Community banks have been increasing fee income fast in recent years, but a bank researcher thinks consumer backlash may frustrate small banks efforts to further boost noninterest income.

"The perception has been that service charges have been going through the roof," said Warren Heller, research director at Veribanc Inc., a Wakefield, Mass., bank rating service.

"We found that the growth in fees has actually slackened at the large banks," he said. "You look at community banks and it's different - that trend is a steady uptrend.

"That's very curious, and I can't imagine that it will continue much longer."

Fee income at banks with $100 million or more in assets was on average 1.10% of assets in 1995, compared with 1.07% in 1994, 1.10% in 1993, and 1.08% in 1992, according to Veribanc.

However, banks with less than $100 million in assets saw fee income as a percentage of assets rise steadily to 0.84% in 1995, up from 0.81% in 1994, 0.78% in 1993, and 0.75% in 1992.

Although banks have focused on fee income strategies for several years, more recent consumer gripes have prompted some institutions, including Citibank or First Chicago, to eliminate or reduce some fees.

Thus, small banks can't indefinitely increase and create fees and expect to remain competitive, Mr. Heller said.

Trust services, Mr. Heller said, are the one area in which community banks can generate more fee income. Trust and fund management services are typically very profitable lines of business, he said.

"I really see this as the growth area that will replace fee income," the researcher said. Baby Boomers increasingly will need such services, he said.

In 1995, banks with less than $100 million in assets increased their fiduciary income as a percentage of assets to 0.09%, up from 0.08% in 1994, 0.06% in 1993, and 0.03% in 1992.

Larger banks went the other way, reporting fiduciary income at 0.28% of assets in 1995, down from 0.30% in 1994 and 1993 and 0.29% in 1992.

Fee income in important for community banks because they tend to have higher overhead. Veribanc also studied banks' cost of employee salaries and benefits.

Small banks' employees costs were flat during 1995. Their salary and benefit costs were 1.68% of assets in both 1995 and 1994, compared with 1.65% in 1993, and 1.62% in 1992.

"It appears that the community banks have maybe gotten a handle on their rising employment costs," Mr. Heller said. "I think some of the less efficient banks have merged or been consolidated."

However, Mr. Heller expects that in the future their costs will continue to rise minimally with inflation.

Larger banks' employee expenses as a percentage of assets have declined since 1993, in large part because of consolidations and job cuts, Mr. Heller said.

Their salary and benefit costs were 1.43% of assets in 1995, compared with 1.47% in 1994, 1.53% in 1993, and 1.52% in 1992.

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