Customers have turned cautious and banks are getting pinched

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Deposit service charges at banks are recovering, but they remain well below pre-pandemic levels.

Fee waivers are starting to subside and customers are slowly increasing their spending. But high levels of deposits and cautious spending habits are limiting the frequency of overdrafts and other actions that typically create charges.

While the financial health of customers is a good thing, a pinch on service fees comes at a time when banks are grappling with tepid loan demand and shrinking net interest margins.

And it may take some time for the situation to normalize, bankers said. The situation could force banks to look for other ways to bring in fees or become more aggressive cutting costs.

“As we look forward to the future, I don't expect a lot of growth” in service charges, Zachary Wasserman, chief financial officer at Huntington Bancshares in Columbus, Ohio, said Thursday during a conference call.

“The elevated levels of deposits we’ve seen are going to be quite sticky for some time,” Wasserman added. “People are fundamentally uncertain about the economy. They’re protecting themselves with all the liquidity.”

“Our people are flush with cash now,” John Copeland, chief financial officer at BancorpSouth in Tupelo, Miss., said Tuesday during the $23 billion-asset bank’s quarterly earnings call. “Our average account balance is up, which is pulling down normal deposit charges. I don’t know when that’s going to come back fully.”

Though service charges at the $120 billion-asset Huntington increased by 26% from the second quarter to $76 million, they were still 22% below the level of a year earlier. At BancorpSouth, service charges rose by 16% from the second quarter but were down nearly 26% from a year earlier, at $8.9 million.

Other banks, including Valley National Bancorp, Commerce Bancshares, F.N.B. Corp. and Umpqua Holdings, reported similar trends.

Regions Financial in Birmingham, Ala., told analysts during its quarterly call to expect quarterly service charges to range from $30 million to $35 million over the near term, or roughly $10 million below prepandemic levels.

“We don't forecast that improving appreciably at this juncture,” said David Turner, the $144 billion-asset company’s CFO. “We'll have to see.”

A sharp decline in service charges was an issue for all banks during the early days of the pandemic, but it hit smaller banks particularly hard, according to data from the Federal Deposit Insurance Corp.

Service charges for all banks fell by 9.4% in the first half of 2020 from a year earlier to $15.8 billion. The decline was 27% for banks with $1 billion or less in assets, totaling $744 million.

Laurie Stewart, president and CEO of the $872 million-asset Sound Financial in Seattle, said customers’ increased use of technology, including potential overdraft alerts, has reduced charges at the company.

“We actually feel really good about the fact [customers] are better able to manage their cash flow,” Stewart said.

Some banks are going a step further to provide leniency on overdraft fees.

Huntington announced last month that it would give small-business and commercial clients 24 hours to rectify an overdraft before incurring a fee. It also implemented a $50 overdraft-free safety zone for consumers and business customers, an increase over its previous $5 mark.

While it is “unusual to walk away from fee income,” Chairman and CEO Steven Steinour argued that the strategy would provide long-term benefits by strengthening ties to customers.

“We’ve done with a view that this will help demonstrate to customers and prospects that we’ll do the right thing and look out for them,” Steinour said Thursday in an interview. “Even though most customers will never use this feature … they’ll feel good about us looking out for them at a tough time.”

Some bankers said they believe service charges will improve from third-quarter levels as holiday spending ramps up.

“I would look for a little bit of improvement over time,” John Hairston, president and CEO of Hancock Whitney in Gulfport, Miss., said Tuesday during the $33 billion-asset company’s quarterly earnings call.

“I think as deposits migrate out or get spent, we’ll see stronger service-charge income," Hairston added. "As more people get into the season for shopping, we’ll see card fees go up.”

Paul Davis contributed to this report.

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