Banks of all sizes are using fees to offset the slowdown in interest income as margins continue to shrink under intense competition.

Noninterest income surged 18.4% last year to a record $124 billion, according to data the Federal Deposit Insurance Corp. plans to release today.

Net interest income grew just 4.7%, to $183 billion.

Fee income's contribution to the industry's bottom line has grown steadily since the FDIC began tracking it, rising from 24.7% of net operating revenues in 1984 to more than 40% in 1998.

Bigger banks offer more fee-based products and continue to make a larger portion of their revenues on everything from trust services to investment products. According to the FDIC, banks with more than $1 billion of assets made 45% of their revenue from noninterest income last year.

While that figure was just 28% for smaller banks, banks with under $1 billion of assets have increased fee income faster than larger banks over the last five years.

According to FDIC data, fee income as a percentage of net operating revenue has grown nearly 22% at smaller banks since 1993 while it was up 18.4% at larger banks.

Like large banks, community banks are building fee income to boost profits, which have been pressured by thinning spreads. Net interest margins have been shrinking since 1992, hitting 4.07% at yearend 1998, according to the FDIC.

"The competition is coming both from banks and, in particular, nonbanks," said Michael W. Gullion, chairman, president, and chief executive of Gold Banc Corp. of Leawood, Kan.

"People are paying more for deposits because they are collecting them electronically and they are charging less on loans ... and that compression is squeezing net interest margins."

Some community bankers said they must increase fee income to remain independent.

"It's crucial that community bankers diversify," said J. Alton Wingate, chairman and CEO of Community Bankshares in Cornelia, Ga. "We have got to rely on noninterest income to remain competitive because we have very little control over that net interest margin."

Community Bankshares, a four-bank holding company with $460 million of assets, offers fee checking accounts not only to attract core deposits but to create fee income. Mr. Wingate said insufficient funds charges have tripled since the banks began offering free checking.

Brighton Bank of Salt Lake City, increased noninterest income simply by cutting down on the number of fees it waives.

"We don't charge higher fees," said chairman and CEO James A. Fraser. "We just collect most of the fees we charge."

The $145 million-asset bank collects 98.2% of the fees it imposes and accomplishes that by posting the names of staff members who waived fees. "It reminds employees that their responsibility is to the bank," Mr. Fraser said. In the past five years, Brighton's return on equity was 42.77% and its return on assets was 5%.

Citizens Bank of Tulsa, one of the 10 banks Gold Banc owns, generates enough transaction account fees some months to cover staff salaries, Mr. Gullion said.

It takes Brighton's tough fee-waiver policy a step further. Any Citizens employee who waives a fee must cover the cost out of his own pocket, Mr. Gullion explained.

Many community bankers are looking beyond traditional types of fees, according to Gary C. Teagno, president of Community Bankers Network, the for-profit arm of the Independent Bankers Association of America.

"There is a lot of increased interest in complementary investment products like mutual funds and discount brokerage," he said. "I don't think any bank is immune from their customers' interest or fascination with the stock market."

For example, $1.2 billion-asset Gold Banc bought a full-service broker- dealer and, without advertising, generated $50,000 in additional income in 60 days, Mr. Gullion said.

"And it helps us keep customers that would have left for higher yields," he said. "We need to get back in front of the money."

First National Bank of Pennsylvania is also adding products to generate noninterest income.

The $1.2 billion-asset bank, based in Hermitage, expects to increase noninterest income by more than 70% this year. President and chief executive officer Stephen J. Gurgovits said First National is aiming to earn 24 cents in fees for every $1 it makes in net interest income. That's up from 14 cents last year.

"Most of this increase will come from new lines of revenues, including annuities, mutual funds, and title insurance on commercial and residential mortgages," he said. "Our goal is to have the largest share of our customer's wallet."

Most community bankers said they are not worried additional fees will turn customers off. "If you give superior service, people are willing to pay," Mr. Wingate said.

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