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Overdraft Fees: 10 Banks Hurt by 'Opt-In' Law

Banks that rely heavily on deposit service charges could face declining revenue.



) -- With the August 15 deadline having passed for banks to get existing customers to opt-in for continued

overdraft protection

on ATM and debit card transactions, the big question for investors is which banks have the most at stake?


has compiled a list of the ten large banks that derived the highest percentage of second-quarter operating revenue from service charges on deposit accounts.

The list is based on data from the Consolidated Financial Statements for Bank Holding Companies (FR Y-9C) filed with the

Federal Reserve System

, as provided by

SNL Financial

for bank holding companies with at least $10 billion in total assets.

Unfortunately, the bank holding company statements don't break-out the ATM and debit card overdraft fees from other deposit service fees, but the numbers for the banks deriving the greatest part of total revenue from service charges on deposit accounts are strikingly high when compared with those just a bit lower on the list. The Federal Reserve data allows for a uniform comparison.

Here are the ten U.S. bank holding companies with the highest percentages of operating revenue coming from service charges on domestic deposit accounts during the second quarter:

SNL Financial defines operating revenue as "total revenue minus securities gains minus nonrecurring revenue."

Thrift holding companies are not included on the list, since they are not required to file with the Federal Reserve.

Of course, customers who didn't sign-up for the overdraft protection by the deadline may change their minds later and they can opt-in for the protection at any time. Banks' marketing efforts to get their customers signed-up for the services will continue, and it is also worth considering that customers who were being charged for the overdraft protection already knew how much it was costing them.

It's quite possible that over time, after a bump in the road during the second half of 2010, banks will resume building their deposit service fee revenue.

Changing Times for TCF Financial

The domestic bank holding company with service charges on deposit accounts comprising, by far, the greatest portion of operating revenue during the second quarter was

TCF Financial


of Wayzata, Minn. Over 25% of the company's operating revenue came from deposit service charges, although neither the company's Federal Reserve filing nor its 10-Q filing with the Securities and Exchange Commission broke-out the actual ATM or debit card overdraft fees from this figure.

Total service charges on deposit accounts for the second quarter were $78.9 million, up 18%, from $66.8 million a year earlier.

It's too early to say what effect the expiration of the Aug. 15 deadline requiring customers to "opt-in" on ATM and debit card overdraft protection will mean for TCF's bottom line, but the company said in its second-quarter 10-Q filing with the

Securities and Exchange Commission

that "approximately 50 percent of TCF's total impacted checking accounts have elected to opt-in as of June 30, 2010."

That of course raises a few questions. Since June 30 was still 45 days before the deadline, what percentage of impacted checking accounts signed-up for the protection by August 15? What percentage of checking accounts made use of the overdraft fee protection during the second quarter?

A call to TCF Financial seeking comment for this article was not returned.

Credit Suisse analyst Craig Siegenthaler has a neutral rating on the shares, saying his firm remains "neutral on TCB as it generates 30% of revenues from fees charged on deposits and debit cards, and will also be impacted greater than peers by the Durbin amendment," which regulates interchange fees on transactions paid for with prepaid or debit cards.

Siegenthaler also said that the monthly account maintenance fees TCF instituted in Marc led to a surprising improvement in fee revenue, contributing between $6 million and $7 million in revenue during the second quarter. But in the end, he expects TCF's total of deposit service charges, debit card revenue and ATM revenue will decline to $188 million for the second half of 2010, from $215 million in the first half.

International Bancshares

Second on the list is

International Bancshares


of Laredo, Texas, for which deposit account service charges comprised 19.2% of second-quarter operating revenue.

The company reported $25 million in deposit account service charges for the second quarter, up 3% from the second quarter of 2010.

In its second-quarter filing, International Bancshares made no comment about the potential impact on its revenue from the overdraft protection opt-in requirement. Company executives were not available to comment in time for this article.

Sterne Agee analyst Brett Rabatin has maintained his neutral rating on International Bancshares, and told


he expects -- considering the customer demographics in its market area - that overdraft protection opt-in rates for International Bancshares depositors will be "fairly robust."

Rabatin also said he was being "fairly conservative in lowering his 2011 earnings estimate for the company to $1.55 from $1.60 a share.

Regions Financial Gives The Straight Dope

The third bank holding company on the list is

Regions Financial


of Birmingham, Ala., which is also the largest, with $135 billion in total assets as of June 30.

Regions Financial derived 12.9% of its second-quarter operating revenue from deposit service charges, which is a big drop from International Bancshares.

Services charges on deposit accounts for the second quarter totaled $208.7 million, up 3% from a year earlier.

Please see

July's 5 Best-Performing Big Bank Stocks

for more details on Regions Financial's second quarter results.

During the company's second-quarter conference call on July 27, CFO David Turner was candid, saying "to date, we have successfully reached approximately half of the users of our standard overdraft service with 90% deciding to opt in or participate in our overdraft protection program, while 10% have opted out." He also said the company stood by its estimate that the impact from the overdraft service opt-in requirement for ATM and debit cards would be "a net reduction of service charge revenue of $72 million in 2010."

For analysts covering the shares, overdraft fee revenue concerns take a back seat to the company's continued efforts to work through credit problems and ultimately repay the U.S. Treasury for $3.5 billion in bailout money received via the Troubled Assets Relief Program, or TARP.

Christopher Marinac of FIG Partners has a "Market Perform" rating on Regions Financial's shares, saying "capital is not sufficient to allow RF to payback TARP, incur 10.5% cumulative loan write-offs through 2011 (i.e., we count 7.8% cum losses thru 6-30-10, and we expect the company to incur more), and appease regulators with 8% Tier 1 leverage ratio. "

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.