008, slipped from $21.4 billion in the second quarter to $20.9 billion in the third quarter, due in part to a decline in that fee income.

Both Wells Fargo and Bank of America are changing the pricing model of their checking accounts to generate new revenue. For its part, Capital One plans to "evaluate products going forward, but as a diversified company, we're not dependent on changes in fee structures, like our competitors," said Jackson. Capital One does charge a host of account fees, but its lucrative credit card business offsets the need for higher banking fees.

Meanwhile, community banks have largely resisted tacking on new fees to their product offerings. Some, such as Burke & Herbert Bank, expect to attract the disenchanted customers of larger banks with their minimal fee structure.

"A lot of the larger organizations are dependent on fees related to debit cards, but that has never been a big part of our earning machinery," said Scott McSween, president and chief operating officer at Burke & Herbert.

Burke & Herbert is embarking on a $2 million infrastructure upgrade, replacing ATMs, remodeling a few branches, and redesigning its Web site. The redesigned Web site will be unveiled in January, while customers can expect to see new ATMs next spring.

The full impact of the Dodd-Frank Act is still uncertain, as regulators have yet to create the actual rules tied to the provisions in the legislation. Bankers, however, are quite certain that Dodd-Frank will lead to more scrutiny, increased cost of capital and higher compliance expenses.

In anticipation, Cardinal Bank has enlisted a new compliance officer, with the possibility of adding three more, according to Bernard H. Clineburg, chairman and chief executive of the McLean bank. "The only black cloud hanging over us is not so much more regulations, [it] is that we don't know what they are going to be," he said.

Until the fog lifts, Clineburg is keen on expanding the bank's offerings and has hired several new loan officers. Cardinal, he says, has also been aggressively going after affluent customers and government contracting and is exploring whether to add to its branch network.

"Competition is brutal from the big banks," he said. "You can tell that they are coming back, they had basically shut down for almost a year and we were taking their customers."

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