Bert Dodson Jr. watched helplessly as the fees he pays to the new Bank of America increased 10 percent after its $57.7 billion merger with NationsBank Corp. three years ago. The Lynchburg-based exterminator could have saved $20,000 of the $45,000 he was charged by BoA for deposits, a credit line and employee paycheck cashing if he took his business to another bank. One candidate was Raleigh-based First Citizen Bank. But BoA had him over a barrel since First Citizens serves only parts of Virginia and BoA’s reach is much broader. "You’ve got to have the services. It’s availability," says the president of Dodson Bros. Exterminating Co.

Illustration by Chris OBrion

Dodson’s experience is hardly unique. The 1990s saw a wave of major bank mergers that have reduced the number of banks by 5 percent each year. Frequently, when banks merge, customers face higher fees and less competition among larger banks for small-to-medium sized business accounts. Banks aren’t soliciting Dodson’s family-owned, pest-control company which employs 490 people in 30 offices. The company needs to make deposits from West Virginia, the Carolinas and Tennessee to Northern Virginia. "If we had 5,000 employees and we were located in Arlington, they (the banks) would be lining up at the door," says Dodson.

Despite industry and government regulators’ assurances to the contrary, the ongoing banking sector consolidation is likely to mean even less competition, fewer branches, higher rates for loans and ordinary banking fees and probably even less customer service, according to one recent Federal Reserve Board report. Indeed, the latest $14.2 billion merger between Wachovia and First Union Corp., creating the fourth-largest U.S. bank, is marred by First Union’s reputation for poor customer service. That Charlotte bank spent millions in recent years trying to spiff up its image with a slick advertising campaign. Yet, the effort apparently didn’t pay off since the merged entity will bear Wachovia’s name, a bank with a good reputation for customer service. Both banks invested heavily in ad and letter-writing campaigns to shareholders, costing nearly $15 million, to reassure customers that the merger of two very different banks was superior to a hostile bid for Wachovia from Atlanta-based SunTrust Banks Inc.

The Fed report contradicts bankers’ claims that such mergers benefit customers. The report, which looked at consolidation’s impact on consumers through fees, shows that mergers have led to higher fees. Though the report looked at consumer fees, its authors, Chicago-based Moebs Services, said commercial customers are similarly affected. Studies by the U.S Public Interest Research Group (PIRG) echo the findings and suggest that banks’ profit growth in recent years is directly linked to higher and, in some cases, new fees from loans to checking accounts and ATMs. A 1999 PIRG study found certain big-bank fees 16 percent higher than small-bank fees. It also found big-bank fees had increased 15 percent in only two years. "They’re always looking to jack up their fees much more so than small banks," says Bob Burks, secretary/treasurer for Dodson Bros.

But bank consolidation may be a mixed bag for Virginia, which has seen all of its large banks gobbled up. These mergers present potential growth opportunities for smaller banks, according to bankers like A. Pierce Stone, who has watched his 25-year-old Virginia Community Bank in Louisa County double in size every six or seven years. While big mergers get the news, an evolving trend is playing out in small communities across Virginia and nationally. Not finding that "loving feeling" from the big banks that used to exist from neighborhood bankers, many small and medium-sized businesses are taking their business elsewhere as community banks sprout up to fill a niche market serving big banks’ throwaways.

Indeed, community banks are getting a back-handed boost by the megamergers. Banking consolidation, of course, is driven by the quest for greater profits, efficiencies of scale, and expanding into new markets without resorting to the head-to-head competition that would lead to price wars. Nothing epitomizes the aggressive trend in consolidation better than Bank of America, which now controls almost 8.5 percent of the nation’s bank deposits. The former North Carolina National Bank acquired rivals C&S Sovran Corp. of Georgia, Barnett Bank of Florida, Boatmen’s Bancshares of Missouri and several troubled Texas banks and thrifts on its way to becoming the nation’s third largest.

