By itself the drop in deposit account service fees caused by the year-old consumer overdraft protections is a minor problem for FNB Inc. of Dennison, Ohio.
The bank's revenue likely will fall by no more than $50,000 this year as a result of the rule change, said Blair Hillyer, the president and CEO of First National Bank of Dennison and its holding company, the $185 million-asset FNB.
But in light of all the other blows to community banks over the past couple of years, from the Durbin amendment to tougher scrutiny by examiners, Hillyer is planning drastic measures — including layoffs and raising interest rates on loans.
"When your earnings are already down, and you take two or three hits like this, it really starts making your owners wonder if this is something they should be doing," he said.
Analysts say the changes are hurting community banks more than the rest of the industry. For banks with assets of $500 million or less, first-quarter revenue from service fees on deposit accounts dropped 12.3%, to $544.4 million, compared with a year earlier, according to Federal Deposit Insurance Corp. data.
For banks with assets of less than $100 million revenue from those fees fell 14.1% in the three months, to $90.04 million.
The figures measure service fees on deposit accounts, which include overdraft fees. Sean J. Ryan, an analyst at Wisco Research, wrote to clients last year that "overdraft fees account for more than half of deposit service charges at consumer-oriented banks."
The free fall began July 1, 2010, when the overdraft fee regulations, which were revisions to Regulation E, took effect. Banks must give customers the option of participating in overdraft protection services.
The requirement applies to debit card point of sale purchases and to ATM withdrawals, so banks were not stripped of all sources of fee revenue from overdraft protection.
Banks can still charge overdraft fees on things like bounced checks.
Still, many consumers have changed their behavior and decided they do not need overdraft protection, prompting the loss of fees.
Since July 1, banks of all sizes nationwide have lost about $1.6 billion of service fees from the new rule, according to a study by Market Rates Insight.
The study did not break out the numbers by banks' asset sizes, said Dan Geller, executive vice president at the San Anselmo, Calif., company.
Federal data shows that at banks with assets of $500 million to $1 billion, revenue from overdraft fees fell 27.8% year over year in the first quarter, to $222.9 million.
For banks with assets of $1 billion to $10 billion the revenue decline was 8.1%, to $809.4 million.
Wall Street is taking note of the impact on bank profits.
Kevin Fitzsimmons, managing director at Sandler O'Neill & Partners, estimated that a 10% hit to deposit service charges translates to a 3% median reduction to his firm's 2011 earnings per share estimates for banks.
Because account balances have been growing, the revenue drop caused by the loss of overdraft fees has been masked, said FIG Partners managing principal Christopher Marinac.
Another concern, he said, is that it's still not known what procedures or changes community banks have put in place to handle the decline, so it is unclear whether they are adequately prepared.
"You could argue that another cost of Reg E is additional expenses in salaries, and in consulting and legal services," Marinac said.
"You'd have to really get into the bowels of a company to learn that," he continued. "Unfortunately, we don't know the full answer yet."
Community banks are having a harder time than big banks in grappling with compliance costs, Marinac said.
"This is almost like a play that's partially written and the first act is, 'Everyone took a big haircut,' " he said. "The next act will be that this took a swipe at their profits."
One way to measure how community banks are coping is to study changes in head counts.
If a bank added only one or two new compliance employees, "that's something you could probably stomach," Marinac said. If a bank needed to add five or six employees, however, it could be a warning sign.
Not all community banks view overdraft fees as a source of revenue, said Cary Whaley, vice president of payments and technology policy at the Independent Community Bankers of America.
At some banks, branch managers analyze each transaction on a case-by-case basis to determine if an overdraft fee should be assessed.
"That's meant to help the customer, not generate fee income," Whaley said.
Even banks that use automated systems for levying overdraft fees have conditions built into their software that waive overdraft fees for small-dollar transactions, Whaley said.