Bank of America Failure, Small Bank Opportunity

NEW YORK ( TheStreet) -- Bank of America's ( BAC) decision to begin charging a $5 monthly fee to customers who use their debit cards for purchases is making a big splash and providing a competitive advantage for smaller community banks.

One institution disagreeing with Bank of America's statement that the Durbin Amendment's limitations on interchange fees charged to merchants by larger banks to process debit card purchase transactions has changed the "economics of offering a debit card," is Green Bank, NA, a privately held community bank headquartered in Houston, with eight branches that reached $1 billion in total assets in July.

Green Bank EVP for Private Banking Paco Rivera said he doesn't "think a lot of the smaller banks will follow suit," on monthly charges for debit card purchases, and that "we are not going to roll out this fee," since "we are an interest-income-driven bank, and we don't have nickel-and-dime fees."

Rivera added that "Bank of America is a fee-income-driven bank," and decisions by BAC and other large banks, including JPMorgan Chase ( JPM) and Wells Fargo ( WFC) to add deposit fees "is interesting and unfortunate," because the big banks -- in the face of the government's attempt at setting price controls through the Durbin Amendment -- "will turn around and charge the consumer," in an attempt to make up lost fee revenue.

Most of the largest banks are rolling out monthly account charges irrespective of debit card use, and River saida, that since many charges are waived for customers with larger balances, the end result of new banking regulation is to "charge more money to the people least able to afford what is being charged."

Green Bank, NA is the main subsidiary of Green Bancorp, a privately held holding company, also headquartered in Houston. In June 2010, the holding company raised $100 million in capital from several private equity investors, including Freidman Fleischer & Lowe, Harvest Partners LP and Pine Brook Road Partners LLC.

The private equity deal left Green Bank NA primed for growth, with a Tier 1 leverage ratio of 13.98% and a total risk-based capital ratio of 17.75%, according to SNL Financial. Most banks are required by regulators to maintain a Tier 1 leverage ratio of 5% and a total risk-based capital ratio of 10% to be considered well-capitalized.

Rivera says that Green Bank, NA is looking to continue its "strong organic growth and always looking out for an acquisition that makes sense." The bank is set to complete the purchase of three more Houston-are branches from Main Street Bank in late October, and will also open another branch in Dallas later next month.

Frank Sorrentino III, CEO of North Jersey Community Bank of Englewood Cliffs, said that "there is a trend developing here, where the largest institutions are now charging their customers fees," and that the "Durbin Amendment is starting to show that price controls just don't work," since the largest banks "are rating their customers and charging the ones they don't think are profitable. At the end of the day here, the consumer has lost."

"We have always had free checking and free debit cards," Sorrentino said, adding that "yes we won't make as much money from interchange fees," but "we can make a profitable relationship with each of our clients because the relationship is not based on any particular service."

The privately held North Jersey Community bank had $656.2 million in total assets as of June 30, operating 8 offices in Bergen, Hudson and Monmouth counties in New Jersey.

The bank was well-capitalized, with a Tier 1 leverage ratio of 8.24% and a total risk-based capital ratio of 10.81% as of June 30, according to SNL.

When asked if the new fees being instituted by the largest banks are good news for his institution, Sorrentino said "every time the larger banks change their models, it is good for us," and that "as the largest bank gets larger, the smaller client falls through the cracks and doesn't get the good customer service any longer."

"A great example of good customer service is that at our bank, if you call your loan officer, he or she can answer your deposit questions as well," he said.

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-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

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 TheStreet.com 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.

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