Virginia has been a big loser when it comes to bank mergers. The number of FDIC-insured banks in the Old Dominion has declined more than 41 percent since the mid-1960s, from 251 banks to only 147 in 1999. At the same time, the number of state chartered banks in Virginia is down to 108 with assets of $47 billion as of June 30 compared to 121 and $56.6 billion in assets just five years ago. The ranks of former Virginia banks include Richmond’s Crestar, Signet, and Central Fidelity banks and Dominion Bankshares of Roanoke.

There were 48 federally insured commercial banks with assets of less than $100 million operating in Virginia in the last quarter of 2000 compared to 72 during the fourth quarter of 1995. Assets of federally chartered commercial banks in the state have also declined from $77.8 billion to $59.6 billion, with much of the loss attributable to mergers and acquisitions by out-of-state institutions.

Following a merger, big banks sometimes pull out of small- and medium-sized markets in favor of the more profitable major metropolitan areas. They also tend to chase accounts with larger businesses, despite advertising campaigns by several banks and credit card companies, including American Express, that target smaller companies. "I don’t think it’s good for Virginia," says Stone, chairman-elect of the Independent Community Bankers of America, of the mega bank mergers and the loss of all Virginia’s largest financial institutions. "But I think it’s good for me. I see people here I never thought I’d see who have roots in these old banks."

That may help explain why community banks have thrived as Virginia’s big banks have been absorbed by large banks based in North Carolina and elsewhere. Of the 827 commercial banks chartered between 1995 and 2000, more than 25 percent of community bank start-ups are in the Southeast, including Virginia, Alabama, Florida, Georgia, North Carolina, West Virginia and South Carolina, according to the Federal Deposit Insurance Corp.

With the Wachovia-First Union merger, Virginia is likely to be less affected by branch closings than in their home state of North Carolina where the two banks have more overlap. Nor will competition be affected nearly as much since the banks’ territories are different. Whereas First Union has an exceptionally strong share of the Roanoke market — with nearly 50 percent of deposits — and is a presence in Northern Virginia, Wachovia tends to be stronger around Richmond and Lynchburg. Still the merger will affect competition nonetheless. The new bank would be No. 1 in East Coast deposits and No. 2 nationally, making it a powerhouse in any Virginia market. "Anytime you have one less door to knock on to get what you need, that’s one more problem," says Gordon Dixon, Virginia state director for the National Federation of Independent Business.

Another North Carolina bank extending its reach in Virginia is BB&T. The Winston-Salem-based bank recently acquired Virginia’s second-largest bank, F&M National Corp. in Winchester, and Fredericksburg-based Virginia Capital Bancshares.

What’s chiefly drawing customers, commercial and retail alike, to community banks is customer service. People take comfort in knowing the personnel and doing business with a bank that has local lending decision-making authority rather than deferring to someone in a loan department in Atlanta or Birmingham. "They’re names and faces, not just account numbers," said Patricia G. Satterfield, executive director of the Virginia Association of Community Banks. "What the larger banks consider the non-profitable castoff customers are exactly the ones that are profitable for community banks."

Many of those starting banks are executives displaced by mergers who are seeking to exploit a niche, an under served market or their relationships within a community, according to the FDIC.

As a result, community banking is booming even in highly competitive regions of the state like Northern Virginia. Burke & Herbert Bank & Trust Co. of Alexandria, the oldest bank in the state, is the largest community bank here with 15 locations. Though community banks are restricted just like any financial institution by federal and state lending guidelines, local bankers say they are able to use more discretion in making individual decisions and not just stick to a lending scorecard. Larger banks, which often don’t have a loan officer in each branch, don’t have that kind of authority anymore.

But even when they do qualify for loans, many small- and medium-sized business owners say the process is too cumbersome at the large banks. "We found that with the community banks you can walk in and you can deal with the president. You become friends with the president, whereas you’re never going to become friends with the president of Wachovia," says Paul Jost, president of Chandler Management Corp. in Newport News. The property management company uses the Bank of Lancaster for its loans and managing client retirement accounts, but also has good relations with Wachovia, which has branches near most of its properties.

