We have seen many analysts bemoan the demise of the banking industry as they witness lost market share on both the asset and liability side to the category killer competitors and foreign companies. One of the important ways in which banks have been combating the assault on their share is by activities which do not appear on the balance sheet.

I'm not referring to the D-word (derivatives) but to the myriad activities which banks conduct of balance sheets which create value to their customers and to their shareholders, which do not appear anywhere on the balance sheet itself. While total assets have traditionally provided an accurate, simple, and easily available measure of banking activity, that approach does not fully capture the scope of banks' role as financial intermediaries in today's environment.

While the core banking is still an important and critical component of most banks, recent data show an increasing reliance on other sources of noninterest income. Companies such as First Tennessee National Corp. now derive 50% of their income from noninterest sources and others, such as Synovus, M&I and Norwest, follow the same model. In addition, many fee- based services including domestic and global custody, mutual fund sales, annuity sales, insurance sales on the retail side, standby letters of credit, cash management, and forward contracts on the wholesale side, do not show on the balance sheet, yet can constitute a critically important component of the bank's profitability and its customer relationships.

Lastly, the huge secondary market in virtually any product, from A- quality paper to bottom fishing D-graded auto loans, creates tremendous liquidity for any asset on a bank's balance sheet today. As a result, securitization and whole loan sales (often servicing retained) have become a day-to-day available option to banks which, in effect, takes assets off the balance sheet while retaining fee income streams and often customer contact.

While we are all touting the importance of fee income, the fact is that small banks have not excelled, by and large, in the generation of such income. This is often due to their self-defeatism, since they feel large banks have strong competitive advantages in that area. But witness Questar, the $190 million bank I wrote about recently with its 35% ROE, derived primarily from the pooling and sale of small business loans. Any small bank can participate in the off-balance-sheet activities that create value on the origination side, packaging, servicing, or sales.

While certain components of the business, most notably securitization and servicing, are indeed scale intensive and therefore may not prove viable for smaller institutions, most other components of the off-balance sheet fee income are up for grabs regardless of asset size. In fact, small banks can access others' economies of scale when it comes to mutual fund sales, insurance sales, and trust sales, as many of their larger brethren have done. Using size as the excuse for low fee income and a low value- added off-balance-sheet component is in most cases not much more than an excuse.

As off-balance-sheet activities become more important industrywide, the implications are significant not only to community and supercommunity banks but also to bank analysts who need to value banks comprehensively, including both balance-sheet and off-balance-sheet activities.

Robert Moore and Karen Couch of the Federal Reserve Bank of Dallas have recently written on that subject. They figured that the industry's contribution to overall economic activity was growing between 1980 and 1993, with nearly half of that growth coming from off-balance-sheet activities. By calculation, the value added from off-balance-sheet activities grew by $25 billion, or 222%, while the value added from balance sheet activities increased by $27 billion, or 50%.

In summary, analysis indicates that off-balance-sheet activities (again, excluding balance sheet hedging and derivatives activities) have become increasingly important for banks today.

Much of the industry's growth has been derived from its tactical shift into fee income and off-balance sheet activities. Community banks and small banks have not caught up with that trend yet, which is part of the reason for their loss of market share. In fact, their market share loss including off-balance-sheet activities is greater than on-balance-sheet activities alone.

Community and supercommunity banks need to wake up to that fact and stop paying lip service to the need to increase fee income, think creativity on both sides of the balance sheet to identify activities that are traditionally on-balance-sheet, but can be converted to off-balance-sheet fee income, including loan origination and the sale of investment products.

The banking industry can and should regain its market share of the total financial services industry, but it cannot do so at any bank size without the creative use of off-balance-sheet opportunities.

Ms. Bird is senior executive vice president and chief operating officer of Roosevelt Financial Group, St. Louis; chairman of the New York consulting firm Finexc Group LLC; and editor in chief of The Community Banker, a quarterly.

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