Community banks may be limited in how much they can individually loan, but through pooling arrangements with other community banks they can do larger deals. Stone’s Virginia Community Bank, with a lending limit of $1.3 million, has put together financing packages as large as $6 million. It’s still small change to large banks like Wachovia or Bank of America, but adequate for many small and mid-sized companies. "The small banks are more willing to take a chance in general and make loans that might be a little more risky. They can take the time to understand the business a little better," says Jost.

Like their larger brethren, community banks, while still local, are branching out to attract customers. The average community bank operated only one or two branches five to 10 years ago. Today, they average five to six locations, including some outside their home areas. The 14-year-old Highlands Union Bank in Abington, for instance, operates nine branches, including ones in Boone, N.C., and Rogersville, Tenn., to serve the needs of customers in Southwest Virginia and Northeast Tennessee.

After eating all the large and mid-sized banks, the only thing left for the big guys to acquire or compete against may be the little guys. And the little guys are also learning that they may have to merge in order to compete as well as survive. Among recent examples: James River was bought by First Virginia, SouthTrust Corporation of Birmingham is negotiating to buy Community Bankshares Inc. of Richmond. Cardinal, Potomac and Millennium banks in Northern Virginia are all results of mergers. "For the same reason that the big banks are merging, the small banks are going to have to change," says Spence Hamrick, regional president for Wachovia in Richmond. "If you want to provide a certain level of service you have to be a certain size so you can spread the cost over a certain number of units." While some community banks are being organized to target niche markets or exploit specific weaknesses of larger banks, many are not profitable he contends.

Left out in the process can be inner city or rural areas where bank commitments were encouraged by the Community Reinvestment Act, the federal law that encourages lending and branches in under served areas. But industry consolidation has led banks to reduce their commitment to such areas as banks chase a bigger pot of money in larger metropolitan areas. Financial analysts point to the combined Bank of America-NationsBank as an example of an institution that has reduced its presence and commitment to community reinvestment, particularly on the West Coast. Filling the void somewhat have been community banks that have opened in more than 400 small towns and cities since the mid 1990s, according to the FDIC. More than 40 percent of community banks are located in towns with fewer than 2,500 people.

Even so, while bank numbers may be dwindling, state regulators insist competition is thriving. "If a customer, retail or commercial, is looking for a particular product, I don’t think they’ll have to look far for someone to service them," says Commissioner E.J. Face, Jr., who heads the State Corporation Commission’s Virginia Bureau of Financial Institutions. But having access to services, says Dodson, the Lynchburg exterminator, doesn’t necessarily mean competition. Dodson says he would drop BoA in a heartbeat if another bank had branches in each area he does business.

For their part, larger banks believe they are being judged too harshly. Some bundle services to reduce fees and attract customers. Wachovia insists that it wants to become the middle market leader and to continue customer service initiatives begun in recent years at both Wachovia and First Union. Wachovia’s Hamrick says, "We want outstanding customer service to be our hallmark." The newly merged bank would be the nation’s fourth largest with assets of $330 billion and more than 2,900 branches in 12 East Coast states from Connecticut to Florida. In fact, Wachovia and First Union have been pounding the airwaves and newspapers with their multi-million campaign to convince shareholders and customers that they can successfully integrate two very different cultures. One newspaper ad talks about how the merged bank will bolster even the institutions’ volunteer community efforts. "Together, we’ll be able to contribute more than one million hours to volunteer work alone," it says. Another captures the essence of the "new" Wachovia. "Wachovia will focus on you our customer. We wouldn’t put our name on anything we didn’t believe in."

But is a change in name enough to erase a bad reputation? First Union is counting on it. As the transition plays out over the next few years, the choice for Virginia banking customers is expected to remain the same: bank with a big fish or a small fish, because the medium-sized minnows are gone.